Showing posts with label financial crisis. Show all posts
Showing posts with label financial crisis. Show all posts
28 April 2010
They couldn't possibly have known
I like this one. A real reality check for Goldman Sachs and their fellows. And here is more of this sort of cartoons.
09 December 2009
Reality Check's Tax Proposal Haunts Bankers
My idea of taxing excessive bonuses for bankers is still alive. After the Americans, now the British give it a try. If only they would keep it up!
27 August 2009
Downsizing the financial sector
It happens rarely, but sometimes it does: Influential people from politics and finance speak up with ideas that are not too far from my view. The latest example is Lord Turner, chairman of the Financial Services Authority in London, who says the financial sector in the city has grown too big and needs to be cut to a socially reasonable size, possibly by imposing taxes.
Good luck, Mr. Turner!
Good luck, Mr. Turner!
20 March 2009
US Congress Follows My Recommendation
Incredible: It seems that some US lawmakers have read my blog! Or did they develop the idea of using tax law to re-claim undeserved bonuses all on their own? Anyway, they House of Representatives passed a bill that imposes a 90 % tax on bonuses paid by government backed companies such as AIG. Revolutionary indeed.
This move is in line with the ideas I have proposed before in this blog (here and here). However, in my opinion it should be expanded dramatically to inlcude all kinds of excessive salaries all over the world. This would be a real step forward, but I doubt it will ever be achieved...
This move is in line with the ideas I have proposed before in this blog (here and here). However, in my opinion it should be expanded dramatically to inlcude all kinds of excessive salaries all over the world. This would be a real step forward, but I doubt it will ever be achieved...
22 February 2009
Money, Money, Money
15 years ago, when I was a postdoc in the US, I read an article in the New York Times Magazine about the earnings of chief executives. As I remember it was entitled "What they earn and why they deserve it". I found it outrageous that they could seriously say that earnings of many millions a year would be "deserved", because of good performance of the company at the stock markets and so on.
Now, the New York Times has an article about reclaiming some of the money that executives of failed banks have received over the past years. Apparently they have come to the conclusion that these guys really did not "deserve" all that money. This is a step forward, but I still wait for someone to argue that excessive pay should not be allowed even if companies make good profits. The point is that such salaries favor a wrong mentality. Take this citation from the above mentioned article:
“This is really in our view a giant fraudulent conveyance, where money was paid out to executives at firms that were fatally undercapitalized,” said Daniel Pedrotty, director of the A.F.L.-C.I.O. office of investment. “We are arguing for a recovery of money that was used by people who treated these companies as a giant A.T.M. machine.”
So what can we do to change the thinking of executives that they can use their companies as giant A.T.M. machines? I have been arguing that a political approach could be to charge excessive taxes on excessive earnings. Would be quite simple if there were no "tax oases", i.e. countries that invite rich people to hide their money from taxes.
Unfortunately, one of the countries that happily accept the money that should be paid to other states is my homecountry Switzerland. The Swiss idea (and law) that "tax evasion" is not a crime, only "tax fraud", coupled with the bank secret, opens the door for such behaviour. And my favorite Swiss bank UBS has championed in it. The US has now turned up the heat on UBS and they agreed to hand over "secret" data on some clients whom they helped to evade US taxes. Furthermore, "the bank admitted conspiring to defraud the Internal Revenue Service and agreed to pay $780 million to settle a sweeping federal investigation into its activities."
Obviously, this breach of the Swiss' sacred bank secret instilled a heated debate in Switzerland. Most blame the US, although it now transpires that the top executives of UBS knew very well that they engaged in a risky and illegal business. What motivated them to do this? Did they just aim to increase the shareholder value of their bank, or could it be that they calculated how much their own personal share would be diminished if they stopped the raid on the US?
So, what's the bottom line? The leaders of UBS not only invested heavily in "toxic" US loans, which cost them many tens of billions, they also engaged in criminal activities to cheat the US government. The fine of $780 million is peanuts, much less than what they still pay out as bonuses to their employees. And the losses are covered by the Swiss government, to avoid a crash of this crucial company. Will they get away with that?
The irony is that these bankers happily accept to be helped with taxmoney, while they help rich people (like themselves) to avoid paying taxes wherever possible. Not only do they think they deserve the millions they earn, they also blame the state for claiming something back via taxes. Even as they themselves are saved by taxmoney, they don't appreciate the value of taxes.
Here is what I would do if I were in charge in Switzerland:
- nationalize UBS
- fire all top executives (they should be happy not to go to jail)
- claim back bonuses of the past 5 years (at least)
- abolish the bank secret and abusive tax laws
- introduce a 99% tax on all income above say 0.5 million Francs
- start the Swiss financial sector all over from scratch
Now, the New York Times has an article about reclaiming some of the money that executives of failed banks have received over the past years. Apparently they have come to the conclusion that these guys really did not "deserve" all that money. This is a step forward, but I still wait for someone to argue that excessive pay should not be allowed even if companies make good profits. The point is that such salaries favor a wrong mentality. Take this citation from the above mentioned article:
“This is really in our view a giant fraudulent conveyance, where money was paid out to executives at firms that were fatally undercapitalized,” said Daniel Pedrotty, director of the A.F.L.-C.I.O. office of investment. “We are arguing for a recovery of money that was used by people who treated these companies as a giant A.T.M. machine.”
So what can we do to change the thinking of executives that they can use their companies as giant A.T.M. machines? I have been arguing that a political approach could be to charge excessive taxes on excessive earnings. Would be quite simple if there were no "tax oases", i.e. countries that invite rich people to hide their money from taxes.
Unfortunately, one of the countries that happily accept the money that should be paid to other states is my homecountry Switzerland. The Swiss idea (and law) that "tax evasion" is not a crime, only "tax fraud", coupled with the bank secret, opens the door for such behaviour. And my favorite Swiss bank UBS has championed in it. The US has now turned up the heat on UBS and they agreed to hand over "secret" data on some clients whom they helped to evade US taxes. Furthermore, "the bank admitted conspiring to defraud the Internal Revenue Service and agreed to pay $780 million to settle a sweeping federal investigation into its activities."
Obviously, this breach of the Swiss' sacred bank secret instilled a heated debate in Switzerland. Most blame the US, although it now transpires that the top executives of UBS knew very well that they engaged in a risky and illegal business. What motivated them to do this? Did they just aim to increase the shareholder value of their bank, or could it be that they calculated how much their own personal share would be diminished if they stopped the raid on the US?
So, what's the bottom line? The leaders of UBS not only invested heavily in "toxic" US loans, which cost them many tens of billions, they also engaged in criminal activities to cheat the US government. The fine of $780 million is peanuts, much less than what they still pay out as bonuses to their employees. And the losses are covered by the Swiss government, to avoid a crash of this crucial company. Will they get away with that?
The irony is that these bankers happily accept to be helped with taxmoney, while they help rich people (like themselves) to avoid paying taxes wherever possible. Not only do they think they deserve the millions they earn, they also blame the state for claiming something back via taxes. Even as they themselves are saved by taxmoney, they don't appreciate the value of taxes.
Here is what I would do if I were in charge in Switzerland:
- nationalize UBS
- fire all top executives (they should be happy not to go to jail)
- claim back bonuses of the past 5 years (at least)
- abolish the bank secret and abusive tax laws
- introduce a 99% tax on all income above say 0.5 million Francs
- start the Swiss financial sector all over from scratch
29 January 2009
The Bankers haven't hit Reality yet
While my homecountry Switzerland is in turmoil over more than 2 billion Francs of bonuses being paid by the government-backed bank UBS (formerly a national pride, now essentially bankrupt), with heated discussions even at the world economic forum in Davos, things are even worse in the center of the entire mess, my former second home New York.
The New York Times had an interesting article about Wall Street paying the sixth highest amount of bonuses ever after a year that hardly can be said to have been one of the best. Yes, I know, they HAVE to do this, otherwise they might lose their best people (e.g., those who just wrecked the world economy). But, where will these people go if most banks are down? The argument was bad even before the crash, now it is just outrageous.
The best comes at the end of the article: "A poll of 900 financial industry employees [...] found that while nearly eight out of 10 got bonuses, 46 percent thought they deserved more." They haven't hit reality yet. They still live in their dream world where money comes from nothing. It either has to get much worse or someone has to tell them that it's over.
Or are we really going to accept that this kind of unrestrained capitalism continues?
P.S. I am glad to learn that Obama seems to share my opinion and tells the bankers what's up. It may be populist, but at least he's not alone.
The New York Times had an interesting article about Wall Street paying the sixth highest amount of bonuses ever after a year that hardly can be said to have been one of the best. Yes, I know, they HAVE to do this, otherwise they might lose their best people (e.g., those who just wrecked the world economy). But, where will these people go if most banks are down? The argument was bad even before the crash, now it is just outrageous.
The best comes at the end of the article: "A poll of 900 financial industry employees [...] found that while nearly eight out of 10 got bonuses, 46 percent thought they deserved more." They haven't hit reality yet. They still live in their dream world where money comes from nothing. It either has to get much worse or someone has to tell them that it's over.
Or are we really going to accept that this kind of unrestrained capitalism continues?
P.S. I am glad to learn that Obama seems to share my opinion and tells the bankers what's up. It may be populist, but at least he's not alone.
02 November 2008
Economics Needs a Reality Check
Apart from the editorial recommending Obama for President, the last issue of Nature also featured an interesting essay entitled "Economics needs a scientific revolution" by a certain Jean-Philippe Bouchaud, apparently a physicist with close links to research in finance. Bouchaud makes some really interesting statements, at least for a physicist like me who is slightly disturbed by recent events in the world of finance. Most important is probably his critique of the fact that economists seem to belief in some assumptions without even caring about empirical verification. As I can't add anything substantial, I just present some clippings from the essay:
"Classical economics is built on very strong assumptions that quickly become axioms: the rationality of economic agents (the premise that every economic agent, be that a person or a company, acts to maximize his profits), the 'invisible hand' (that agents, in the pursuit of their own profit, are led to do what is best for society as a whole) and market efficiency (that market prices faithfully reflect all known information about assets), for example. An economist once told me, to my bewilderment: "These concepts are so strong that they supersede any empirical observation." As economist Robert Nelson argued in his book, Economics as Religion (Pennsylvania State Univ. Press, 2002), the marketplace has been deified.
[...]
The supposed omniscience and perfect efficacy of a free market stems from economic work done in the 1950s and 1960s, which with hindsight looks more like propaganda against communism than plausible science. In reality, markets are not efficient, humans tend to be over-focused in the short-term and blind in the long-term, and errors get amplified, ultimately leading to collective irrationality, panic and crashes. Free markets are wild markets.
[...]
Crucially, the mindset of those working in economics and financial engineering needs to change. Economics curricula need to include more natural science. The prerequisites for more stability in the long run are the development of a more pragmatic and realistic representation of what is going on in financial markets, and to focus on data, which should always supersede perfect equations and aesthetic axioms."
All in all, I think the scientific revolution that Bouchaud calls for is nothing else than a reality check. And I agree that economics (plus the banking and finance sector) really seems to need it!
"Classical economics is built on very strong assumptions that quickly become axioms: the rationality of economic agents (the premise that every economic agent, be that a person or a company, acts to maximize his profits), the 'invisible hand' (that agents, in the pursuit of their own profit, are led to do what is best for society as a whole) and market efficiency (that market prices faithfully reflect all known information about assets), for example. An economist once told me, to my bewilderment: "These concepts are so strong that they supersede any empirical observation." As economist Robert Nelson argued in his book, Economics as Religion (Pennsylvania State Univ. Press, 2002), the marketplace has been deified.
[...]
The supposed omniscience and perfect efficacy of a free market stems from economic work done in the 1950s and 1960s, which with hindsight looks more like propaganda against communism than plausible science. In reality, markets are not efficient, humans tend to be over-focused in the short-term and blind in the long-term, and errors get amplified, ultimately leading to collective irrationality, panic and crashes. Free markets are wild markets.
[...]
Crucially, the mindset of those working in economics and financial engineering needs to change. Economics curricula need to include more natural science. The prerequisites for more stability in the long run are the development of a more pragmatic and realistic representation of what is going on in financial markets, and to focus on data, which should always supersede perfect equations and aesthetic axioms."
All in all, I think the scientific revolution that Bouchaud calls for is nothing else than a reality check. And I agree that economics (plus the banking and finance sector) really seems to need it!
23 September 2008
Amazing Predictive Skill
One last post related to the financial crisis for the time being...
A question that comes up as one sees the highly praised (and paid) financial experts wrecking their ships: Could it have been avoided? Could it have been foreseen that those suprime mortgages eventually would backfire? Well, in hindsight it is easy, but was there anyone who did anticipate it?
I've heard Swiss and German bankers and politicians say (with regard to banks over here being affected by the American virus) that no one could have possibly foreseen this crisis. It came out of the blue...
Well, CNN has a page where they show eight experts who did smell that something was starting to burn, and eight others who didn't. But much more impressive to me are the predictive abilities of the American author James Howard Kunstler. In his really interesting book "The Long Emergency", which was published in 2005, he did indeed foresee that the housing bubble would not last too long. Ok, it lasted longer than the thought, but in the end he passed the reality check. Much better than many so-called financial experts, anyway. Here are a few sentences from the book:
James Howard Kunstler: The Long Emergency
Chapter six: Running on Fumes (The Hallucinated Economy)
Section: Home: The last refuge of value
By the time you read this, it is very likely that the housing bubble will have begun to come to grief. [....]
The economic wreckage is liable to be impressive. If large numbers of house owners cannot make their mortgage payments, Fannie Mae and Freddie Mac, and by extension the federal government, would be the big losers. [...] It could easily bring on cascading failures that might jeopardize global finance. This time, the American public would feel the pain.
Does this sound strangely familiar? It was written in 2004, and although Kunstler probably did not think that it would take another four years to become reality, eventually it did. At least I am impressed by Kunstler's future-telling abilities.
Interestingly, the main topic of "The Long Emergency" is peak oil, another hotly debated issue. Many energy experts, economists for the most part, don't think that oil production might peak anytime soon (if ever). Kunstler expects otherwise, an he is not alone. His view is backed by ASPO, The Oil Drum, Matthew Simmons, and the EnergyWatchGroup, to mention just a few. Could Kunstler be right in this case as well?
Certainly, some of the opinions put forward in the peak oil debate deserve a closer look under the title of a reality check. I will come back to this topic.
A question that comes up as one sees the highly praised (and paid) financial experts wrecking their ships: Could it have been avoided? Could it have been foreseen that those suprime mortgages eventually would backfire? Well, in hindsight it is easy, but was there anyone who did anticipate it?
I've heard Swiss and German bankers and politicians say (with regard to banks over here being affected by the American virus) that no one could have possibly foreseen this crisis. It came out of the blue...
Well, CNN has a page where they show eight experts who did smell that something was starting to burn, and eight others who didn't. But much more impressive to me are the predictive abilities of the American author James Howard Kunstler. In his really interesting book "The Long Emergency", which was published in 2005, he did indeed foresee that the housing bubble would not last too long. Ok, it lasted longer than the thought, but in the end he passed the reality check. Much better than many so-called financial experts, anyway. Here are a few sentences from the book:
James Howard Kunstler: The Long Emergency
Chapter six: Running on Fumes (The Hallucinated Economy)
Section: Home: The last refuge of value
By the time you read this, it is very likely that the housing bubble will have begun to come to grief. [....]
The economic wreckage is liable to be impressive. If large numbers of house owners cannot make their mortgage payments, Fannie Mae and Freddie Mac, and by extension the federal government, would be the big losers. [...] It could easily bring on cascading failures that might jeopardize global finance. This time, the American public would feel the pain.
Does this sound strangely familiar? It was written in 2004, and although Kunstler probably did not think that it would take another four years to become reality, eventually it did. At least I am impressed by Kunstler's future-telling abilities.
Interestingly, the main topic of "The Long Emergency" is peak oil, another hotly debated issue. Many energy experts, economists for the most part, don't think that oil production might peak anytime soon (if ever). Kunstler expects otherwise, an he is not alone. His view is backed by ASPO, The Oil Drum, Matthew Simmons, and the EnergyWatchGroup, to mention just a few. Could Kunstler be right in this case as well?
Certainly, some of the opinions put forward in the peak oil debate deserve a closer look under the title of a reality check. I will come back to this topic.
22 September 2008
Competitive Pressure
As a follow-up to my previous post, this Times article about the "fate" of some top managers of the bankrupt Lehman Brothers may be of interest. A few excerpts:
"Barclays has identified eight individuals out of the New York staff of 10,000 who are vital to make the deal succeed and a further 200 who are identified as “key”. It is thought that these eight directors will be locked into two-year contracts worth between $10m and $25m a year. [...] Barclays said there is no obligation to pay it out but analysts say the competitive pressure to keep key staff means he will have to. "
I don't accept this "competitive pressure" argument. CEOs of the biggest Swiss bank UBS also use it all the time, even after these "key" people led the bank into its biggest losses ever. If this "competitive pressure" really forces them to pay insane salaries to few while laying off many, it has to be stopped. See my last post...
"Barclays has identified eight individuals out of the New York staff of 10,000 who are vital to make the deal succeed and a further 200 who are identified as “key”. It is thought that these eight directors will be locked into two-year contracts worth between $10m and $25m a year. [...] Barclays said there is no obligation to pay it out but analysts say the competitive pressure to keep key staff means he will have to. "
I don't accept this "competitive pressure" argument. CEOs of the biggest Swiss bank UBS also use it all the time, even after these "key" people led the bank into its biggest losses ever. If this "competitive pressure" really forces them to pay insane salaries to few while laying off many, it has to be stopped. See my last post...
21 September 2008
The Big Bailout
So the US government is going to bail the banks out of the mess they created, and the taxpayer is going to pay. Well, maybe this is the only way to solve the current financial crisis. Obviously, the laissez-faire capitalism of the Bush-era has crashed and the bank CEOs and fund managers happily accept the help of the government, now that their risky strategies didn't work out. As long as they worked, of course, they thought the gains belong all to themselves and the state should not take anything away in the form of taxes.
I'm wondering: Will we learn something from this costly adventure? Will we just let the banks, hedge funds, stock markets, and their big-buck managers and traders continue as they did before? Or should something be changed to prevent more of these bubble - collapse cycles? And if so, what?
I think there is one basic thing that should be changed. I don't understand why anyone should earn millions, no matter how good the business goes that he or she happens to be doing. Crazy salaries let people lose their sense of reality. Those who earn that much, and even more those who think that anyone could possibly "deserve" to earn as much as hundreds of average workers are in desperate need of a reality check.
So, as in the end tax money is always going to pay the damage, why don't we make sure that we get the money from those who earn these insane salaries before the next crisis will force us all to pay for them?
My proposal: Take the salary of the US president (400,000$ per year) as a cap of what anyone can reasonably earn. There is hardly another job that carries more power and responsibility (even if the present incumbent is not quite up to the task). If things get really tough, multi-millionaire bankers are happy if a comparatively lousy paid president helps them out. So they should show a bit of humility in their pay checks.
How about taxing everything above the president's income level by 100 %? If this would be done worldwide, maybe the folly could be stopped...
I'm wondering: Will we learn something from this costly adventure? Will we just let the banks, hedge funds, stock markets, and their big-buck managers and traders continue as they did before? Or should something be changed to prevent more of these bubble - collapse cycles? And if so, what?
I think there is one basic thing that should be changed. I don't understand why anyone should earn millions, no matter how good the business goes that he or she happens to be doing. Crazy salaries let people lose their sense of reality. Those who earn that much, and even more those who think that anyone could possibly "deserve" to earn as much as hundreds of average workers are in desperate need of a reality check.
So, as in the end tax money is always going to pay the damage, why don't we make sure that we get the money from those who earn these insane salaries before the next crisis will force us all to pay for them?
My proposal: Take the salary of the US president (400,000$ per year) as a cap of what anyone can reasonably earn. There is hardly another job that carries more power and responsibility (even if the present incumbent is not quite up to the task). If things get really tough, multi-millionaire bankers are happy if a comparatively lousy paid president helps them out. So they should show a bit of humility in their pay checks.
How about taxing everything above the president's income level by 100 %? If this would be done worldwide, maybe the folly could be stopped...
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