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End Bonuses For Bankers
theodp writes "NYU risk engineering prof Nassim Nicholas Taleb has a suggestion that won't sit too well with the banksters. In his NY Times op-ed, Taleb writes: 'I have a solution for the problem of bankers who take risks that threaten the general public: Eliminate bonuses.' The problem with the bonus system, Taleb explains, is that it provides an incentive to take risks: 'The asymmetric nature of the bonus (an incentive for success without a corresponding disincentive for failure) causes hidden risks to accumulate in the financial system and become a catalyst for disaster. This violates the fundamental rules of capitalism; Adam Smith himself was wary of the effect of limiting liability, a bedrock principle of the modern corporation.'"
bankers will still upset the market on purpose for bribes, much like how politicians lie to (and upset) voters because of what amounts to bribery....
This is a fundamental property of capitalism: when a corporation gets lucky it can cash in and when it gets unlucky just go bankrupt.
This isn't a solution until he first figures out how to get this by the politicians that said bankers have bought with said money.
"why didn't anyone think of this before" things.
After all, banking isn't really an "industry" in the sense that the word is used in relation to other industries. What does the banking "industry" produce? Money? (In the form of deposits when they make loans?)
How do you increase productivity? More loans per bank employee?
Ideally, banking is supposed to be a support process, not a growth industry in itself. So, yeah, it seems to make sense not to give bonuses to bankers.
I'm not a lawyer, but I play one on the Internet. Blog
If the problem is no corresponding disincentive for failure, it doesn't make sense to remove the incentive for success.
Instead, should unwarranted bonuses be given that later turn out to be fraudulent, the bonuses should be clawed back. Perhaps add a penalty of 50% of the bonus on top of clawing back the full bonus.
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How about if a corporation is awarded death penalty, all its assets would be sold,the proceeds will be distributed to the shareholders, the corporations name, ticker symbols and other trade marks will be sequestered for ever?
It is far too easy to create corporations, compared to real human beings. Corporations do not require visa/green card/work permit/citizenship to work and profit inside the USA. So we can apply the lower standard of "preponderance evidence" to award death penalty to them, not the stricter "beyond reasonable doubt".
Any corporation that is too big to fail, is too dangerous to exist. They should be executed. We bailed out the financial institutions. They technically are living due to our mercy.
Let us break up any bank that has more than 10% market share in retail banking. Any investment bank that has more than 10% market share. And reinstate Glass-Stegall act. Let us do it peacefully when we still can do it in an orderly manner. Else someday roving mobs will be pulling out chairman of Goldman Sachs hiding in sewer pipes.
sed -e 's/Chuck Norris/Rajnikant/g' joke > fact
It doesn't take a doctor of risk engineering to figure that out. The average Joe on the street could tell you the same thing. It's easy to come up with ways to improve the banking system. Now, getting our overlords to implement them is another matter.
A corporation that is too big to fail is too big to have. The Justice Department spent 10 years trying to break apart Microsoft while the banks kept consolidating and getting bigger and bigger. This is a problem.
The solution isn't to eliminate bonuses, it's to send people to prison when they lie (and their lie disrupts the entire global economy, as is the case with the S&P / Moody's / Fitch ratings agencies that declared all of those worthless bonds AAA), and to not bail them out when they fail.
Again ***
The solution is to not bail them out when they fail.
Therefore, they should not be allowed to be so big that they pose a systemic risk to the entire system.
Period.
Also when a corporation is executed, all the internal contracts between the board and top executives on one hand and the corporations on the other would be null and void. Thus they don't get their golden parachutes.
sed -e 's/Chuck Norris/Rajnikant/g' joke > fact
So the incentive for people to be creative, finding better ways to increase profit goes from a system of irregular rewards to one of threat? e.g. You don't make $$$ in quarter, you get the sack.
While this may be popular with the people who lost jobs or homes, plus the Occupy movement, banks probably won't go for it as psychology has determined we are more productive with irregular, but predictable (you know you'll get a bonus of you make the money) rewards.
I'd rather the change to banks be that they are not to put more than certain % at risk. I know they don't like that, but better safe and steady than another massive flop like 1929 or 2008.
A feeling of having made the same mistake before: Deja Foobar
What TFA is proposing seems to be a way to recover some of the protections lost when Glass-Steagall was repealed; specifically, don't allow retail banks like BofA and Citi to have trading floors or do investment banking.
BTW Phil Gramm seems to have an uncharacteristically low profile these days.
Totally eliminating all risks is a bad idea, because then banks will not back a lot of potentially good, but also risky ideas. It will stagnate the economy even further when only mundane ideas can get loans...
The reason you see WAY too much risk being taken is that some large banks know now the government will not let them go bankrupt. When there is no chance of failure you can shoot for the moon, so to speak.
The traditional disincentive for failure is that if you fail often enough, you'll be fired or your company will go under. You are playing with other people's money, you can only screw that up for so long - unless of course you are backed by an endless parade of government bailouts.
Look to places where regulations have indeed eliminated risks of failure and fix THAT, don't dumb down what banks are able to invest in by eliminating upside.
"There is more worth loving than we have strength to love." - Brian Jay Stanley
This changed when firms went public and came to be run by employees rather than partners, with the usual issues of agency, of which asymmetrical incentives are high on the list.
Lacking <sarcasm> tags,
I'm a voracious reader. I figure I've easily read thousands of books in my life. My top ten list (hey, I'm a nerd) of most thought-provoking books I've ever read are:
10. Why Societies Need Dissent - Cass Sunstein
9. The Road to Reality - Roger Penrose
8. Diplomacy - Henry Kissenger
7. Last Chance to See - Douglas Adams
6. Free to Choose - Milton Friedman
5. Cosmos - Carl Sagan
4. Guns, Germs, and Steel - Jared Diamond
3. Black Swan - Nassim Nicholas Taleb
2. Meditations - Marcus Aurelius
1. Bible (KJV)
You are doing yourself a disservice if you don't read Taleb. He is one of those rare authors who doesn't just serve up facts, but fundamentally alters the way you see the world.
No point in alienating mutual funds and individual investors in this war. Often it is the small investor who stands to lose a $1000 investment in a bank is the one who would be most seriously fighting back. The fat cat bankers will hide behind these small investors and use them canon fodder. First cut the most egregious bad boys away from the not-so-innocent but not-so-culpable group. That is where they hide. That is the sanctuary we should deny, and the escape route we should cut off before rounding up the fat cats.
sed -e 's/Chuck Norris/Rajnikant/g' joke > fact
That way, we can claw it back if their policies bankrupt a company. Also, by doing it that way, we encourage the corporations to think in longer terms -- and to structure the bonuses to pay out depending on longer term results.
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I vote we start chasing them into the sewer pipes and just save ourselves some time.
A $500,000 salary with a potential $5M bonus, a $5.5M salary with a potential "fail risk" of $5M, and a $2.5M salary with a potential bonus of $2M and a potential "fail risk" of $2M amount to the same thing.
The "risk of failure" in each is entirely in the mind of the banker - does he see his salary as "at risk": "I'll get $5.5M unless I fail to perform at the highest level" or does he see it as an opportunity to be rewarded for going beyond expectations: "I'll make $500,000, but I could make an additional $5M if I do really well."?
For the sake of argument, assume that all 3 salary options are paid out over the same period of time, have the same tax and other consequences, and are subject to identical performance or lack-of-performance measures.
Knowledge is how to play a game, intelligence is how to win, wisdom is knowing what game to play.
Bankers aren't the working class, their the ruling class. You can't "end bonuses" for them without a major social upheaval. The trouble is those bonuses represent a major redistribution of wealth from the working class to the ruling class. The only answer that "ends bonuses" is switch the redistribution to the other direct. But when we redistribute wealth to the working classes we call that socialism. It's only capitalism when the ruling class gets the money.
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Let's just hope you don't work for an "executed" corporation. You're just throwing potentially hundreds of thousands of working class people out of a job to punish the top tier - no problem with that, right?
If you can read this... 01110101 01110010 00100000 01100001 00100000 01100111 01100101 01100101 01101011
It's not a property of capitalism. It's a property of cronyism. I'm so sick of anti-capitalists and their Che Guevera T-shirts. What do you think the guy you bought that shirt from is?
The last thing an ego-maniacal millionaire is going to do is give up his "hard-earned" money. At some point in the wealth process money becomes the _only_ measuring stick of success. It's not that you need more, rather it's that you want more. It's like an addiction. The only way a law like this would pass is if there were a bigger payoff awaiting those who would support it.
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For every proposed solution or reform, people come up with a thousand reasons why it can't possibly work, and why we can't change the status quo.
I guess the implications of that are obvious - We're living in something approaching the best of all possible worlds.
Therefore we shouldn't change anything.
On our current course, we're set to virtually eliminate the middle class in several more decades, so I guess that makes the world a better place. I guess that makes it sound like my status as a member of the middle class is making the world a worse place, but I guess I'll go on being "evil" as long as I can mange.
But let's look at the bright side...
Without a middle class, we won't need as much infrastructure, since most of us will be walking or taking a bus, since we won't be able to afford cars any more. We don't need to bother fixing that aging infrastructure, we can just decommission it. Decaying infrastructure problem solved.
As our income sinks lower and lower, even those low-paying jobs currently taken by illegal immigrants will start to look attractive. Americans will take the low-paying jobs. Illegal immigration problem solved.
Once there is no middle class and the wealthy are safe in their gated communities, drug addicts won't be able to find easy victims to support their habits. They'll wind up going cold-turkey simply because they can't afford the drugs on their own, and are no longer able to steal enough. Drug problem solved.
The military becomes the only reliable employer, since all other decent-paying jobs have been sent overseas. There are so many people trying to get in that the military can raise their standards back up to where they ought to be. Recruiting problem solved.
As we quite being able to afford to travel, we can take the national parks and either mothball them to eliminate cost, or out-and-out sell them as resorts, generating revenue. Not a solution, but certainly an assist to the deficit/debt problem.
The living have better things to do than to continue hating the dead.
Essentially the corporation will be broken into divisions and sold off in pieces. Most of the actual productive jobs will remain. We have quite good knowledge, experience and track record of breaking companies into smaller pieces. In the long run, the competition creates more jobs and more vibrant economy. When AT&T was broken up by court order, and before the baby bells re-agglomerated into Verizon, we had a nice trajectory of falling prices and improved services.
sed -e 's/Chuck Norris/Rajnikant/g' joke > fact
"Let us break up any bank that has more than 10% market share in retail banking. Any investment bank that has more than 10% market share."
Actually, bank size is NOT the problem. Canada only has seven banks and they are of course bigger than US banks with all their alleged competition.
'reinstate Glass-Stegall act."
That is indeed the regulation situation in Canada and Canada's economy did NOT go into the shitter.
"Let us do it peacefully when we still can do it in an orderly manner. Else someday roving mobs will be pulling out chairman of Goldman Sachs hiding in sewer pipes."
Screw peacefully, I want to see the banksters get frog marched to the Guillotine.
I say that THEY are the terrorists. The DESERVE to be treated like Quadaffi...
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He actually said companies that have received bailouts should ban bonuses. (listen at 8:00 from the below clip.) This could be an easy thing to do, tied to the bailout money that they receive. Though he argues other places, that the banks shouldn't have been bailed out in the first place, they should have been allowed to fail. Bailing them out has rewarded those that have made mistakes, socializing the losses and privatizing the gains - this is the definition of crony capitalism. IT'S NOT CAPITALISM. This is incredibly important to understand so we can get out of this mess. Listen to him at 6 minutes in: "we're not living in capitalism, we're not living in socialism, we're living in some weird combination, with a cartel, the banks controlling more than their share". "It's a compensation scheme nothing more." "they blew up in 82-83, and they blew up now".
Unfortunately, now these liabilities have been moved from the banks balance sheet to the government balance sheet, moving lethal risk from the banks to the sovereigns, which will blow up the monetary system.
He also goes on to talk about the code of Hammurabi 1750 BC: "If a builder builds a house and the house collapses and causes the death of the owner of the house, the builder shall be put to death." "If it causes the death of the son of the owner of the house, the son of the builder shall be put to death" The Romans also implemented it, "If you were the engineer of a bridge, you had to spend a few nights under the bridge" "CAPITALISM IS ABOUT INCENTIVES, BUT IT IS ALSO ABOUT DISINCENTIVES."
Here is the clip of him on bloomberg:
Am I the only one who has a man crush on Taleb?
http://www.zerohedge.com/news/nassim-taleb-occupywallstreet-and-his-updated-views-global-banking-system
It is far too easy to create corporations, compared to real human beings.
I know how to make a real human being, in any state of the union; there are lots of instructional videos on the internet. Please point me to a video for creating a corporation as easily, and as pleasurably if possible.
Often times some of the biggest shareholders are the executives of said corporation so that would be directly rewarding them for executing their company.
I got here through a series of tubes
Great link! I agree that the real problem is that we have these firms that are too big to fail. Asset price bubbles (like internet stocks and real estate in the past couple decades) are going to to happen, but we must not support firms that exacerbate the issue with a government guarantee.
After the corporation is already dissolved, the IRS will trackdown the LLC partners and make them pay the back SS and medicare payments?
Yes, in fact failure to pay payroll taxes is considered tax fraud and a criminal act.
"Somebody has to do something. It's just incredibly pathetic it has to be us."
--- Jerry Garcia
Wall Street firms — independent companies and the securities-trading arms of banks — are doing even better. They earned more in the first 21 / 2 years of the Obama administration than they did during the eight years of the George W. Bush administration, industry data show. Source: http://www.washingtonpost.com/business/economy/wall-streets-resurgent-prosperity-frustrates-its-claims-and-obamas/2011/10/25/gIQAKPIosM_story.html
Bush. Obama. Clinton. Who cares? I grow tired of trying to pin the tail on the appropriate "ass" here to find blame...like THAT is going to do any good? Think we're actually going to incarcerate a former President? Please. We can't even manage to impeach an active one even when we find reason to. Greed and Corruption existed far before the last dozen presidents were in office, so let's stop with the name games already. If you want to throw any name around, then stick with the current guy for not doing a damn thing about the problem. Everything else is water under the bridge, and in many ways, all equally guilty.
Or a community bank.
That will get their attention.
Ah, you're confusing the top 1% in the world with the top 1% in the US. Wealth is distributed much more evenly in the rest of the developed nations in the world, but once you compare cost of goods in the US to say, China, India, Honduras or even Greece, you'll see that the lower income in those countries is also easier to live on than that amount of money in the US.
Your reference to $34k/year is a straw man. The Occupy movements are specifically rallying against the upper 1% in the USA or the upper 1% in their own country.
Most ignorance is vincible ignorance. We don't know because we don't want to know. --Aldous Huxley
Instead of paying people based on their self-inflicted stress levels, imagine paying people based on value delivered to other human beings.
Or we could just pay them based on supply and demand. There's just something screwed up with the supply/demand ratio, because these fraudsters, gamblers, and self-deluded financial geniuses aren't in short supply.
You're funny, you were insightful until you started calling the President a liar. How do you reconcile that despite Goldman Sachs people being brought in, that the President actually did propose to congress what he promised while campaigning and he's met nothing but staunch opposition from Republicans who's stated goals are to make him, the President of the United States fail. You should probably look at the number of proposals the executive office has put forward to the legislators only to have little to no progress in return even when it is their own proposals.
So rather than trying to portray the issue as black and white and cloud the problems with the banking industry by blaming government maybe you should realize that both are messed up and in need of serious reform, reform that McCain as a Republican proposed during the Clinton years with compaign finance reform. Then there is the need to put taxes back to where they were in the Clinton era, then put Glass Steagel back in for regulation of the financial sector and you start the process of developing a sane road to real recovery.
I look forward to the day when we can have rational debates that don't involve Republican versus Democrats and instead revolve around actual problems that need solving, like alternatives for oil, infrastructure rebuilding, energy generation, healthcare, and the myriad of other actual problems.
"How Economic Inequality Harms Societies" (video http://www.ted.com/talks/richard_wilkinson.html )
I dunno about 'wealth'. This video talks about income instead. Income *is* more evenly distributed in every developed, western-style economy than it is in the US. The UK seems to be a close second in income inequality.
As this video points out at the very beginning, income differences between nations MAKE NO DIFFERENCE in life expectancy (or any of the other measures of societal well-being used in the man's talk). But WITHIN a country, every income group does a bit worse than the income group just above.
In addition, countries with high inequality do worse (example used in video: child mortality) at all income levels than a country with with lower inequality (given comparable GDP/capita). Yes, the difference is large at the bottom and small at the top, but it is consistent across the whole income gradient.
So, go ahead and sneer that people who want greater income equality are just ungrateful, greedy, lazy, stupid, confused or whatever. But the fight for greater income equality has the data to show that it is a *cause* of negative social outcomes, and the data to show that it hurts the rich too (just not as much as it hurts the poor).
I don't vote for the leader of the world. I do vote for the leader of my country and several representatives for my state in the national legislative body. So I have limited influence on income inequality across the whole world. I support open borders, free trade, reduced agricultural subsidies, and anything else that would help raise the world's poor out of the trap they live in. But you are suggesting that I should let my version of "The American Dream" be better realized in Denmark than in the US (social mobility is highest in Denmark, lowest in US). I don't know what kind of country you want to live in - but daddy's income shouldn't be the most important thing in *your* income. It should be about how hard you work. That happens in more equal societies, not in the US.
Ignorance about how the world works is curable - but now you have no excuse.
I don't have time to watch a 53-minute YouTube video, but in case you haven't been paying attention, inflation is not a problem in this country right now. Interest rates are at record lows. In fact, rates on some T-bills are negative. This means that people are paying the federal government for the privilege of lending it money.
We could do with a lot more inflation in the near term. It would accelerate economic growth, and it would cause the debt held by many middle-class people to shrink in real terms. This would be good for people with underwater mortgages, massive student loans, or big credit card or medical bills.
Strict anti-inflationism (and the idea that the system is secretly rigged to create inflation) is a viewpoint that tends to be held by gold bugs and other "hard money" obsessives. But inflation is mostly something that hurts people with lots of money. It doesn't hurt ordinary people as much, as long as their incomes keep pace with inflation in the cost of living, and as long as we don't have hyperinflation. And again, inflation actually helps people with debts.
From a macroeconomic perspective, the best thing that both the Fed and the European Central Bank could do right now to jump-start the American and European economies would be to significantly increase inflation.