"That's just history"

It's easy to mock politicians' ignorance. So let's do it!

Cautioning against the potential unintended consequences (at least I think that's what he was trying to do) of the planned stimulus program, an Ohio republican cited the example of FDR. Speaking to his local newspaper's editorial board, Representative Steve Austria said:

"When (President Franklin) Roosevelt did this, he put our country into a Great Depression," Austria said. "He tried to borrow and spend, he tried to use the Keynesian approach, and our country ended up in a Great Depression. That's just history."

Setting aside the highly likely scenario under which Austria can't define, much less apply, Keynesian economic theory, how great is this? It totally makes sense now why FDR contracted polio. He was being punished for going back in time to create the Depression before his presidency began. Down with time traveling liberal presidents! Vote republican today!

Two Sides of a Delightful Coin*

I'm done with the ranting for now. Partly because the end of the week is in sight so I can look forward to forty hours or so without thinking as much about this stuff. More importantly, my spittle-flecked monitor is due for a cleaning after the last two apoplectic posts. Many thanks for your kind comments and links as well as your indulgence.

Since we've covered some of the negative aspects of emerging class warfare resulting from all the fun on Wall Street, it's time to give a few blog inches to the positive aspects. Feel free to add your own in the comments.

- Bad economic times mean better customer service. Just as job market mobility in good times upgrades the 7-Eleven clerk to bank teller, people capable of logic, proactivity, and cheerfulness are likely to find themselves grateful for jobs dealing with the public. I for one look forward to much less frequent attempts at humor by cashiers who notice my name on the credit card.

- More affordable housing will be available for most people. Yes, it's unfortunate if you bought your house around the market peak and were hoping to turn a quick profit. (Must...not comment...on...moral hazard...of bailing out...overextended fools.) People who have been saving for a proper down payment, those looking to move up to a more expensive home, and most renters will be better off for the next few years.

- Entrepreneurship will flourish. Just as the death of an old growth tree allowing sunlight to reach the forest floor for the first time in decades prompts rapid new flora growth, financial dislocations will prompt more people to launch their own ventures. My prediction is that twenty years from now we'll look back to the closing years of this decade as the genesis of new growth industries much like what happened in the early 1980s. Creative destruction, despite the pain it creates, generally works.

- Some people will rediscover what matters most to them. That it's cliche makes it no less true.

- More hobos!

* If you're unsure about the reference in the title of this post, you need a little refresher here. It will make you feel better about the world.

Thoughtful Lance. Mirthful Lance. Two sides of a delightful coin.

Look! It's a Dead Horse - Let's Hit It With This Stick!

Senator McCaskill proposed limiting executive compensation for Wall Street firms receiving federal money to the same $400,000 annual amount that the President of the United States is paid. She went so far as to call bankers who paid employee bonuses this year "idiots". Fair enough, I called those of her ilk stupids yesterday. Let's think about what it would mean for people to be paid the same as President Obama. There are plenty of sources on the interwebz where you can put together your own data on Presidential compensation. I'll make mine very simple:

• Cash compensation: $400,000; full health benefits with no deductible or co-pay
• Housing allowance: unlimited use of 55,000 square foot home in good neighborhood, adjacent guest house complex, and private 125 acre mountain retreat
• Transportation allowance: fleet of chauffeured cars, helicopters, and aircraft available around the clock for unlimited use
• Household allowances: full kitchen staff (food included), maid staff, staff of personal assistants for recipient and spouse, drivers, pilots, press agents
• Retirement: $200,000 annual pension; lifetime health benefits
• We'll ignore the value of security services and gifts received as a result of the job since those are unique to the Presidency.

Essentially the Presidential compensation package includes most non-discretionary expenses and provides all the amenities to allow the world's most powerful person to focus on running the country. I'd be the first to sign up for a $400,000 cash compensation cap if it also included free housing, travel, food, and healthcare. (You mean I have to pay for my own movies? That's a slap in the face! Oh wait, we can use the White House theater.) Because I'm a generous guy, I'd even be willing to live in my current home rather than the White House. Wouldn't mind the multiple hundred thousand dollar remodeling budget, but I digress. The point is that holding up what the President of the United States is paid in cash as some kind of "more than fair" amount for anyone is ridiculous.

The latest plan comes from the Obama administration and calls for an annual cash limit of $500,000, with additional funds payable in restricted stock that vests only after government funding is repaid. This is far better than McCaskill's plan, but still misses the point. I don't believe that people need the prospect of making millions of dollars to enter this business. However, limiting compensation won't change how people who are paid to take risks do their job. (And it completely ignores the impact on the vast majority of Wall Street employees whose jobs entail taking zero capital risk.) If government wants to eliminate traders putting on positions that jeopardize the financial system, clawbacks of past earnings would be better. Use Warren Buffett's method of paying bonuses three to five years after performance is booked to minimize short-term gamesmanship if no one can come up with a better idea.

Indiscriminate responses to complex problems tend to not work out so well. Is it asking too much to hope for a little nuance and understanding?

But Mom, It's Not Faaaaiiir

This is another in my occasionally-appearing series of posts you should not read. It's just going to make you like me less, frustrate you, or make no sense. You have my apologies. I recommend you spend a few minutes here or here instead.

To recap, a brief update on where we stand in the whole Wall Street imploding, financial world ending, class warfare beginning thing:
- National governments have supplied capital (generally not equity, but we'll get to that below) to prop up virtually every major bank in the world.
- People have noticed that the funds for these programs are drawn from the nation's general budget rather than some magical bucket of reserves saved for just such a purpose by our wiser predecessors.
- People are outraged that their money is being "given" to the fat cats who spend it on private jets, office remodels, and big bonuses.
- Populist politicians (currently most of them) are suggesting compensation caps and other draconian measures to ensure that this doesn't happen again.

This is all pretty fun for those of us in the business, so I hate to rain on the parade. However, I must confess my desire to shout at the stupids while violently shaking them in hopes of getting across a few points:
- Money used to support the banking system is no more "your money" than the Medicaid dollars spent to pay for your child's emergency room visit necessitated by your unwillingness or inability to pay for private insurance is my money. Look up fungibility.
- The government doesn't own equity in most banks, at least not yet. I know that most of you have no understanding of how corporations work and probably don't care because you're pursuing your own agenda, but it's the equity owners who dictate how companies are run. Should other parties have a voice? That'd be nice (not really), but the system doesn't work that way.
- You are not the "largest shareholder in Bank X" as I keep reading in press articles. See the above point -- you're not a shareholder at all. Even if the government was a significant common equity holder, your individual portion of that stake would be represented by the value of your portion of national tax revenue divided by the government's investment. For most of the loudest blowhards, the numerator is so small in that equation that the resulting value is irrelevant.
- We get it: you're mad because bad decisions by people doing things you didn't understand have damaged the global economy and hurt your family. Welcome to the party. Half a dozen of my friends have lost their jobs in the last few weeks. Not one of them bore any more direct responsibility for the decisions that got us here than a schoolteacher in Oklahoma.
- Stop whining about how unfair it is that some people made so much money. You hear all about the hedge fund manager who earned a billion dollars in one year or the retiring CEO who is getting $150m to sit on the beach. Are you so naive that you believe those numbers are typical? When was the last time you read about the banker who works a hundred hours a week, is paying fifteen thousand dollars a year in property taxes for his modest three bedroom home, owes a hundred thousand dollars for student loans and was just told he worked last year for free? There are far more of those stories across Wall Street -- even in normal times -- than the ones pitchfork and torch bearing mobs cite.
- Your views on how to "punish" those responsible for this mess are the best example of cutting off your nose to spite your face that I've seen in years. Want to know why things went from bad to worse last summer? (I know you don't really care, but I'm going to tell you anyway.) Lehman Brothers. No, not the bad investments or inability to access capital that pushed the firm to insolvency. It was disorder created by the loss of a major counterparty and the difficulty of unwinding tens of thousands of complicated financial contacts. If the same thing were to happen today with a much weaker financial system the outcome would be worse. Be careful what you wish for -- you just might get it.

Edit: Let me be clear in my use of pronouns. All "yous" after the first paragraph are directed at people getting up in arms without having even the slightest understanding of what is happening. My vitrol matches their foolishness, but few people who come across this post will fit into the addressed audience. Just venting here instead of throttling someone at church or on the street.