More than 70 percent of Americans say big bonuses should be banned this year at Wall Street firms that took taxpayer bailouts, a Bloomberg National Poll shows.
An additional one in six favors slapping a 50 percent tax on bonuses exceeding $400,000. Just 7 percent of U.S. adults say bonuses are an appropriate incentive reflecting Wall Street's return to financial health.
A large majority also want to tax Wall Street profits to reduce the federal budget deficit. A levy on financial services firms is the top choice among more than a dozen deficit-cutting options presented to respondents. Bloomberg
As bonus season arrives, the gap between the American people and Wall Street couldn't be wider. And where is Washington in this great divide? Don't ask.
At a moment when Americans desperately want jobs on Main Street and expect Wall Street to pay its fair share, Washington officials are hard at work -- seeking jobs for themselves on Wall Street. (Congratulations, Peter Orszag, on parlaying your position as Obama's OMB director into a top job at CitiGroup, the bank that received hundreds of billions in taxpayer bailouts and guarantees on your watch!)
Most Americans rightly sense that our mixed free-enterprise economy, which once built a broad middle class, has devolved into a system of financial socialism by and for elites. The public wants and deserves answers to these basic questions:
1. Why do people in the financial sector make so much more money than the rest of us? Mainstream economists claim that your income reflects the economic value you produce -- at least in free and open markets. But are proprietary traders, for example, really 100 times more valuable than neurosurgeons? In the UK, some economists say no: The British New Economics Foundation calculates that "While collecting salaries of between £500,000 and £10 million, leading City bankers destroy £7 of social value for every pound in value they generate."
Let's try a back-of-the envelope calculation of Wall Street's net social value. Compare their bonuses and profits for roughly the last five years (about $500 billion) with the economic losses produced in the financial crisis the bankers caused (about $4 trillion in value destroyed, not counting the ongoing travails of the 22 million people who haven't yet been able to find a full-time job). For every dollar "earned" on Wall Street, about 8 dollars were destroyed. (In case you're suffering from financial amnesia and forgot how the financial sector single-handedly caused the economic crisis, please see The Looting of America. Chapter One can be found gratis on Alternet.com.)
There's plenty of room for argument about this kind of calculation. But even Wall Street wizards would have trouble defending the billions they've acquired by profiting from a bubble that blew up the economy. What's the real value of junk CDOs that were rated AAA and then sold for enormous profits before they blew up? We could make a strong case that those who profited from such bubble investments - like the people who sold synthetic CDOs to Wisconsin school districts -- should pay back their fraudulent profits. (In fact, the school districts have filed a lawsuit toward that end.)
2. Do current profits of financial firms come from tax-payer bailouts?
The old free-market mantra was that you could make as much as you wanted, so long as you were willing to accept all the risks that went with it. Joseph Schumpeter, a great defender of capitalism during the 1940s when much of the world was turning towards socialism, called the process of winning and losing "creative destruction." In his vision of capitalism, the best and the brightest staked everything in their quest for success, and only the true innovators survived. Inefficient enterprises would be left by the wayside.
So... are the survivors of the economic collapse like CitiGroup, Morgan Stanley, Bank of America, Goldman Sachs and JP Morgan Chase, receiving their just rewards?
Actually, it sounds a bit quaint these days to suggest that the rich must actually suffer the consequences of failure. These top financial institutions did not have to pay for their reckless gambling and gaming because they were deemed to big too fail, and so were bailed out. Goldman Sachs, for example, made a very bad bet when it purchased $13 billion of financial "insurance" from AIG to cover its toxic assets. AIG, due to its own enormously bad business decisions, could not pay up and was on the verge of bankruptcy. Had it gone under, as Schumpeter probably would have urged, Goldman Sachs would have received pennies on the dollar for its bad gamble, and might have gone broke. Instead, AIG was bailed out by taxpayers and Goldman Sachs got 100 cents on the dollar. It gambled, lost, and instead of suffering the consequences, was made whole by the government. And now Goldman Sachs execs are hauling in tens of millions in bonuses (disguised as stock options, even as its profits slip a bit from astronomical highs.)
Clearly, the "free and open" market did not determine who should be spared "creative destruction." Instead, CitiGroup, Goldman Sachs, JP Morgan Chase et al were saved because of their deep political connections. These companies would be kaput were it not for taxpayer bailouts, hastily contrived loans, and all kinds of market guarantees from their friends at the Fed. Schumpeter would have recognized this scheme in a flash: It's precisely the kind of crony socialism that he detested, only this time the game was was designed by and for financial elites in the world's largest capitalist economy. (Please don't compare the Wall Street rescues to the GM and Chrysler bailouts. Wall Street received ten times as much and will pay themselves a hundred times more than the top auto-executives. And the auto industry didn't topple the US economy and send millions to the unemployment lines.)
3. But since Wall Street is paying us back, why shouldn't they go back to earning whatever they can? Let's follow through on that logic. Let's say you raid your husband's pension fund for $100,000 and take the bus to Vegas, naively hoping to triple your money. As luck would have it, you lose it all. Desperate, you manage to borrow another two million from a rich friend (Wall Street calls it "leverage") -- and then you really load up on your bets. Tragically, you lose that too. I hate to tell you this, but you're in big trouble now. Don't expect the government to come around and offer to cover your losses with taxpayer bailouts so you can keep on gambling till the lights go out, and then, if you win, pay back the government. That is, unless you're too big to fail -- say, a very large, well-connected investment bank. In that case, party on!
It's true, Wall Street has paid us back for much of the bailout money we gave them. That's the good news. The bad news is that, having been rewarded for their bad behavior, they're now back at the casino tables, playing many of the same games that took down the economy in the first place. This time there are even fewer players who are now way too big to fail. And fewer players means less competition -- hence the rise in banking "fees," especially for the average consumer.
4. Where does all their wealth come from? There are only two possible sources for all the money the financial sector is spewing: The bankers are either creating new wealth or they're siphoning off wealth from the rest of us. Hedge fund honchos like to boast about how they weren't bailed out and therefore are entitled to their enormous hauls. (The top 10 in 2009 earned an average of $900,000 an HOUR. The top 25 earned as much as 658,000 entry level teachers.)
But our noble hedge fund managers have a great deal of difficulty accounting for what I call their "paradox of productivity." You see, there's supposed to be a connection between the productivity of your employees and your profits. Apple Corporation, for example, earned about $6 billion in 2009 by expertly engaging its 35,000 employees. (They went on to earn $6 billion in the last quarter of 2010 alone.) Along the way they offered us an array of popular new products that people are enjoying and putting to use. Appaloosa, the hedge fund, earned about as much as Apple in 2009 by speculating on god knows what. But it has fewer than 250 employees and it's not at all clear what these individuals added to our economy -- certainly not the iPad. How can 250 workers, no matter how wise and talented, produce as much real worth speculating on stuff as 35,000 Apple employees can make inventing, manufacturing and marketing useful products? They can't. So hedge funds must be siphoning off wealth from elsewhere, not creating it themselves. (If you think I'm wrong, please prove otherwise, because I haven't found a single book or paper about hedge funds, even from insiders or academics, that explains this paradox of productivity.)
Ever since the crash, I've been calling for a ban on Wall Street bonuses and for new taxes on the financial sector. Though I felt like I was hollering in the wind, apparently most Americans agree (if we can believe the polls cited above). I naively thought that during the crash the government would come done hard on Wall Street as it did during the 1930s. I was wrong. Instead we have institutionalized a festering problem that allows Wall Street to continue siphoning off the nation's wealth. So we have to think about a more radical restructuring. I believe the only way to end financial socialism for elites is to turn the core of high finance into group of heavily regulated public utilities -- like power, water and electricity (not semi-private entities like Fannie and Freddie before they were nationalized).
Financial socialism for elites has failed and will fail again, plunging millions of Americans into joblessness and sinking our nation deeply into debt. Big government has many faults, of course. But the American people, I believe, can tell the difference between public utilities that aim to serve the economy and a private oligopoly that only serves a tiny elite. Ironically, those who run the government don't want government to end financial socialism (maybe because of financial industry campaign contributions--or because of Wall Street's inviting revolving door). It may take another crash before Washington is willing to listen.
Les Leopold is the author of The Looting of America: How Wall Street's Game of Fantasy Finance destroyed our Jobs, Pensions and Prosperity, and What We Can Do About It Chelsea Green Publishing, June 2009. He is currently working on a new book, How to Earn $900,000 an Hour: The Rise of Wall Street Billionaires and the One-sided Class War, (hopefully to be published in 2011).