Some Chicago Boyz know each other from student days at the University of Chicago. Others are Chicago boys in spirit. The blog name is also intended as a good-humored gesture of admiration for distinguished Chicago School economists and fellow travelers.
…it may be said that at any time when finance is under attack through the political authority, it is an infallible sign that the political authority is already exercising too much authority over the economic life of the nation through manipulation of finance, whether by exorbitant taxation, uncontrolled expenditure, unlimited borrowing, or currency depreciation.
–Isabel Paterson, The God of the Machine
Previous in the series:
I, II, III
Given my positions about work and unions, it would be natural to assume that I would want them to shuffle off into history as fast as possible. Nothing could be further from the truth. Unions are bankrupt, but that doesn’t mean that they are without value. The process of bankruptcy is the process of trying to maximize the value you can save from something when it can no longer continue operating as it has in the past. Ideologically bankrupt unions need to go through bankruptcy to identify and save that value as best as possible, not to kill them off and throw that real value away.
This is where simplistic conservative solutions go wrong. The wasteful idea of “just shut it down” guts political support among the population of people who are frugal and understand what bankruptcy is. These people are natural conservative supporters but they are not going to sign up for wasteful shutdowns that increase net value loss for society. So long as they perceive that there’s more net value to retaining the present arrangements than to tear them down without replacement they will both be unhappy with unions and fight to keep them in business.
Improvement and replacement instead of elimination creates a wider natural coalition. The union label itself will likely live on so long as it has brand value and far beyond it retaining its original meaning.
I recently read and highly recommend a book called “The Great Big Book of Horrible Things
As someone who has spent their entire life reading books about history and military history in particular, this “organization” of cataclysmic events is very interesting. The author has different types of events, such as major dictators, not just wars, as he attempts to “rank” and chronicle each occurrence. Here are the top ten items per the author:
1. Second World War 66m
2. Chinggis Khan 40m
2. Mao Zedong 40m
4. Famines in British India 27m
5. Fall of Ming Dynasty 25m
6. Joseph Stalin 20m
6. Taiping Rebellion 20m
8. Mideast slave trade 18.5m
9. Timur 17m
10. Atlantic slave trade 16m
(as a note the First World War comes in tied for 11th at 15m)
The first thing that came to my mind is that I didn’t even know what some of these items were; I know relatively little about ancient Chinese regimes and I had never even heard of the Taiping Rebellion which occurred from 1850-64 and per this book at least killed more than World War I (of which I know a great deal). Here is a wikipedia article on the Taiping Rebellion which also quotes the 20 million figure (for what it is worth).
I also find interesting the separation of individual dictators from the military conflicts that they led or sponsored. He did not break out Hitler from WW2 since Hitler’s atrocities were mostly contained within that time span. However, Stalin’s atrocities occurred pretty much from the moment he took power until the day he died so he received a separate section dedicated to his crimes. The author also makes a special section on the communist crimes where he aggregates the various tyrants and crimes in one spot for sad if easy reading.
There was a made for HBO movie called “Too Big To Fail” about the 2008 financial crisis. I recommend watching it (even though it was controversial in some circles for showing Hank Paulson as a virtual saint) especially for people who aren’t in the finance industry because it is intelligently written (based on a book) and they really got big name actors to play the part of Wall Street CEO’s.
The Wall Street Journal has an “overheard” box on the back page of the financial section and they had some interesting observations on Wall Street in 2011 on how the various players have shrunk in market capitalization.
Here are the current market caps of the “Too Big To Fail” parties:
– Lehman Brothers (Dick Fuld) – bankrupt
– JP Morgan-Chase (Jamie Dimon) – 110B (CORRECTED)
– Vikram Pandit (Citigroup) – 69B
– John Mack (Morgan Stanley) – 25B
– John Thain (Merrill Lynch) – bought by bank of America (see below)
– Lloyd Blankfein (Goldman Sachs) – 52B
– Rickard Kovacevich (Wells Fargo) – 123B
– Bob Willumstad (AIG) – 38B (resurrected by Federal Government)
– PREVIOUSLY Bear Stearns – sold to JP Morgan-Chase
In the movie Wells Fargo was treated as an afterthought. Not mentioned are two banks listed below and Bank of America is given only a small part in the movie, even though they ended up buying Merrill Lynch (I don’t even know who played Ken Lewis).
US Bankcorp 45B
PNC Financial 44B
Ken Lewis (Bank of America) 52B
The fact that these banks which are generally thought of as “regional banks” like US Bankcorp and even Wells Fargo have market caps in line or ahead of the giant Wall Street banks is a sea change in reality.
As these Wall Street companies become smaller what you are also seeing is the relative shrinking of the financial sector as a total portion of the US market capitalization. Financials returned -48% over the last 10 years vs. -17% for the S&P 500 (for the link to work change the time frame to 10 years and you can see the results).
These companies have an outsize impact on the economy of New York in particular because they pay out such a high percentage of their revenue in compensation. According to this article the compensation will drop 20 to 30% this year compared to the prior year.
In the first nine months of the year, Goldman Sachs, Morgan Stanley, JPMorgan Chase, Bank of America and Citigroup set aside almost $93 billion to pay employees, up from $91.25 billion in the year ago period, according to Johnson Associates. The final number, however, is not set until the fourth quarter, when firms have a clear idea of their total revenue for the year.
While employee compensation as a percentage of market capitalization is not always a good metric to use for comparison purposes, in this case it is enlightening. Much of the outsize pay (some would say obscene) that these New York traders and executives receive is justified by the profits (and high stock prices) that result from their actions. But if the banks are paying out such a high percentage of their total market capitalization in profits every year, that justification starts to take on water a bit.
As far as alternative metrics, Business Insider had an interesting article on Wal-Mart, which employs 1% of the US work force. This analysis attempted to show what would happen to the average worker if Wal-Mart plowed back all their profits into employee wages (just a theoretical case). Per the article:
If Walmart took its entire $22 billion of annual pre-tax income and used all of it to give each one of its 2.1 million employees a raise, this would amount to about $10,000 a year apiece. In other words, if Walmart decided to use 100% of its operating profit to pay all of its employees more, the average store associate’s salary would go from $20,000 to $30,000.
In an even sharper turn down the rabbit hole of linked causality, Wal-Mart itself is essentially moving off Wall Street to become a private company. This is obviously an exaggeration but Wal-Mart is using its profits to buy back stock, and much of its stock is held by the descendants of Sam Walton in the first place, so the outstanding stock metric is even lower than it appears. Wal-Mart has 3.46 billion shares outstanding but the “public float” is only 1.73 billion shares. And Wal-Mart is working hard to whittle away that public float, per this article…
Wal-Mart said on Friday that it would buy back $15 billion more of its shares to try to improve returns for its shareholders. The initiative, which was announced at the company’s annual shareholders’ meeting here, comes after a previous $15 billion repurchasing plan that was announced last year. The company bought back 244 million shares, worth about $13 billion, under that program
So there you go. Wall Street, that icon of capitalism, justifies high salaries for traders and executives on the basis of stock capitalization values that no longer support this line of reasoning. And on the other hand, the core basis for Wall Street, the raising and allocation of capital, is turned on its head as one of the largest and most well-run companies, Wal-Mart, essentially plows its earnings into a de-facto move to privatization and off Wall Street in the first place.
Cross posted at LITGM
