Sunday, February 08, 2009

Does Obama Have The Guts To Nationalize The Failed Banks?


The average American CEO makes hundreds of times more than what the average worker his company employs makes-- if we can even be sure what the crafty CEO really makes. The average big company CEO in the U.S. also makes far more than the average comparable CEO in any other industrialized country.
Nobody beats the U.S. when it comes to the difference in pay between CEOs and the average worker. In 2000, on average, CEOs at 365 of the largest publicly traded U.S. companies earned $13.1 million, or 531 times what the typical hourly employee took home. The corresponding ratio in 1980 was only 42, and in 1990 it was 85.  As one source has put it, "in 2000 a CEO earned more in one workday (there are 260 in a year) than what the average worker earned in 52 weeks. In 1965, by contrast, it took a CEO two weeks to earn a worker's annual pay". US CEOs' pay rose 313 percent from 1990 to 2003, an advocacy group UFE said. By contrast, the Standard & Poor's 500 stock index rose 242 percent and corporate profits gained 128 percent.

The closest countries to the American model are

Brazil- 57 times
Venezuela 54 times
South Africa 51 times
Argentina 48 times
Malaysia 47 times
Mexico 45 times

Countries we like to think of ourselves as having more in common with have vastly different pay gays between workers and CEOs:

Britain 25 times
Australia 22 times
Netherlands 22 times
Canada 21 times
Belgium 19 times
Italy 19 times
Spain 18 times
New Zealand 16 times
France 16 times
Sweden 14 times
Germany 11 times
Switzerland 11 times
Japan 10 times

Typically, CEO pay in other industrialized countries is only about one-third of what American CEOs make and these out-sized compensation packages are utterly unrelated to performance and in some cases are inversely related to performance-- the worse a company has done, the more money the CEO has gotten for himself. In 2006, that average American CEO made in a day more than a worker makes in a year. A hallmark of the Bush Regime has been that the old truism-- the rich get rich and the poor get poorer-- was supercharged

So now President Obama is in an awkward situation. The avaricious banksters and CEOs who have driven the American economy off the cliff need hundreds of billions of dollars to make up for the systematic looting of the companies they have overseen. He can't tell them to take a hike because if the companies all go bankrupt, they'll take the U.S. economy with them. Bush already gave them over $350 billion dollars in the first installment of TARP-- no accountability and no strings attached. Much of it has been stolen-- in the form of discretionary bonuses and golden parachutes and... well, letting the good times roll. Now they're back for another $350 billion.

Obama has said that anyone company that takes TARP money going forward-- though not the ones who already did-- have to limit individual executive compensation to $500,000 a year. Not a prison sentence not even a requirement that they be forced to give back what they've already stolen-- the punishment is half a million dollars a year until the TARP money is paid back. The Republicans, of course, are screaming bloody murder. And so are the Blue Dogs and other anti-working families pseudo- "Democrats." But aside from the politicians they own, their media outlets are also making the case that a self-respecting CEO can't be expected to survive on a measly half mil a year. This week's Economist dismisses Obama's move as "political theatre" and points out that when this has been tried in the past, CEOs have cheated and gotten around the rules with ease. The Economist warns that some will leave (for Brazil?) and others will stop working so hard.
Capping the non-equity-based remuneration of executives in companies receiving “exceptional assistance” at $500,000 a year and banning “golden parachutes” for failed executives is likely to strike most Americans as fair, or even generous, given that Mr Obama himself earns a mere $400,000 and the rules will apply only to new bail-outs. Indeed, after the outrageous payment of billions of dollars in bonuses by Wall Street firms that had survived only because many more billions had been injected into them by the government, the executives should probably be grateful for getting off so lightly. Moreover, executives will be allowed grants of restricted stock (which they cannot sell until the taxpayer is repaid), so they may yet end up making a fortune.

...Will Mr Obama’s message to bosses that they have “got responsibilities not to live high on the hog” lead to restraint in executive pay more broadly? Ira Kay of Watson Wyatt, a pay consultant, thinks it might, because rising pay on Wall Street in recent years led to higher pay elsewhere—a trend that may now operate in reverse.

In the long run, the more significant change may be Mr Obama’s decision to give American shareholders a vote on executive compensation, through a “say on pay” resolution. A vote is certainly more sensible than a crude government limit—especially if it is extended to all public companies, not just those bailed out by Uncle Sam. A similar reform is reckoned to have made at least some difference in Britain, and not before time.

A few days ago BusinessWeek published a pro and con look at the question Should The U.S. Nationalize the Broken Banks? Pro won.
Friday Nobel Prize-winning economist Joseph Stiglitz (watch the video) came to the same conclusion: Nationalized Banks Are The Only Answer. "The banks," he says, "are in very bad shape. The U.S. government has poured in hundreds of billions of dollars to very little effect. It is very clear that the banks have failed. American citizens have become majority owners in a very large number of the major banks. But they have no control. Any system where there is a separation of ownership and control is a recipe for disaster. Nationalization is the only answer. These banks are effectively bankrupt."

Interviewed at Davos last week, Nassim Nicholas Taleb, author of the best-selling finance book The Black Swan and New York University Professor Nouriel Roubini, were in complete agreement. Taleb: "You cannot trust the banks in taking risks. We have a very strange situation in which it's the worst of capitalism and socialism, a situation in which profits were privatized and losses were socialized. We taxpayers have the worst... "We should not trust these bankers; look at their track record. They know we're going to bail them out. They hold us as hostages [and] the only way to stop the process is for the government to own those banks, tell them what to do."

The American public isn't even aware that this debate is going on. Instead they get simplistic, politically-charged drivel from the hacks we elect to office and from the sad excuse for popular media. Just watch this clueless-- but well-coifed-- CBS talking head try to get Steve Forbes to warn Americans that Obama is a socialist:

So back to the question up top about President Obama's intestinal fortitude. I'm afraid not. And I gather from what Paul Krugman wrote today is his column, What The Centrists Have Wrought, he's not counting on Obama knocking some sense into any Republican heads any time soon either.
[T]o appease the centrists, a plan that was already too small and too focused on ineffective tax cuts has been made significantly smaller, and even more focused on tax cuts.

According to the CBO’s estimates, we’re facing an output shortfall of almost 14% of GDP over the next two years, or around $2 trillion. Others, such as Goldman Sachs, are even more pessimistic. So the original $800 billion plan was too small, especially because a substantial share consisted of tax cuts that probably would have added little to demand. The plan should have been at least 50% larger.

Now the centrists have shaved off $86 billion in spending-- much of it among the most effective and most needed parts of the plan. In particular, aid to state governments, which are in desperate straits, is both fast-- because it prevents spending cuts rather than having to start up new projects-- and effective, because it would in fact be spent; plus state and local governments are cutting back on essentials, so the social value of this spending would be high. But in the name of mighty centrism, $40 billion of that aid has been cut out.

He ends with an even more dire prediction: Obama won't be able to come back for what is needed to make this idea work after this version fails. "This," he writes, "is really, really bad." And, it could get even worse if Obama doesn't take seriously the building populist disgust with the Wall Street-Beltway Axis of Evil real Americans have had just about enough of.

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At 7:21 AM, Blogger VG said...

"Bush already gave them over $350 billion dollars in the first installment of TARP-- no accountability and no strings attached."--

And, irrc PEBO twisted arms to get Senate votes for this... (or was it for a different bad bill?)

At 9:58 AM, Blogger jamesinsf said...

I am assuming that he will not nationalize the banks, although that is what needs to be done. He is as much of a capitalist as the next President, so my guess is he will tiptoe around the super-powerful megacorp banks, sadly. I wish to be proven wrong in my assumption, because President Obama is aiming to do right by the American people.

Jimboland Jots


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