Bailouts, Bonuses and Fat-Cat Economic Advisors

(this post appears on rabble.ca)

In 2006, which was a very good year at Merrill Lynch, Dow Kim, at the time Executive Vice President and President of Global Markets and Investment Banking, took home a modest salary, $350,000. But then he received a bonus that made things more comfortable for him---$35 million.

That year Merrill’s profits came in at a record $7.5 billion. To express its appreciation not only to the top guns at the company like Kim, but also to the company analysts who had helped make it all happen, the company paid out between $5 billion and $6 billion in bonuses that year. Analysts in their twenties with salaries of around $130,000 received bonuses of $250,000. Company traders in their thirties, a little higher up the pecking order, with salaries of $180,000 were treated to bonuses of $5 million.

There was a problem at Merrill though. The record profits were illusory. Because the company was so heavily invested in mortgages that have since crashed in value, Merrill has lost three times as much as the fat profit realized in 2006.

The geniuses at Merrill Lynch played a role in driving the economy over the cliff. But they haven’t returned the bonuses they received, bonuses that allowed them to live like modern day Roman aristocrats.

Even since the crash and the multi billion dollar bailouts, the bonuses haven’t stopped flowing. Things aren’t as lavish as they were a couple of years ago, but bankers in New York are still in line for bonuses worth millions of dollars a year.

In the media, both south and north of the border, however, the target of choice these days is the unionized auto worker, whose annual salary wouldn’t pay for one fat-cat dinner in New York to celebrate bonus day. During the smash-up of the economy over the last three months, it was unclear what direction the political right would take to cope with their new surroundings. Now it’s become all too clear. The American right and its Canadian subsidiary will devote their energies to attacking auto workers and other unionized wage and salary earners.

Meanwhile, the Harper government has assembled an eleven member economic council to advise it on the upcoming federal budget. No workers or trade unionists were asked to participate. Instead the council is replete with millionaires and billionaires---Jim Pattison, Paul Desmarais Jr., and James D. Irving among them. I wonder if they’ll recommend corporate taxes as a way to stimulate the economy!

The Harperites are operating on the theory that people who know how to make money for themselves are experts on how to manage an economy for everyone. Anyone who believes this should read John Kenneth Galbraith’s classic, The Great Crash: 1929. He tells the story of how the big New York bankers thought all they had to do was to ride to the rescue of the stock market and reinvigorate it with a spirit of confidence. They tried it, were cheered for a couple of hours, and then the Depression took hold.

The truth is that tycoons know very little about the economy. They tend to assume that because they made it so big they have some special insight into how things work in the economy and society. Usually their assumptions amount to little more than a grab bag of Social Darwinist ravings about how the true giants rise to the top in the ferocious jungle of the real world and that’s how homo sapiens makes progress. Tycoons often think they conceived of this theory of the world themselves as a consequence of their own life experience. Little do they know that they are reciting tracts from some hack who was writing in the late 19th century.

The dirty little secret of capitalists is that they all know that it benefits them in their own enterprises to keep wages as low as possible. Paradoxically though, they also know that to sell their goods and services somebody out there has to have money to spend. In their economic theorizing, the fat cats can never get around this elementary conundrum. And that takes them back to their fantasies about themselves as Big Cats in the jungle.

Two final notes:

I’m so glad that the CBC has decided to balance its left-leaning At Issue Panel by adding Rex Murphy to it.

And congratulations to Harper’s 18 new senators. Now that Mike Duffy is in the Senate, he can interview himself about the ethics of a Prime Minister who prorogued parliament to prevent his government from being defeated on a vote a confidence but feels free to anoint Senators before parliament resumes and he receives that vote of confidence.