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"By almost any measure, 2008 was a complete disaster for Wall Street

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A figure like this is trotted out every year, and the figure is misleading. Rather than investment bankers walking home with $19 billion in cash, these employees are typically hired with contracts that specify a certain number of stock options to be paid out as non-regular (i.e., non-taxable) compensation. If the value of the stock falls below the stock option price, then the options are totally worthless. Paying out stock options is a cheap way to provide incentives for employees to do whatever they can to keep the stock prices up -- which is why shareholders (i.e., the owners of these companies) approve of these arrangements.

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This crisis is very illuminating on the unfairness of capitalism and this, I must say, came a surprise for me. All that ideology that I believed in about hard work, talent and ability proved to be just crap. Some people can't lose while others can't win. Capital owners gain less then managers. Some are right this is not capitalism but managerialism. There is no free-market, the game is fixed.

Yeah, but keep the blame on managerialism before capitalism. Capitalism would have the owners rejecting excessive deals for management through their own financial interest, and it is puzzling why their wishes fail to get transmitted via the board of directors that they vote in.

 

In the US, some say it is rigged because companies almost exclusively claim the shareholder-unfriendly state of Delaware as a regulatory home, sort of a flag of convenience like Liberia is for ships. Also too few vote their shares; in the US almost everybody is a shareholder but often through intermediaries such as with pensions.

 

Management culture used to err in the opposite extreme. Instead of being hyper-responsive to financial opportunities, they were stagnant and refused to unleash the power of their capital and employees. When this was kicked loose by the so-called takeover raiders (1980's?), the press reviled them as greedy and layoff creators. But that was the stick that brought better health to business and actually to workers as well. Later (1990's) it was turbocharged by a carrot approach to attract and bait managers to even further achievement.

 

Every such experiment that works will be pushed to test it's limits, and it was unfortunate this limit wasn't detected in more normal times. But unfortunately the aftermath of Asia's 1997 crash led to huge global distortions that enabled the western world to defy gravity for the next decade. Overreacting in a defensive way, China was a "pusher" of funds and the US (plus UK etc) was the "junkie" debtor: http://www.economist.com/displaystory.cfm?story_id=12972083

 

I'm suggesting it was an unfortunate collision of 2 cycles of excess that could have been expected to sort themselves out in the normal way capitalism turns colliding self interests into solutions bearable to each side. But the confluence of cycles let things go way overboard.

 

Over regulation of capitalism may be the worst response. It's crazy to think similar bonus system would go on, when it's very structure offers zero to folks in the rest of the cycle (eg. "underwater" options). Regulation has been among root causes of some of this, like Clinton-era restrictive terms for Asian bailouts and government mandates pushing mortgage money to sketchy borrowers.

 

Allow flexibility and unclog the channels of counterbalancing self interest that keep things in line. There used to be famous "turnaround" CEO's who would go from one dying company to another and revive them, but the current populist outrage wouldn't allow enticing those experts with enough compensation.

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The markets can regulate themselves if there is a penalty for bad behavior, including for excessive risk taking. The size of today's companies overgrown with mergers and acquisitions makes bankruptcy unlikely for top players making them risk free, at least for managers as stockholders can lose their shares.

 

The outrage against overpaid management it's not populist. This huge amounts of bonus money have no connection with healthy profits and are the root of this crisis. A manager has a huge interest in making profit even if that profit comes with a serious risk. This reckless behavior it's helped by advantages like "golden parachute" so even if poor performing the management gets large "compensation" for contract severance.

 

I don't believe that those stock options paid now are worthless.They could became such if the shares lose value but if they sell quickly the money it's theirs whatever happens with the market.

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I love capitalism...with some brakes. It seems like it's on a path to destroy itself, unless regulation and transparency are reinstated. The subject of executive pay is very relevant to the discussion. Increased productivity should always be rewarded. However, many top executives were raking in salaries that had little to do with the performance of their company.

 

 

From: Executive Pay Watch, 2007 trends in CEO pay:

http://www.aflcio.org/corporatewatch/paywa...index.cfm#_ftn4

 

"During the past 12 months, overall total compensation of the highest-paid executive increased 20.5 percent while revenues increased 2.8 percent, the study found. As of February 2008, the average top executive received overall total compensation of $18,813,697, according to the study. In comparison, the median pay for workers rose only 3.5 percent to $36,140 in 2007, from $34,892 the previous year, according to the U.S. Bureau of Labor Statistics.[4]"

 

[4] Usual Weekly Earnings of Wage and Salary Workers: Fourth Quarter 2007, Bureau of Labor Statistics release Jan. 17, 2008.

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I'm curious to know everyone's definition of capitalism.

 

 

This definition has the classic attributes of capitalism along with some of its more contemporary features. I tend to agree with the some of the comments above, that we're in a period of managerialist capitalism:

 

"Capitalism: the dominant organisation of contemporary global economic life. The basic processes of capitalism are the production of commodities, the extraction of value from labour, exchange and attention; and according to Marx the tendency towards monopoly. Contemporary capitalism is often analysed in three component sectors: industry (or manufacture), services (retail, officework) and finance (banking, stock markets). According to many observers, the global economy is now dominated by finance capital, perhaps as a result of the rapid expansion of electronic telecommunications networks."

 

from:

http://shiva.smst.waikato.ac.nz/~seanc/sea.../glossary2.html

Edited by Ludovicus

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I'm curious to know everyone's definition of capitalism.

 

There are hundreds of definitions but for me capitalism should be an economic system based on private ownership of goods and money on a free market.

Markets were never free as state involvement was always increasingly present and now most states decide how to spend about a half of a country's yearly GDP. From the 70's the private ownership it's losing importance to management not only by increasing company size, divided ownership and state/public ownership but especially by the explosive expansion of investment funds and other funds where capital owners have practically no saying.

Obviously, things are not how they should be according to my above definition, so I say capitalism it's the existing economic system while that definition it's just it's ideology.

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Ok, those are very vague and general.

 

If a central government bank or a banking cartel has a monopoly on legal tender and the supply of it, is that considered 'capitalist'?

 

If the government gives to certain people the type of special privileges that have been historically considered fraud, is that 'capitalist'?

 

If a government uses its monopoly of the use of force to confiscate money and determine its distribution and its specific uses, is that considered 'capitalist'?

 

If the government is considered to have the duty and power to control the economy in such a way that ensures prosperity, is that considered 'capitalist'?

 

In my opinion we haven't had capitalism, except perhaps something close to it around the turn of the 19th century in America. After that, we had turned towards mercantilism, which has been increasingly incorporated with aspects of both fascism and socialism over the past century. If you define capitalism in the context of fascist/socialist-mercantilism, then you end up with endless definitions of what capitalism actually is. The word can describe almost anything to anyone and be used for any purpose.

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"By almost any measure, 2008 was a complete disaster for Wall Street

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incorporated with aspects of both fascism and socialism over the past century.

I have a question that maybe belongs in another thread (these forum categories have names that leave me eternally confused). What really is Fascism? Is it just an extreme on the left-right spectrum? Can Roman Republic or Empire be placed there (or maybe on a 2D spectrum?).

 

Some (Yale or Princeton) professor wrote a book defining fascism in the most complicated way that seemed to fail Occam's razor - something about a consensus that democracy cannot work and heads have to be whacked (democraticly deciding against democracy?).

 

Hitler put the Z into nazi party by adding national SOCIALIST workers party. He hated communists, but maybe as a family squabble because they were competing for the same anti-establishment demographic. Yes, he had his socialist brownshirts slaughtered at one point, but he was very reluctant to do so (delaying execution of the top guy for long) and apparently activated operation longknives only after false reports of an uprising planted by Goering and Himmler. So he was Fascist, but somehow aspired to be a national socialist rather than internationalist? I guess it's hard to tell how he would have organized the economy absent the special cases needed during war.

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I don't believe that those stock options paid now are worthless.They could became such if the shares lose value but if they sell quickly the money it's theirs whatever happens with the market.

 

Options can't be redeemed until a much later date, typically years. That's why the figure being trotted about is meaningless, populist rhetoric.

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