A Rant About Bonuses; Then the Lesson to Be Learned

First: allow me to rant:

Twice in the recent past we have been witness to the enormous cultural gap that separates senior corporate executives, and their coterie of hangers-on, from the rest of us. The first instance was the absurd trio of auto maker CEO’s flying into Washington on their private jets in order to solicit taxpayer support. The second came last week with the report that financial companies who had taken bailout money had still managed to pay out approximately $18 billion in year end bonuses.

Now is it just me or are these folks really stupid?

The hubris is immense. There must be some perverse lag factor at work here. The economy tanks. Presumably these guys are aware of that. Then their own business models are exposed as inept and illusory. They surely must be aware of that also. Then they start to flail and ask for help. But even then they find it too difficult to give up the gilded way of life they feel entitled to. Instead we start to read heartfelt articles in the New York Times about the terrible conundrum these nouveaux riche people now have to face as if we care a hoot. Like so many Marie Antoinettes they find life suddenly so so awful. We are urged to recall that they earned that faux wealth. That those bonuses were contractual. That it’s just so hard to find good people these days that sensible companies still pay vast sums to proven idiots and incompetents just in case those said idiots and incompetents throw a hissy fit and leave to join … well let’s not ask that question it might invite honesty.

The problem seems to be that word ‘faux’. It’s something we all have to get used to. The wealth, the creation of which is the justification for these bonuses, was faux. It didn’t really exist. At least not long enough to register anything other than a short lived blip on the equally faux profit and loss statements of the failed institutions now being bailed out.

Maybe that’s the most difficult part of all. These CEO’s and their minions simply cannot comprehend that the money they thought they had made for their supine shareholders was an illusion. They are not skilled financiers at all. They are not masterful brainiacs striding across the complex world of finance, surviving the harsh cut and thrust of global financial competition. They are weak ignorant lemmings prone to group think and fads and whose servile staffs were incapable of compensating for the surfeit of ego swishing around the executive suites.

Enough of them. There is work to do and they should be marginalized. They messed this up. They should be locked in their ill-gotten mansions and estates and left to ponder their own foolishness. The rest of us have to clean up and retrieve what we can from the debris.

That ends my rant!

On a more serious note: the deep lesson here is one that I have raised before. We have just suffered a failure of our leadership. Our power elite, even though it was largely self described it was just that, has let the country down. That elite extends across all domains. The failure encompasses business, politics, academia, the arts, and journalism. They all benefitted far more than the rest of us from the bubbles of the past two decades. They flattered themselves and fell into a mutual self-congratulatory stupor. They failed to heed the skeptical wisdom of David Hume who warned against predicting the future on the basis of the past. They allowed standards to fall. They accepted the average and lauded it as the great. Average Americans, those not involved in the power lunches and social scene, fell into the trap of believing the hype: these were new titans of industry, and these were the next great theories of economics. After all we never had the evidence to contradict the hype however obnoxious it sounded.

Well now we do. And we had better all sober up and realize the extent of the trick played on us. Those are our jobs and homes, our livelihoods and futures being affected by the collapse of the great illusion. So it’s one thing to rant about the idiocy and pathetic actions of the newly exposed fools on Wall Street and in Detroit. It’s another to get down to the hard task of fixing the problem. Let’s not get diverted from the work ahead by bickering over misspent money or the gaudy baubles of the gilded age just past. It was the glitter that prevented us seeing clearly before.

We have just witnessed an intellectual, moral, and social failure of epic proportions. The last such was in the 1930’s. That decade produced a ferment of ideas, art, and industry enough to form the foundation for the period since. Looking back we have added precious little subsequently despite all our expenditure of energy and treasure. Why is it, for instance, that the work of John Maynard Keynes is now so popular amongst economists who as recently as three years ago were lauding his irrelevance in the face of what they saw as the perfection of the pure free market thinking he questioned? Nobel Prize winner after Nobel Prize winner sought to expunge his theories from our policy making memory. The University of Chicago virtually launched a full scale war against his version of economics.

There are many stories to be written about this crisis. Much is yet to be learned. But one thing we know with certainty is that the economics, and methods of business based upon that economics, formed during that last forty to fifty years are wrong. They just failed miserably. I hesitate to paraphrase Karl Marx, but he seems to have been onto something when he pondered about the inherent contradictions within capitalism. It is a frail system when left unfettered. It always collapses under its own weight. That’s why we have democratic institutions to counter-balance it.

I have long held that far from democracy and capitalism being mutually supportive, they are actually in constructive tension: the one stops the other from becoming rampant. We distribute wealth made by capitalists through democratic programs like health care and social security. The cost to the capitalists is marginal wealth. The gain is an extensive well educated and supportive population eager to benefit from the creativity of capitalists. Too much capitalism leads to unsustainable income inequality and social disorder. Too much democracy leads to socialism and the loss of individual freedom. That’s why regulation is a necessary feature of a balanced economy, and why government is not, to contradict Ronald Reagan, the problem. That’s why Keynes was right and people like Milton Friedman were so wrong. We actually live within a populist capitalism, not a free-market capitalism. We had better remember that now as we replace the fallen system and its failed theoretical underpinnings.