"Save the Fat Cats"
Excellent article by Kristof.
http://www.iht.com/articles/2008/10/02/opinion/edkristof.php
"Just as in the U.S. today, most Japanese did not initially appreciate how devastating a banking crisis could be to the real economy. Banks and real estate tycoons in Japan were corrupt, profligate and unsympathetic figures, and no one wanted to help them. On corporate expense accounts, they sipped coffee with gold leaf and patronized "no-panties shabu-shabu" restaurants, which had mirrored floors and miniskirted waitresses.
In short, the businessmen involved were jerks. And, whether in Japan or the U.S., it's challenging for politicians to frame a bailout with the slogan: Save the jerks!
Japanese politicians didn't want to rescue such unpopular fat cats and didn't see any emergency. So Japan's economy slowly lost air, and the biggest losers were the small futon makers who couldn't get credit and the farmers on remote islands who lost ferry service when the government eventually had to cut back on spending.
For those of you accustomed to bull markets, who think we're sure to come out of this quickly, remember this: Japan's stock index is still less than one-third of its level of 19 years ago."
"A starting point would be to remove tax subsidies on executive pay and allow courts to restructure mortgages as they do other kinds of debt. The Institute for Policy Studies in Washington estimates that U.S. taxpayers every year provide more than $20 billion in tax subsidies for executive pay.
Among the strongest critics of inflated executive pay have been Warren Buffett and the late management guru, Peter Drucker, who argued that CEO salaries should peak at no more than 20 or 25 times those of the average worker. (Last year, CEOs got an average of 344 times the wages of the typical worker.)"
I guess if, in saving the fat cats, we were also able to put them on a diet -- limit pay and tax breaks, etc., then good might come out of this bailout.
Originally posted by spruce112358This is a very good idea. Might lead to more numerous, leaner, productive companies, too.
Among the strongest critics of inflated executive pay have been Warren Buffett and the late management guru, Peter Drucker, who argued that CEO salaries should peak at no more than 20 or 25 times those of the average worker. (Last year, CEOs got an average of 344 times the wages of the typical worker.)"
Originally posted by spruce112358Unlike in Japan, I don't think U.S. banks and lenders were fully to blame. According to Russell Roberts, a professor of economics at George Mason University and a scholar at the Mercatus Center:
"Save the Fat Cats"
Excellent article by Kristof.
http://www.iht.com/articles/2008/10/02/opinion/edkristof.php
"Just as in the U.S. today, most Japanese did not initially appreciate how devastating a banking crisis could be to the real economy. Banks and real estate tycoons in Japan were corrupt, profligate and unsympathetic figures, and no one ...[text shortened]... diet -- limit pay and tax breaks, etc., then good might come out of this bailout.
Missing is the role politicians and policy makers played in creating artificially high housing prices, and artificially reducing the danger of extremely risky assets, says Russell.
Beginning in 1992, Congress pushed Fannie Mae and Freddie Mac to increase their purchases of mortgages going to low and moderate income borrowers:
* For 1996, the Department of Housing and Urban Development (HUD) gave Fannie and Freddie an explicit target -- 42 percent of their mortgage financing had to go to borrowers with income below the median in their area; the target increased to 50 percent in 2000 and 52 percent in 2005.
* For 1996, HUD required that 12 percent of all mortgage purchases by Fannie and Freddie be "special affordable" loans, typically to borrowers with income less than 60 percent of their area's median income.
* That number was increased to 20 percent in 2000 and 22 percent in 2005; the 2008 goal was to be 28 percent.
* Between 2000 and 2005, Fannie and Freddie met those goals every year, funding hundreds of billions of dollars worth of loans, many of them subprime and adjustable-rate loans, and made to borrowers who bought houses with less than 10 percent down.
By pressuring banks to serve poor borrowers and poor regions of the country, politicians could push for increases in home ownership and urban development without having to commit budgetary dollars. Another political free lunch, says Russell.
What can we learn from this, asks Russell? Beware of trying to do good with other people's money. Unfortunately, that strategy remains at the heart of the political process, and of proposed solutions to this crisis.
Source: Russell Roberts, "How Government Stoked the Mania; Housing prices would never have risen so high without multiple Washington mistakes," Wall Street Journal, October 3, 2008.
For text:
http://online.wsj.com/article/SB122298982558700341.html
Originally posted by Bosse de NageUnfortunately, more than ever, it's going to require talented, creative, hardworking people to fix this mess. Limiting their compensation is a sure way to put people off.
This is a very good idea. Might lead to more numerous, leaner, productive companies, too.
Originally posted by der schwarze RitterActually the problem is with the boards of directors. They are so weak and dysfunctional in the US they have given rise to what I would call the 'CEO scam'. This starts with an individual who is creative, talented, and hardworking -- but mainly at tooting his own horn.
Unfortunately, more than ever, it's going to require talented, creative, hardworking people to fix this mess. Limiting their compensation is a sure way to put people off.
So one of these guys manages to get in for the CEO interview and while the board is half-asleep or discussing golf over cocktails, he suddenly reads them the Riot Act, swears a bit, and demands an ongodly compentation package to save them from Certain Destruction. The board, is woken up, shocked, and stunned to hear such language -- and since they don't understand what he is talking about but it sounds Very Serious -- naturally give him everything he asks for. Then, pleased to have made such an important decision, they start planning an executive retreat.
CEO candidate number 2 hears about how well that worked, tries it, and also succeeds.
CEO candidate number 3 isn't going to lower himself to those tactics. But he does go to his board to discuss his compensation package. "1 and 2 get so-and-so much." So the board immediately votes him the same.
And so on.
Pretty soon, there we are. No extra talent. No harder work. Just more money being paid out.