Curbing CEO Pay

We want an America where hard-work, intelligence, and accepting responsibility get you ahead. I should add 'honest' before both the hard-work and the responsibility. But the Randian philosophy that CEO's, and especially banking CEO's, are earning their money because of those qualities, and that in so doing they are providing a useful service has been severely strained during the past year.

With apparently reckless abandon, the major banking institutions increased their risk exposure, and the system of CEO compensation not once put on the brakes as hoped. So, we all know the outcome: Men like Jamie Dimon, Lloyd Blankfien, Dick Fuld earned $100 of millions before the companies they ran went insolvent (oh, wait: They didn't actually have to declare bankruptcy, we bailed them out!) With no money back for our effort.

How can CEO pay be restructured so that it provides the proper incentives to the individuals running the show? How can it require longer term exposure, so that risky bets that pay short term (but may fail spectacularly later) are fully carried as a liability to the CEO, so that they have to wait for maturity also to get paid?

I've had some ideas, but I really like it when those more familiar with the financial system get involved. So I was particularly interested to read this open letter from Yves Smith (of naked capitalism) to Sheila Bair (Chairwomen, Federal Deposit Insurance Corporation). She starts out with some good observations, specifically that we (the communities) end up paying the excessive CEO pay without a good return:

Dear Chairman Bair,

America can no longer afford to have a banking system that serves the ends of its executives rather than those of taxpayers and communities who have been saddled with cost of reckless profit-seeking. The FDIC proposal to tie deposit insurance premiums to the incentives in executive compensation programs would be an important step forward towards making sure that bank managers operate in a way that reflects the value of the extensive government support and safety nets they enjoy. Bank officers should not be encouraged, as they are now, to take “heads I win, tails you lose” bets with deposits.

There is no question that the annual accounting/bonus cycle is badly out of line with the time horizon of many of the wagers that financial institutions take. Unfortunately, the belief that using stock options or restricted shares as an important part of compensation would lead to responsible behavior has proven wildly false. Both Bear Stearns and Lehman had substantial equity ownership at both the executive level and among the rank and file. By contrast, when Wall Street was dominated by private partnerships, so the management group was jointly and severally liable for losses, the sort of profligate risk-taking that took place in the run-up to the global financial crisis was virtually unheard of.

Along the way, Ms. Smith observes that 'every academic study' that she has seen on bank size is inversely correlated: Bigger banks do not gain an efficiency that allows them to run cheaper, contrarily, they have higher cost to asset ratios. But, it balloons executive pay (and the outgoing execs as the result of a merger are given hefty golden parachutes.)

And so to the meat of her request:

I strongly encourage the FDIC to remove the incentive for executives to bulk up their banks solely to pay themselves more. One way might be to require that executive bonuses be set in relationship to the pre-acquisition peer group for a substantial initial period (at least three years, better yet five) and be benchmarked against the new peer group of bigger banks only if the merged entity had met certain operational performance targets.

There's substantially more, plus a link to the current FDIC proposal, along with enlightened remarks by many readers at naked capitalism.

Let's face it: Any institution that has grown 'Too Big Too Fail' is really just too big to exist under our current scheme, for the monopolistic power it then holds over the entire economy suppresses advancement, both for individuals and society. If the incentives for executive pay give them incentives to grow their companies without regard to long term survivability or potential damage to other entities and communities, then those incentive structures are wrong.

Because our goal is a wealthy society, as much as possible free from the scourges of poverty, and because the means to achieve that goal have been to allow individual monetary enhancement does not mean that we can't curb individual takings when those takings prove disastrous to our goal. I'm heartened that there is finally some work being done - although this is only a first step, unless we can remove the spectre of 'Too Big Too Fail', we will always have to live with the threats of Deep Recessions or future Depressions.

Good Work, Yves!

On Bias

Tom Tancredo doesn't read my blog. Apparently, he should.

Although I've covered the subject of voting tests before, I think there's an additional point to be made – especially if someone in our government still thinks they are a good idea.

One of the difficulties that we face with our modern society is one of scale. There are so many people, with so much going on, that we realistically perceive only a slice of all that is occurring. If you are like me, you attempt to gather more information than just what's on the 5 o'clock news. But, if we're honest with ourselves, despite our sometimes voracious appetites for information, we're only gathering a subset. We don't know all the laws, all the interactions between the government and the population, all the intended and unintended consequences of those interactions.

And so, to a degree, we trust in the working of the institutions upon which our Constitutional Democracy is based. We trust that if the legislative branch passes a law that undermines our rights unduly, that would create inequality, or give too much power to groups rather than maintain it spread amongst all the people, that the executive branch would step in with its veto. If that doesn't happen, laws are challenged in court, and again, the judicial branch would rule against any law that doesn't comport with our ideals as set out in our Constitution.

One has to admit that it has worked fairly well. Despite the rather myopic understanding of personal freedom and democracy exhibited by our founding fathers, (John Adams ignoring his wife's pleas to “remember the ladies,” the 2/5ths clause concerning slavery, landowning requirements for voting), our institutions have endured, and in using them, participation in the process of democracy has been increased. Previously discriminated groups have had some of the most egregious discrimination lifted. Women no longer have to stay in poor, abusive, or violent marriages for financial reasons – they are recognized participants with rights to own and purchase property, work, and vote.

While it seems plausible that everyone should have some understanding of the workings and history of our government, since none of us can gather it all: Which subset is the important subset over which we should test? Does it really matter if someone can't name a single dead white guy who once held the office of president? If you've never had to go to court, and can't name the local judge, is your understanding of government deficient? If you can't recite the fifteenth amendment to the constitution in its entirety, trusting instead that those who study and practice law can, should you no longer able to participate in democracy?

Through my life's experiences, through the people I've met, the subjects I've studied, I find myself most interested in how we can build a society of equality. My empathy for those who don't start out with the gifts of money, my perception that groups too often wield unreasonable power, that a modern corporation resembles not our ideal of democracy but rather a feudal oligarchy lead me to study those aspects of government and its interactions that could redefine society and allow greater opportunities to all. Were I to design a voting test, through no intention, but due to the history and ideas that I find most compelling; if it were to impart a bias upon its takers, it would be a liberal bias that matches my own.

Tom Tancredo, by his own admission, recognizes that a test designed by him would naturally cover those subjects that he finds compelling, those subjects that would impart a conservative bias.

Only a very naive person would make the mistake of thinking that if only Mr. Tancredo and I could get together and jointly design a test that it would somehow be neutral. Although you could draw a line between my position and his, we are not just two points in a one-dimensional world. Rather, we are two points somewhere inside a three-dimensional box: There is no reason to believe that the midpoint of the line between us represents any meaningful position inside that box, that it's in any way close to the center, or that the center itself is meaningful.

All voting tests would represent the bias (or biases) of their author or authors. Since individual bias is built on impartial knowledge, and the only group that actually encompasses all knowledge is the complete group (all members of society), the only way to leverage all of society's knowledge is to allow all of its members to participate in the governing process. Any test, by its very nature, would eliminate those individuals who don't possess a specific subset, but there is no reason to suspect (or prove) that the knowledge they do have isn't valuable.

It's also one of the tenets of our democracy: No matter who you are, no matter where you came from, no matter the circumstances of your life, you have a right to participate in matters that concern you. Any exclusion of full participation creates an oligarchy – antithetic to our ideals.

So, let's put the ideas of voting tests behind us for good. Building an inclusive society is hard. But, in looking at the expansions in freedoms for individual members made over the last 200 years, surely it is rewarding and worthwhile.

Oh, The Irony!

Xenophobia is the fear of others.

In our society, xenophobia is most often expressed through our discrimination and distrust of those in groups other than the group with which we identify. Different ethnic backgrounds, different sexes, different religions, different educations are all means used to identify, group, and distrust, if not out-right discriminate.

During the Civil Rights movement, realization dawned that combating discrimination was more than just passing laws: It was also completely removing from our minds discriminatory attitudes. Our speech often reveals our underlying attitude, and pointing out discriminatory speech as an aid to recognizing hidden attitudes became acceptable. Ethnic jokes and put-downs revealed our inner thinking, and we became intolerant. Sexism and Racism entered our vocabulary, as did PC, or Political Correctness.

PC bites us all sometimes. That old family joke about that other ethnicity? No longer repeatable. Poking fun at someone dressed differently? No.

The aim is tolerance. Acceptance of the others that make up our varied society. Ultimately, inclusion – allowing every individual the same rights, responsibilities and freedoms that we would give ourselves and those in 'our' group.

There have been those who chafe under the new rules. They want to maintain the status quo. We often see this in their standing in the way of laws that prohibit discrimination. “Women shouldn't have the right to vote”. “Business should be able to choose those who aren't tattooed, pierced, or require modes of dress, etc.”

This defense of the status quo, this backlash against what they see as overreach into our individual attitudes as become identified with the Conservative movement. “Those darn liberals,” they cry, “taking away our ability to force people to look and talk and behave like us!”

So it was with great surprise last week that one of the most un-PC of the conservatives, one who has reveled in her very lack of correctness, should call someone out for uttering a discriminatory put-down. When Sarah Palin called out Rahm Emmanual for his transgression, she gave tacit approval to the idea that what we say reveals what we think – and that we should attack our discriminatory attitudes where they live.

But do you think the concept of reciprocity will enter her thinking? Do you think that she will realize that by extension, that discriminating against any other group is unacceptable? Will she, and other like-minded conservatives, realize that we still have far to go to admit all other groups into society as equal members?

Gays may soon be able to openly serve in our military. When will we give them the right to marry? Come on, Sarah. You've said the words against discrimination: Can you live up to their promise, and start supporting equality for all?

Light Bulbs

One of the light bulbs burned out on the car the other day. Not a big deal. After work, I stopped by the auto parts store to get a replacement. I was confronted by an assortment of bulbs, all the right size. The question was: How bright did I want to go?

For a mere $22, I could get a pair of OEM replacement bulbs. For just $3 more, I could get a pair that promised up to 30% brighter. $15 more than that, and I could have 45%. And for another $10 above that, I could give my vehicle up to 50% more light than it previously had.

Being frugal, and pretty happy with the lights on the vehicle, I opted to get the first step up set, and hurried home.

While I was replacing the bulbs, my curiosity kicked in. How do they make the bulbs brighter? I read the back of the carton, just to see if there were any clues.

Where they higher wattage? Nope. Same 55/60 watts as the original. Different style? Nope. Halogen. Different shape? Not that I could discern. Different emitted wavelength? Ah, yes. The new ones emit light equivalent to 3200K, compared to the originals at 3100K. A higher Kelvin rating on a bulb will indicate a whiter (but not necessarily brighter) light. Whiter light may allow us to see more clearly, but that is just perceived brightness, not actual brightness, as measured by the lumen output.

And then I read the very, very fine print. It indicated that halogen bulbs dim over time, that towards the end of its life, a bulb could emit as much as 20% less light than when new. Replacing your old, worn out bulbs with these new ones will give you 30% more brightness when compared with the old bulb!

Well, sure! And the direct replacement will give you 25% more light than an old one.

But that's not the comparison we expect (or at least, that I expected). I figured that a bulb that was 30% brighter was a comparison of new to new - if you multiply 30% by 80%, it turns out that the new, brighter bulb I purchased emits only 4% more light when new than the OEM bulb would emit when new.

Is the advertising false? Well, not directly; They do print the actual comparison, it is factually true. But is it deceptive? Absolutely. Would I have sprung the extra dollars for a bulb that was measured to be only 4% brighter? Probably not.

Am I angry? No, not really. I'm more amused than anything. Amused that I would fall for something so deceptive. Amused that this activity (purposefully deceptive advertising) is so widespread and accepted in our society. Amused that my desire for safety could be so easily manipulated into worthless spending.

And, quite honestly, surprised that we put up with it.

Caveat Emptor!


(That 50% brighter bulb? Turns out that it's only a 20% improvement over new...)

On Voting Tests

An individual was expounded on the idea that there should be some test before being allowed to vote. Perhaps something as simple as the ability to read should be required, so that people who are making the decisions about who would lead us at least have indicated some base intelligence, and wouldn't be too likely to support a candidate just because the candidate was a proficient speaker.

As with many heinous ideas, it sounds plausible on the surface. We don't want the truly ignorant making decisions that effect all of us, do we?

But, the idea of imposing a test deeply bothers me, on at least three counts.

First, it is antithetical to the idea of democracy. True, in America, we are a representational democracy, and many hide behind this fact as cover for advancing elitist and exclusive ideas – ideas aimed more at keeping in power those with whom they agree rather than allowing for a pluralism of thought (and action.) It reveals the inability of those who expound such ideas to grasp that their experience and their decisions are not universally right or universally accepted: That other citizens, with other experiences, can, and do, reach rational but different conclusions.

Second, there is the difficulty in determining which test to impose. It is hardly a trivial problem to attempt to solve. Want people who are not likely to be hoodwinked? How, exactly, do you test for that? Early constraints, like requiring land ownership (and maleness) surely did nothing to indicate a lack of gullibility. Individual experience and specific situations certainly play a much larger role in avoiding gullibility, plus any test would be lengthy and still likely prone to error. (Just witness the inability for SAT scores to predict success in college to gain an understanding.)

Finally, and I think most importantly, the idea of excluding individuals from participating in society violates and undermines one of our most important goals: Building an equitable and just society. For far too much of human history, ruling classes have taken advantage of, and treated differently those ruled. Of course, when the tables turned, and the former slaves became the masters, they continued their master's ways, and the cycle continues.

However, the structure of a fully inclusive democratic society is different. It attempts to break with this cycle, and build durable, just institutions that can withstand changes in society's composition, changes in the ruling class, and absorb and advance changes in the understanding of justice. We don't want to build a society that just protects us when we are the ruling class: We want a society that will continue to protect us fairly if/when we become a minority. We want to embody John Rawl's ideas of Justice as Fairness (as set forth in his book 'A Theory of Justice'). We want to place ourselves behind a veil, and build a society and institutions whose very structure would be fair, and we would not protest no matter which position in society we find ourselves (majority, minority, ruling class, middle class, etc.)

Imposing a test would violate this principle. What if someday, we or our descendants no longer get to determine the test, and it is redesigned to exclude us or them? What a horrible legacy to leave. Far better to support full inclusion today, to support and strengthen a society built on justice for all citizens.
For only in doing so do we have a chance to break with human tradition, and forge a new path towards a fairer, and ultimately freer, tradition.

A Nation's Counterfeiters

"These actions furthered blurred the lines between banking and counterfeiting.”

So iterates Stephen Mihm's “A Nation of Counterfeiters” - a book that traces the history of counterfeiting in America. But, although the book traces the lives and livelihoods of many of our nation's foremost counterfeiters, it is about much more than just counterfeiting. It is about money as a product.

Through its pages, we read about not only the problems of counterfeit notes, but counterfeit banks (dubbed wildcat banks.) For it was not uncommon in antebellum America for a group of men (and it was men, women were not yet allowed) to obtain a state charter for a bank, set up the vaults and the printers, take their deposits, print and circulate their currency, make loans, take profits (which they quickly exchanged for the currency of a well-known reputable bank), and then shutter their doors, insolvent. This left ostensibly 'real' tender in circulation that had often less value than a well-executed counterfeit note on a good bank.

Bankers have been earning our ire for 200 years.

We're caught in a double-bind. We need money, and for the money supply to correlate with the demand for goods and services and the productive capability we have to fulfill those goods and services. Although we now have a central printer of actual money, the printing presses of the Federal Reserve are not the only way 'money' as we know it comes into existence.

When a bank takes its deposits, say $10 million, it doesn't lend just $9 million back, but perhaps $90 million – thus creating $80 million dollars. That created money serves a purpose: It is the grease that enables a modern economy to run and expand.

But the unevenness of the money supply vis a vis demand and productive capability is a major factor in creating recessions and depressions – periods of adjustment to re-align production, consumption, and restore faith in the economy and the currency.

It would be fine, I suppose, if after a glut of money, it was bankers and other employees of finance who found themselves looking for new lines of work as their sector contracted. But, as we all know, it is predominantly non-finance people who lose their work as a result of too much money.

We need to acknowledge that losing one's job due to a severe contraction in the economy is not the same as losing one's job due to a lack of diligence or laziness. We should concentrate our ire on those most responsible – those who unreasonably profited while creating more money than the economy could absorb.

So, we have a right to be angry at these modern counterfeiters who devise new ways to create money for their own enrichment. And, just as the movement to a common, Federally executed currency and the creation of the Secret Service to ferret out counterfeiters after the Civil War brought early counterfeiting to heel, perhaps new regulations or stronger leadership at our current regulator (The Federal Reserve itself, Mr. Bernanke!) will even the economy.

Regulating or constraining the actions of some for the greater public good is not a descent into Socialism – it is precisely what good societies do. Antebellum counterfeiting died when the risks outweighed the potential profits. Modern day counterfeiting will, too, but only if we and our rule-makers are willing to restructure the laws governing the world of lending, investing, trading, and finance. Restructure the rules so that individual short term gains cannot be taken against long term risks. Regulate actions and products - just as it is illegal to print your own money, why can't it be illegal to create products (I'm thinking Credit Default Swaps) that mimic money?

We'd like to think that counterfeiting belongs to a time long ago. But, recent events prove otherwise. Until we address its modern forms, we remain A Nation of Counterfeiters.

Avatar

I saw the movie 'Avatar' yesterday.

It really was like nothing I've seen before. The computer generated scenes blended with the real actors. As Greg Moody said, this movie is worth seeing for the visual effects alone. What's really cool is that the visual effects aren't limited to just pyrotechnics, but a vivid realization of an alien world, complete from fearsome carnivores to strange herbivores, surprising insects, and a flora as varied and sometimes startling as found in any rain forest on Earth.

The Science Fiction in the movie does leave a few questions unanswered, and a few inconsistencies. I awoke this morning to a couple of questions of “But what if?” and “If that worked there, why didn't it work later in the movie?”. Part of the movie is very Matrix-like, with humans making a mind-transferring link to another entity; But unlike the Matrix, when the humans leave their Avatar's body, it leaves the Avatar incapacitated, and very vulnerable. Surprisingly, nothing happens to them in that state.

But those are just nits in what is other-wise a fine movie. Although, as has been pointed out, the plot is fairly simple, that's not the point of this particular film. James Cameron has a message to convey, and everything in the movie, from the actions of the aliens and The People, from the portrayal of a rich, green, interconnected and spiritual world contrasted with greedy, destructive and isolated self-interest is used as metaphor to drive the point. It may be a little heavy-handed at times, but this particular message has been given many times with more subtlety, and unheard, so perhaps Mr. Cameron can be forgiven.

Sadly, one of my movie-going friends indicated that many of those that would benefit most by contemplating the message have already rejected it. If only there were a metaphor for a closed mind in the movie...

Ah, yes. In the words of the Na'vi, “You can't add to a vessel that's already full.”

Indeed.

But for those whose vessels are receptive, Avatar is the most richly imagined and vividly realized telling to date. I recommend it.