Calling Ferdinand Pecora ... a smart reading of '30s history
The telling thing about the political jihad unleashed this week on the bankers blamed (alone, it appears) for the global financial meltdown, is how blithely folks accept the notion that bureaucrats at the Federal Reserve are preparing to insert themselves into the pay practices of "any" institutions they regulate.
Not the seven companies, including General Motors Co., Chrysler Group LLC, Citigroup and AIG, who are essentially owned by American taxpayers -- as I argued today. But everyone else. Wake up, people, and go read your history. At least back in the 1930s, as author Ron Chernow recounts in an op-ed in today's New York Times, the narrative was clear, the villainy was obvious and the need for a regulatory response was more obvious. Now? Not so much.
"Far more dangerous is yesterday's announcement that the Fed plans to impose new pay guidelines on all of the banks it regulates," The Wall Street Journal argues in an edit today. "While the Fed imposed no pay cap, and it was at pains to say it didn't want to impose a 'one size fits all' standard, the implication is that any large single-year payouts will be frowned upon by regulators. The irony is that judgments about what constitutes 'excessive risk' at banks will presumably be made by the same Fed regulators who let Citigroup put hundreds of billions in [Special Investment Vehicles] off its balance sheet. That certainly looks 'excessive' now, though apparently it didn't amid the credit mania. The point is that Fed officials aren't likely to have a clue what kind of risks warrant tighter compensation rules."
But at least they'll look like they're doing something. Which apparently is preferable to emulating the example of Ferdinand Pecora, chief counsel to the Senate Banking Committee in the early 1930s, and assembling an exhaustive narrative of how political pressure from Congress, legislation pushed by successive White Houses and the get-rich-fast ethos of Wall Street conspired to push Main Street into today's funk. It wasn't just the bankers, folks, explaining the precise need to make it look like they are the only ones to blame. Accountability should be more than a one-way street -- but it isn't.
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Why we NEED a Pecora
You walk in the door. A terrible stench attacks your sinuses. The sewer has backed up and flooded the place. And the maid is dusting pictures.
I read the analogy many years ago, and, while I forget the author's name and the precise context in which he wrote, the analogy strikes me as appropriate. The regulation of executive pay is equivalent to dusting the pictures.
Nevertheless, it is time to do something. And the something is a complete overhaul. And it will not be done without a political revolution.
It took a Pecora report to make the Securities Act of 1933 possible to put past the Senate of the time, and it will take something like it to get anything worthwhile past the Senate we have now, one wholly owned by the banks. The real breakdown in the Senate is not Republicans versus Democrats, but is bank-owned or not bank-owned. Who remembers alleged liberals Daschle and Biden assisting the 2005 Bankruptcy Reform and Consumer Protection (snort!) Act because the credit card issuers were in S. Dak and Delaware?
The real problem with executive pay is not that gaudy compensation offends little people. Little people really don't matter any more, as they have been shown to be easily manipulated (why else would an Alabama working stiff vote for a Shelby, or a Macomb-St. Clair area working stiff for a Miller?)
What is important is that the chase of Xanadu pay nearly led to the collapse of the economy as the so-called smart people kept selling soup (mortgage securities) into which they were simultaneously urinating (NINJA loans), and other so-called smart people kept buying it until the stench got too bad.
The chase had multiple bad consequences. First, the notion that the mortgages made highly desirable and marketable securities diverted credit from productive use to making a real estate bubble which briefly enriched real estate speculators and salespeople. Second, the collapse made the lenders into Twain's cat who sat on a hot stove.
So homeowners found their primary asset became much less valuable, or even valueless. But there was worse to come. There are Michigan businesses which have been destroyed because credit was made unavailable to them. Small companies had contracts with D3 companies, but couldn't get loans to be able to do the work until they got paid (the D3's slow pay practices didn't help much either). The workers they laid off, of course, stopped buying things, and, eventually, stopped making loan payments. The avalanche started, and as it continues downhill, it picks up more and more snow, whose mass increases not arithmetically, but geometrically ( a cube function).
The Keynesian solution is that the government has to provide demand when the private sector does not. And it must do that by taking (taxing) from the hoarded and getting it to those who will circulate it. This can be by direct payments, or by building roads, bridges, and weapons, or other government actions, including creating employment as soldiers, police, firefighters, teachers, and even bureaucrats. The hoarders, naturally, do not like this idea very much, and will fight to keep what they have. And they fight by buying portions of the government. The cheapest effective things to buy are Senators from small states, especially ones who don't even know they've been bought, bacause they actually think what they do are good things. Thus the Senate is full of Hatches, Conrads, Baucuses, Shelbys, and the like.
While I have digressed a bit (well, OK, a lot), I return to the point that a Pecora is necessary to provide the necessary explosion to break loose the resistance of the Senators who belong to the banks, just as dynamite was essential to make possible tunneling through rock, and, thereby, such things as transcontinental railways and the Panama and Suez canals. America's threatened middle class needs a new Pecora to counter the upper class's Becks and Limbaughs.
Actually, attacks on executive pay are just the battles the owners of America want to fight, because on these they can make arguments which appear attractive to the working stiffs who are, still, the majority of the voters. They can argue that such is the first step on the slippery slope away from freedom. What they don't want to talk about is the freedom the owners take from others by the erection of barriers to entry. They also do not want to start debates about the constraints on ruthless capitalism that such icons of conservatism as Adam Smith and Edmund Burke called required by Natural Law.
The history of the 20s and 30s is important not only to read of the FDRs and Pecoras, but also of what daily life was like for working stiffs. It was not a time of suburban homes, two or more SUVs in the driveway, cable TV and internet. It was a time when having one's own washing machine was a rare thing, and when electricity was not available in much of rural America. The unions of which you now write so disparagingly were necessary to the creation of a middle class. Unfortunately, they, too, have become perverted versions of what they once were. Gettlefinger is to Reuther as Clinton is to FDR, or, even, as Dubya is to Eisenhower.
Dan, you are too smart to think that Wall Street is not predatory. The country needs to be protected from it. But one needs to be smart about it. We do not want to create the equivalent of Robert Sheckley's fictional "Watchbirds" (http://www.mastersofscifi.com/site/masters_of_science_fiction/episodes/watchbird.html)(The short story is well worth reading, if you haven't yet)
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