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December 21, 2008

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Hilzoy, I share your ire (little good it does, though), but I must point out:

They have caused massive amounts of money to disappear.
Money does not disappear. It moves from one pocket to another.
One type of information is called Money.

There are people who refuse to concede that money can be created and destroyed. They spend their entire lives altering records and making adjustments to ensure that every time a bit of money leaves some place, an equal bit seems to appear somewhere else. These people are called accountants.

The Alice and Bob After Dinner Speech

Though couched in humor, the point is that the money goes somewhere.

True. Possibly I should have said value.

We were just discussing this article earlier, towards the bottom of this page.

Forgive me for repeating a comment of mine from there: Also this and the rest of the story:

Goldman Sachs reported Tuesday that it paid $10.93 billion in compensation for the year, which includes salaries and bonuses, payroll taxes and benefits. That is down 46 percent from a year ago. Goldman Sachs received $10 billion from the Treasury.
I'd also suggest keeping one's eye on the ball of who is truly responsible here.

if they had any sense at all of how angry a lot of us are getting, sheer prudence would do the trick.

I imagine they think their wealth means there's no way our anger can hurt them, and I fear they're right. Oh, maybe a few will get caught up in some legal issue and sacrificed in the courts for our entertainment, but the vast majority will get away with it. They do live in a different world.

This">http://lj-toys.com/?journalid=8741539&moduleid=6&preview=&auth_token=sessionless:1229918400:embedcontentiurl=http://i2.ytimg.com/vi/qDC0qcf0kzE/hqdefault.jpg&feature=player_embedded">This may change your heartless attitude

Ah, value, a slippery concept. If I own 100 shares of X, the only thing that really determines its value is what I sell it for. Until I sell it, it only has potential value. I can borrow money using it as collateral, but if the market price falls to zero I will still owe the money.

Has value been destroyed? Companies, houses, commodities and so on have fallen in market price, but they continue to exist just as they did before this collapse.

I would say what has disappeared is trust. This is serious, of course, because all transactions have to be based to some degree on trust.

Companies, houses, commodities and so on have fallen in market price, but they continue to exist just as they did before this collapse.

Some companies have ceased to exist: in particular, those which due to the credit crunch can no longer borrow the money they need for operating funds. Auto factories are closing which may never re-open. They haven't been destroyed (conservation of mass prevents that), but they may well have been transformed from factories to abandoned buildings, and their interiors from machinery to scrap metal.

"if they had any sense at all of how angry a lot of us are getting..."

Really? I haven't seen any news about any organized demonstrations or any signs of actual anger. I hope it has been happening and I just missed the stories about it. Instead I see stories about people crushing a Walmart employee in a rush to get cheap TVs. It is especially striking when compared to the recent activity in Greece or Russia.

The ultra-rich have of course much more need for security than the average penniless pauper. And the greater the disparity in wealth distribution the greater the need. I am surprised that armed bodyguards are not on the list because there is (or will be) need to protect he owners of the wealth from the unwashed masses storming their palais'. and don't get me started about the cost of the SAM protection upgrades for the corporate jets.

It's worth pointing out that just because a bank is losing money, that doesn't mean that all of its activities are unprofitable. Even in the worst performing banks right now, there are people making a lot of profit, it's just that that profit is more than counteracted by the losses elsewhere. Yet still means that there are thousands of bankers earning their bonuses this year.

Say the government takes over Bank A because it is facing enormous losses. Of Bank A's 10,000 employees, however, 1000 are still making lots of money. If the government bows to political pressure and cancels all the bonuses, then the government has gone from owning a bad bank to owning a truly worthless bank, as those 1000 employees will be hired by a different bank very happy to scoop up people who are actually making money in the current climate.

Thus the government will have spent quadzillions of taxpayer dollars to buy a bad bank, and then to destroy, thus completely annihilation the taxpayer's investment.

To be honest, I think it is the politicians who are to blame for this, not the bankers. The bankers made as much money as they could; the politicians set rules of the game that were inherently unstable.

Clinton, Greenspan, Bush, Gordon Brown et alia: over the past 15 or so years these guys consistently chose to flood the market with cheap money in order to get re-elected. Save the pitchforks for them.

To be honest, I think it is the politicians who are to blame for this, not the bankers. The bankers made as much money as they could; the politicians set rules of the game that were inherently unstable.

Good point. It would be a different situation if any of the bankers in question had ever attempted to influence the conduct of the government. But since the financial industry scrupulously abstains from lobbying in general, and regarding the bailout specifically, they are surely blameless in the eyes of god.

Money does not disappear. It moves from one pocket to another.

When debts are recognized as uncollectible, money disappears. It's not a physical thing, subject to a conservation law like matter and energy. It's based on perception and belief -- money is created by our fractional reserve banking system, and destroyed when people wake up to the fact that the emperor's expensive clothes are nonexistent and worthless, much like payments on a liar's loan.

That said, money does disappear into pockets, but they're not even bothering to hide it any more.

It would be a different situation if any of the bankers in question had ever attempted to influence the conduct of the government. But since the financial industry scrupulously abstains from lobbying in general, and regarding the bailout specifically, they are surely blameless in the eyes of god.

I appreciate your sarcasm, but I believe the point is not that the bankers are blameless, but that looking out for the welfare of our nation was the responsibility of our politicians, not the bankers. The pols allow the system of legalized bribery which lets the bankers write their own rules, and the pols sign the rules into law.

Though couched in humor, the point is that the money goes somewhere.

No the real point is that the money never existed.

I would say what has disappeared is trust. This is serious, of course, because all transactions have to be based to some degree on trust.

I think what disappears is confidence in the future, in which trust plays a part. The value of your stock is based on an assessment, by "the market" of likely future events. When that assessment becomes pessimistic, the value falls.

I believe the point is not that the bankers are blameless, but that looking out for the welfare of our nation was the responsibility of our politicians, not the bankers. The pols allow the system of legalized bribery which lets the bankers write their own rules, and the pols sign the rules into law.

I think I'm going to have to go with the Father of the Constitution on this one:

"The stock-jobbers will become the praetorian band of the government, at once its tools and its tyrants; bribed by its largesses, and overawing it by clamors and combinations."

He didn't seem to have any problem spreading the blame around.

fish: No the real point is that the money never existed.

Well, the money that didn't exist isn't real money. This idea can take us off on a tangent -- what is money anyway? Just numbers on a piece of paper. See the link above.
The huge market value that was created and then disappeared in instruments like credit default swaps has clearly been shown to be illusory. So far, though, I think real money still exists.

Mike Schilling: Auto factories are closing which may never re-open. They haven't been destroyed (conservation of mass prevents that), but they may well have been transformed from factories to abandoned buildings, and their interiors from machinery to scrap metal.

That kind of decay takes time. I don't mean to deny that this collapse has caused real damage. I'm just saying that the wealth creating capacity hasn't vanished. Was its market value illusory? Is it undervalued now? I don't know.

Bernard Yomtov: I think what disappears is confidence in the future, in which trust plays a part.

I agree. I was thinking more about credit. When I borrow money, even when collateralized with an asset, the lender trusts that I will repay the loan even if the asset value falls. Trust in me, trust in the valuation of the asset, trust in society's enforcement of contracts, trust that investment isn't just a rigged game.

The anger that I feel stems from the shameless, untrustworthy behavior hilzoy points out in this and the next thread. The people who do treat this all as a rigged game need to face consequences.

A small matter..largely left over from English nastiness to the people they have subjegated...

But my wife is Scottish, and every time some one says "scot-free" she grinds her teeth.

Can we send "scot-free" and "welshing on a bet" the way of "Paddy wagons" and "Indian givers?"

"The people who do treat this all as a rigged game need to face consequences."

The problem is, the game IS rigged, and not in our favor.

Say the government takes over Bank A because it is facing enormous losses. Of Bank A's 10,000 employees, however, 1000 are still making lots of money. If the government bows to political pressure and cancels all the bonuses, then the government has gone from owning a bad bank to owning a truly worthless bank, as those 1000 employees will be hired by a different bank very happy to scoop up people who are actually making money in the current climate.

You assume that they're making money because of their personal, irreplaceable brilliance, not because they happen to be working in a sector that's still profitable. That's the same fallacy that resulted in the obscene bonuses in the first place.

Possibly I should have said value.

It's all too easy to forget that distinction. Same thing with price and cost. One is the map, and the other is the territory.

I think what disappears is confidence in the future, in which trust plays a part.

And this is true of all forms of money. The central purpose of money is, ultimately, to turn "trust" -- one agent's confidence that some other agent will provide something of utility at some point in the future -- into something fungible and durable and measurable.

You assume that they're making money because of their personal, irreplaceable brilliance, not because they happen to be working in a sector that's still profitable.

By that logic, those who lost money did so purely because of their misfortune of working in a bad sector, not their incompetence. Surely then they should not be punished by having their bonuses cancelled?

But my wife is Scottish, and every time some one says "scot-free" she grinds her teeth.

"Scot-free" has nothing to do with Scots; "scot", in this context, was a kind of tax. See "scot-free" for more details.

By that logic, those who lost money did so purely because of their misfortune of working in a bad sector, not their incompetence. Surely then they should not be punished by having their bonuses cancelled?

I've never worked in a place where there were profit-sharing bonuses after big losses. Why should the financial sector be an exception?

"But my wife is Scottish, and every time some one says 'scot-free' she grinds her teeth."

Scott Free is a hero.

Albeit dead, at least for a while.

I've never worked in a place where there were profit-sharing bonuses after big losses. Why should the financial sector be an exception?

Profit-sharing? Maybe they do a little of that, but to my knowledge the bonuses are awarded on a very individualistic basis.

A relative of mine, for example, had a very good year at his bank, and is one of the few people receiving a bonus there. If they didn't give him a bonus he would walk instantly, and indeed other banks are courting him. It's his expertise and his contacts that are the basis of his success or failure, and he obviously can take those with him wherever he goes. There are thousands like him.

And why shouldn't he get his bonus? He's done his job. This mentality that the financial sector should be collectively punished is very hypocritical, and gets mileage purely from the widespread envy and resentment of people who make a lot of money working in comfortable offices. That's psychologically understandable, but neither morally nor practically defensible.

It's fundamentally different from how we talk about auto workers - they fought for every penny and perk they could for decades, why are bankers any worse for having made as much cash as they could while the could, even though the writing was on the wall?

My fundamental argument is that the pols and the regulators are at fault, almost criminally so. We can't blame people - whether auto workers or bankers - from getting the best for themselves based on the situation they were presented with.

Look at the total amount of bonus payments that hilzoy describes. That can only come from grade inflation: redefining average or even below-average performance as exemplary.

Recall how Ken Lay deserved every penny of his compensation when Enron appeared to be profitable; when the fraud was revealed he was only a salesman".

My fundamental argument is that the pols and the regulators are at fault, almost criminally so.

I sorta kinda endorse this position, but with the disclaimer that it's subject to further reduction.

If bankers and auto workers are to be held harmless for acting to maximize their private utility at public expense, then why not pols and regulators who do the same thing?

"Because it's their job to maximize public utility instead of their own utility" isn't realistic. The observation that that's an unrealistic argument is one of the founding principles of modern democracy. We are not now, nor will we ever be, governed by saints and angels. Recognizing this, we have decided to adopt institutions which, at least theoretically, do not require saints and angels in order to maximize public utility. In place of altruism we substitute oversight.

All of which is to say that (at least in democratic contexts) there is no substitute for an informed and engaged populace. No matter how much we would all like there to be.

bryningman: The real question isn't should they (collectively) be punished. The real question (and always has been) is are they being given reasonable reward for their effort.

When the guy running a company is getting an annual bonus which is tens of thousands of times what the avereage employee is making, I (personally) think there'd better be some objective justification. I really think what ought to happen is more of that money ought to be paid out to workers at the bottom, who are making the product the guys at the top are selling.

When one looks at what percentage of costs the American CEO gets (and how much larger it is in the financial sector than the manufacturing) it seems there is a huge disconnect.

Back in the day (under Ike) when income in ecxess of 250,000 was taxed at ninety percent there didn't seem to be a lack of talent, or productivity.

In Europe, where that sort of vast differential isn't practiced they manage to be competitive. So something about these levels of compensation is a function of some quiddity of the american way of doing business. Quite frankly, I'd rather see the gov't get the money, and spend it, than some guy who can't manage to spend it in then lifetimes locking it up.

>>They have caused massive amounts of money to disappear.
>Money does not disappear. It moves from one pocket to another.

Magicians would call it misdirection.
Pickpockets would call it distracting the mark.

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