What's up with the root?

I miss that light-skinned black guy who used to come on BET news, what's his name? Courtney Malloy. He's so buried in history that it took me about eight searches to verify that this guy even existed. Apparently he was a columnist for the Washington Post. and pretty much all i got was this article on www.blackcommentator.com, which by the way is going out of business. But that was just a reference to an article that is no longer available on the washington post website.

Anyhow. What's my gripe? Well, I am a regular Slate reader. I especially like the column jurisprudence, there's something widly entertaining about how they cover the shenanigans of the supremem court. And perhaps only they can make what the Supreme Court does into shenanigans.

Back to topic.

I'm a regular Slate reader, and i want the same kind of poignant commentary about the world and life from a black perspective. They have a sister-site (can we call them sisters?) called The Root. But everytime i go to the root, i'm sadly disappointed. I don't know, i read the NYT, economist sometimes and a few other online rags that keep me up-to-date. however, whenever I read the root (no longer caps), I'm sadly disappointed.

Most of the stories they have are of the Chris Brown (W) vs Rihanna (L) tragedy. They talk about entertainment and sports. But is that all black people do?

Great, i want a black perspective. But sometimes that means I want an economist who is black, not just some random black guy talking about the economy (me, duh). I'd like a political commentator or seventy who are dissecting the politics of the day, mostly the way the mainstream media does, but who also has the compassion, wherewithal and sense to throw in something from a grounded multi-cultural perspective. I'd just as well like to see the Sino-American or Hindu-American (maybe not Jindal) viewpoint. But it seems that those viewpoints are so niche and pushed to the side, that they can't even be mainstream.

Maybe I'm just spoiled by NYT and Slate. I'm just upset that the Root doesn't have anyone that speaks statistics and translates them into english.

Nassim Taleb on bonuses

1. I was just saying that i was sick of the bailout. and this comes along.
2. I'm beginning to like this guy (Nassim) more than the wizard of omaha.

How Bank Bonuses Let Us All Down

by Nassim Nicholas Taleb

One of the arguments one hears in the compensation debate is that the bonus system used by Wall Street - as John Thain, former Merrill Lynch chief executive, put it - is there to "reward talent". While I find this notion of "talent" debatable, I fully agree that incentives are the heart of capitalism and free markets - but certainly not that incentive scheme.

In fact, the incentive scheme commonly in place does the exact opposite of what an "incentive" system should be about: it encourages a certain class of risk-hiding and deferred blow-up. It is the reason banks have never made money in the history of banking, losing the equivalent of all their past profits periodically - while bankers strike it rich. Furthermore, it is that incentive scheme that got us in the current mess.

Take two bankers. The first is conservative. He produces one annual dollar of sound returns, with no risk of blow-up. The second looks no less conservative, but makes $2 by making complicated transactions that make a steady income, but are bound to blow up on occasion, losing everything made and more. So while the first banker might end up out of business, under competitive strains, the second is going to do a lot better for himself. Why? Because banking is not about true risks but perceived volatility of returns: you earn a stream of steady bonuses for seven or eight years, then when the losses take place, you are not asked to disburse anything. You might even start again, after blaming a "systemic crisis" or a "black swan" for your losses. As you do not disgorge previous compensation, the incentive is to engage in trades that explode rarely, after a period of steady gains.

Here you can see that this mismatch between the bonus payment frequency (typically, one year) and the time to blow up (about five to 20 years) is the cause of the accumulation of positions that hide risk by betting massively against small odds. As traders say, they have the "free option" on their performance: they get the profits, not the losses. I hold that this vicious asymmetry is the driving factor behind investment banking.

If capitalism is about incentives, it should be about true incentives, those resistant to blow-ups. And there should be disincentives to remove the asymmetry of the free option. Entrepreneurs are rewarded for their gains; they are also penalised for their losses. Now, by comparison, consider that Robert Rubin, the former US Treasury secretary, earned close to $115m (€90m, £80m) from Citigroup for taking risks that we are paying for. So far no attempt has been made to claw it back from him - only UBS, the Swiss bank, has managed to reclaim some past bonuses from its former executives.

For hedge funds and medium-sized companies, the incentive problem might be a simple governance issue between private entities free to choose their contract terms. However, when it comes to banks and other "too big to fail" entities, the problem is severe: we taxpayers in our respective countries are funding these global monsters and are coughing up money for mistakes made by bankers who retain their bonuses and are hijacking us because, as we are discovering (a little late), banking is a utility and we need them to clean up their mess. We, in fact, are the seller of that free option. We should claim it back.

The Obama administration has been trying to set compensation limits for banks under the troubled asset relief programme. But this is insufficient. We need to remove the free option. Beware the following situations.

First, those who are taking risks even outside Tarp or society's protection can still be gaming the system - since their risk-taking can result in a collapse, with the taxpayer having to step in. For instance, Goldman Sachs, the US bank, might want to avoid the limits on executive compensation for its managers. That should be fine so long as society does not have to bail out Goldman Sachs (or, worse, its creditors) in the future.

Second, Vikram Pandit, Citigroup's chief executive, while claiming to want to earn one single dollar a year in compensation unless the bank returns to profitability, is still getting a free option given to him by society. He does not partake of further losses; we do.

Third, leveraged buy-out companies used the free option by borrowing heavily from the banks and taking monstrous risks: they get the upside, banks (hence we taxpayers) get the downside. These partnerships made fortunes in the past on deals that society will have to bail out. They too should have their past profits clawed back.

Indeed, the incentive system put in place by financial companies has produced the worst possible economic system mankind can imagine: capitalism for the profits and socialism for the losses.

Finally, I was involved in trading for 21 years and I can testify that traders consciously play the free option game. On the other hand, I worked (in my other job as risk adviser) with various military organisations and people watching over our safety. We trust military and homeland security people with our lives, yet they do not get a bonus. They get promotions, the honour of a job well done and the disincentive of shame if they fail. Roman soldiers signed a sacramentum accepting punishment in the event of failure. This is prompting me to call for the nationalisation of the utility part of banking as the only solution in which society does not grant individuals free options to look after its risks.

No incentive without disincentive. And never trust with your money anyone making a potential bonus.

© 2009 The Financial Times

Sick of the Bailout

Remember the last time you drank too much? You didn't know until the next morning. Right now, with all this talk about the bailout and tarp and the stimulus . . . it's too much. I'm already having a hangover. There is only so much that i can do or say about it:

I don't agree with the bailout.
I don't agree with the stimulus.

I think we should have let the idiot bankers rot. I think the stimululs is misguided.

Of course, there was a fantastic cartoon the other day, i forget where it was though, shoulda tagged it. Basically a homeowner was standing next to their house questioning his wife why he should support the bailout. Well, the house was actually pictured like a domino, in a curve of dominoes. All the houses behind it had foreclosure signs on it, and they were tumbling.

I get it: systemic risk. The bailout and stimulus is more like chicken soup than surgery, it's good for the body (nobody know's why) but not the specific ailment.

But my real question is: nobody did anything illegal? I don't hear about indictments, confessions and deals. The only people on trial seem to be Bernie Madoff and that guy Stanford down in Texas or Antiga or wherever it was. These are our only villans? Nobody in the middle of the Wall Street diaster? Oh, they weren't wrong, just morons.

I'm sure.

But i'm sick of it. I don't even want to hear Obama speak. I want to hear what my state (PA) is going to do with the stimulus monies, excuse me "America Recovery Act" funds. I want the transparency that Obama's putting into place to filter down into each dollar spent.

I want third-level accountability. That means if i get a contract, and i subcontract it out, i have to report how much i'm paying to subcontract it out. This will give us a sense of who skims how much. I'm even glad that McCain is making waves, assailing military cost overruns. Time to reign that in for sure.

I want our gov't to be both penny-wise and pound-wise.

More on the wealth cap

So, the last post was about a wealth cap. The condition behind this argument is the gaping hole in the wealth between rich and poor people, especially in America. The intent i have in proposing a limit on the amount a person can "be worth" is to equalize the chances of people being able to feed and support their family.

I think i've added an option, here they are so far:
Cap income
I would limit the amount a person could earn in a year. 1 mil is too low. how about 10 million? But that is just for business owners. What if we limited total compensation from a company to 1 mil per year.

This would force down salaries of business execs, and on down the line so that more wealth could be spread

We could also configure it so that the highest paid person in the company can earn no more than some multiple of the lowest paid person. If the lowest paid person earns $30,000, a 30x multiple would get that highest paid person $900,000.

Cap total net worth
We could alternately cap the total amount of money a person was worth. If they earn more money, they have to spend it, which pumps money into the economy. We can cap this at somewhere around 50mil,

Abolish trusts
One of the strategies that the rich use to protect their wealth for future generations is to create trusts. Trusts are tax-shelters enabling people to put their money in an entity and dispense it in such a way to minimize taxes, and to avoid the estate tax. I would abolish them. This line of thinking actually has libertarian roots in that it encourages each individual to work to their maximum, and not ride the coat-tails of generational socialism.

Increase the estate tax(new)
This comes with a little subtly. If the assets to be taxed is a owner-operated business worth less than 10mil, then i would think about abolishing the estate tax. I think this is a good cut-off to insure the financial stability of small businesses in succession agreements.


Okay. So there are no real breakthroughs, i think sometime i'll have to sit down and think each of these through more seriously. keep watch.

Minimalism

A good friend was complaining that nobody wants to hear that we have to save money. Not Wall Street or the people on Main Street (Market if you're in Philadelphia). He aptly says " . . want to still have their toys". I agree. Having been unemployed for a while, and not a big spender i know this intimately.

I only have two credit cards, both of which are half full, and I only got those so i could build up a credit history to buy a house. So my credit history, besides student loans, is only about three years old. I haven't bought a new article of clothing in nearly a year. I don't save much however, i spend it on my three best friends: Sailor Jerry, Jack Daniels and Jim Beam.

But i realize, as my friend does, that we can't have our cake and eat it too. We can't get the economy pumping again because we have to pay off the credit debts we're already in.

The bigger problem is that now Uncle Sam is doing the same thing that got us into this mess: borrowing money. The medicine that nobody wants to swallow is that we have to cut spending drastically. We have to batten down the hatches and weather the storm. Think about it. 2.5Trillion in consumer debt. That's a monkey on our backs if there ever is one.

In the hearings, Secretary Geitner said they had to manage the sweetspot between pumping enough money into the economy to stop the hemorraging but not enough to create a bigger disaster. It's like surgery, taking a sharp instrument to cut around and extract a bullet. Consumers will have to play the same game (operation). We have to manage paying down our debts, saving money and buying at least the goods. The world of three TV's in a house, new cars and disposable clothes are over.

The problem is that nobody in Washington, Wall Street, Main STreet or Market street is realizing this in public discourse. We're silently moaning about this to themselves everytime they look at their bills.

What's wrong with the stimulus

So, we've been talking about fiscal policy and wall street bailouts, now let's talk about the Democratic "stimulus" plan.

I'm against it.

Taxcuts
Look, I like the taxcuts for lower income people. Especially when the Bush tax-cuts for the upper income people will expire soon, great i think, balances revenue a bit. The problem with tax cuts is two-fold. The last two tax cuts and rebates that Bush pushed for, went to paying down debt, not stimulating the economy. I actually encourage that. This does put more money in the pocket of the American consumer, but 1. they can't spend it and 2. even if they did, it would only temporarily help the economy.

Most people are forgetting is that consumer debt (non-mortgage) is about 2.5 trillion dollars. For the next two decades we are going to whittle this down. Even if Americans get a 10% pay raise, a lot of that money will go to the Wall Street greed mongers to pay back what we borrowed to buy HDTV's, computers, clothes and other things for the last 10 years. The levels of consumption that we have had for the last 10 years, which was the artificial "growth" of the economy was based on consumers taking on more and more debt. It was not real growth. Present and recent historical levels of consumption are financially unsustainable.

The other sink-hole of American wealth, if lining the pockets of wall-street fat cats and credit-lending institutions wasn't enough, is the national trade deficit. Thanks to the promotion of free-trade and outsourcing both mid-high skill manufacturing and low-skill call center jobs the economy exported 4.5 million jobs to Mexico, China, India, Taiwan and all the countries that now make products that used to be made in the US. That probably doesn't include the jobs that would have been created like the eateries that pop up around places of employment and suppliers for those goods.

So the reason the tax cuts won't stimulate the economy is that smart consumers will pay down debt (like the banks did with bailout money) and if they spend that money, a lot of that money will be exported to other countries (Saudi Arabia, China, etc).

Social Policy
There's a good bit of money going into the coffers of state and local governments that doesn't create jobs, it just stops the hemorrhaging of jobs that would be due to layoffs from decreased government revenue. I don't agree that all this 'stimulus' money should go to pay for healthcare, unemployment benefits and the like. I think it much wiser to fund intelligent infrastructure projects that will be coming soon to a road or utility near you. Instead of padding unemployment, the government should fund training programs specifically for the upcoming greening of America. This can range from short-term weatherization to long-term programs to build the capacities to manufacture high-speed trains domestically. We're decades behind Europe and Japan in this respect, and instead of paying people to look for work, pay them to have the skills necessary for the medium-term and long-term infrastructure projects. That's not spending, that's investment.

Infrastructure
Not big enough. If it was up to me, we'd have tax cuts and infrastructure only. I count training programs for skills needed to build infrastructure as part of infrastructure projects. The infrastructure I'd be looking at building is mass transit, high-speed rail, smart grid electricity, large-scale DC power lines from middle-american wind-farms (vastly different from smart-grid technology) and the like. All of the infrastructure projects would be green projects unless it is for road, bridge, water, swere repair. Building new roads to handle capacity would be replaced by installing mass transit systems. Paying billions of dollars so that people can watch TV (converter boxes)? Really? I mean really?

So I'm against the stimulus plan. Just becasue supposedly we have to 'do something' does not mean that we have to do everything. Obama talked about prioritizing. It seems that his priorities is to create something that's palatable to the Democratic base that got him elected. But i didn't vote for that. I voted for someone who wasn't afraid to make the 'hard decisions'. Instead of spending money on Bush's war, you're now spending it on Obama's society. If he was bold, two-thirds of the bill would be in infrastructure spending.

I think he thinks we'll get to that point sometime. I'm pretty sure that he thinks the move to spend on priorities is a gradual process.

It isn't.

Go green, go now.

Trickle Down Obamanomics

So, apparently people have been heeding my warning. I have been saying for a little while on this blog in this post that the disparity in incomes has got to stop. I say the thing to keep an eye on was the multiple. What i mean by the multiple is how much a top-level executive makes as a multiple of how the least compensated person in the company (janitor, etc) makes.

Over all but the last couple of decades, the most highly compensated person made let's say 20 times what the lowest paid worker makes. Now, we see compensation packages of up to 570 times what the average worker makes. You can find good info here , here and here . And you wonder why the rich keep getting richer?

So, recently Emperor Obama has decreed a limitation on the total compensation an executive can get if their company receives bailout money. This is a great slippery slope I detect. I hope, really really hope, that somewhere and somehow that this extends not just to companies who take bailout money, but all companies doing business with the federal government! before we get to that though, let's look at this.

So the companies that take bailout money are restricted from getting extravagant compensation packages for their 'best and brightest'. One consequence of this can be that a company that takes bailout money will shed good, mediocre and bad people like a butterfly sheds its cocoon. Now you have an over-saturation of people who want to be employed as finance gurus who will take lower and lower wages. But their wage demands will compete with one another to lower the bar on compensation.

The other option is for these folks to go abroad, as a friend from Goldman Sachs proclaims, as its easier to make stupid amount of money fleecing the locals. I say good riddance to these robber bankers. So in the short-term, i think executive compensation will reluctantly plummet and the multiplier will drop from some over 500x the average worker's salary to somewhere closer to 100x the average workers' salary. This will then create downward pressure on the luxurious compensation packages of the next lower and lower tiers. this will never reach Peter Drucker's (management guru) 25-1 ratio, but it'll be something significant.

I think to accelerate this trend, what Obama should do is to spread that cap to all companies doing business with the government. I mean if we're really about saving taxpayers' money, how come the CEO of Lockheed Martin gets 24mil a year (757x average) while living off of 80% of the revenue coming from government contracts? I think to really save the government a good bit of money, Obama should spread this ceiling over a wider swath of the economy by extending this ceiling to all companies that do business with the government.

I am against the government bailing out the economy. I think if you really want the economy to pump again, you have to seriously re-design compensation. If the government put a multiplier cap on ALL executive compensation, then there would be a hell of a lot more payroll money to spread towards the bottom of the pile, as well as around. Think, you pay one man the salary of 757 men? What if you cut that in half, you could employ another 300 depending on their skill sets.

Even if driving down the ceiling of executive compensation doesn't immediately spread to employing others. The incresed savings on compensation at least puts money into these banks, which in turn they can lend from.

So I'm all for putting a ceiling on executive compensation. This 'tricke down Obamanomics' would take a serious bite out of the windfall money these executives get. I'm just scared that this has no teeth as no company 'in their right mind' would take anymore bailout money.

Homo Economicus Must Die

So, there's a depression setting in, not just a recession going on. It seems that the news media, business people, economists and everyone reading what they have said are stuck in the same trap. They think money is the problem and money is the solution.

"No problem can be solved from the same level of consciousness that created it" -Einstein

I'm sure that someone else said it before, but he's the one that got the quote. And the way he says it is kinda quippy.

The problem with the recession and all the talk about economics is that it is one-sided. The underlying assumption is that growth is good and so is employment. That may be true, but what industries grow, and what are people employed doing? We know that there are many many problems with out economy. We are losing our manufacturing base, the biggest employer in America is a temp agency! So even if people get put back to work, that's only important in so far as they can buy more stuff. Sure, there's lots of considerations such as food, electricity and clothing. But the assumption of the American isn't just providing himself or herself and their family with basic needs. The assumption of the American is that they'll go out and half-recklessly buy things they really don't need (cable, larger flatscreens, new furniture, trips to hawaii instead of the museum . . )

That's the level of consciousness we're in. We want to employ people, but only so they buy things, not so that they have a sense of purpose in life. We employ them so they spend. We employ them "for the love of money." There's no talk about human development, purpose, usefulness, contribution and the like.

What happened to the Pursuit of Happiness over the Pursuit of Luxury? The media has succumbed to the paradoxical seduction of statistics and talks about development only in economic terms.

We need something else. The green movement hints at this. Their elevation of near aseticism through being energy efficient and low carbon footprint will eventually call into question mass consumerism itself. We will have to ask what will replace shopping and displaying our financial conquests as a national pastime?

I don't know. I figure it would have to be something new, different. Perhaps the old pastime of conversation. You could say that American culture was built in the time between work, when parents talked with and schooled their kids. Where neighbors would have each other over for dinner. Perhaps the death of Homo Economicus will give way to Homo Sapiens.

I'm not saying i have the answer. I'm just looking ahead and seeing something cloudy, trying to convey to you that at sometime the beast Homo Economicus will be slayed and humanity will have a new expression/master. I'd just like to know what it is.

Perhaps for once we will have a conversation about the actual quality of our lives, not just in terms of physical things, but our intellectual, social, moral and spiritual lives. Sounds good to me.