Monday, September 07, 2009

We're All Communists Now

Question: Why is Kenneth Feinberg (and his like in other countries) referred to as a "pay czar"? Surely "pay kommisar" is more accurate, both literally and historically?

In any event, the G20 reiterated its desire to reshape the compensation structure of the banking industry over the weekend. And while Macro Man has no wish to dispute that banking pay practices have been suboptimal over the years, he is left to wonder whether or not the current vogue for the top-down allocation of resources isn't the first step on a very slippery slope.

Sure, some bankers get paid too much....but then again, so do some movie stars. And if we start to claw back, ex-post, contractual payouts rendered on a good-faith basis in real time, what does that say about the rule of law? If we do it with bankers, why not do it with sports "stars", particularly those playing in publicly-funded stadia? Hell, why constrain clawbacks to pay? Macro Man has little doubt that there have been a few occasions when the public would like to "claw back" its election of a particular candidate after a couple of years' performance in office.

While it's not exactly new news, the world is becoming frightenly Orwellian, seemingly by the week. Given the cronyism and fondness for dirigism in the corridors of power, it looks like we're all Communists now. Perhaps this explains the market's attraction to China this morning; after all, the Chinese have plenty of practice in the arbitrary abrogation of contracts and the central allocation of resources....and they're literal Communists to boot!

In any event, Macro Man's Bloomberg chat manager is alight with commentary on renewed interest in the CNY, which appears to be making impressive gains against the USD, as seen below.
It's impressive, of course, until you bother to look at the scale on the chart. Put into a slightly longer-term context, the recent breakdown literally doesn't register.
But hey, why let the facts get in the way of a good story? And if we're all Communists now, what other currency would we want to own but the most centrally-directed of all, the renminbi?

Just remember, folks: Poverty is prosperity. Insolvency is adequacy. Regulation is freedom. Plus ca change....


Nemo Incognito said...

I'm riding the inflation all the way up until poor capital allocation and insolvency blows up China and rates hit 12% in the US. Hopefully by that time I will be long a farm, a lot of physical gold and some firearms in Australia.

Charles Butler said...

..."claw back" its election of a particular candidate...



The gold'll be a good hedge for your long Aussie rainfall.

Nemo Incognito said...

no kidding. Though some of that did arrive recently, check out wheat and corn futures.

Crisis Management said...

Excellent post MM. Finally someone with the courage to say it. At long last we discover what the C in CNBC stands for, with their incessant parroting of the so-called China miracle.

In other news, a story circulated this weekend about a macro revolt; namely Paul Tudor and Clarium Capital bucking the bullish orthodoxy.

Bloomberg used the salacious title "Goldman Sachs Wrong on Economic Recovery, Macro Hedge Funds Say." However you read their article and it's not clear that either fund actually said anything about Goldman specifically.

Thus is the state of affairs in the cut throat business of financial journalism of the 21st century, where behind every story lurks the enigmatic Goldman angle, veracious or otherwise.

Charles Butler said...

Food prices, phenomenal! My guess is they're off 30-40% in a year around here. Lots of farmers won't sow in those conditions.

Anonymous said...

Mr Butler,
It's called deflation !

The guy painting my house is working for less than he would have got 3 year ago !

When the UK next year redefine public sector pensions that will also be a subtler form of deflation if you just wish to define it as having to do more for less.

It's where we are right now. Farmers will have to decide for themselves to try and buck that trend or not ,but they are part of it whether they like it or not.

Charles Butler said...

Mr. Anonymous 1115

Thanks for clarifying all that.

Nemo Incognito said...

On the other hand there's a longer term issue with the availability of agricultural land, crop yields, yada yada. Yet more reasons to see inflation/money printing's dark side appear in EM before the places where the money is printed as EM countries peg or quasi-peg their currencies to USD.

Anonymous said...

Regulating executive pay has absolutely nothing to do with communism. I can´t see why it should be bad when the regulator says that a CEO is not allowed to earn more than say 40 times the average salary in his company. It would also be good to forbid companies to pay out the full contract when an executive gets fired. I never understood that practice.

Anonymous said...

Mr Nemo,

That sounds intuitive enough ,but as you know with the amount of govt debt required to be sold ,the more they print to support buying that debt the more the bond market will be inclined to back off and demand higher prices for same.What does higher prices on govt debt mean for feeding inflationary growth ;) lifting a brick with an elephant sat on it.

Even Bernanke should realise by now that the bond market ultimately controls the size of his bailout bucket.

Ironically ,only if matters do deteriorate will the bond market give him a license to crank up that printing press without demanding a better price for the debt it ultimately represents.

There is no action without a reaction in this game. If they are lucky they'll find a muddle on through line ,but given their colossal ineptitude I wouldn't be prepared to put money on their success in achieving that outcome.

Nemo Incognito said...

Question to MM or someone more rates-market oriented: is there any way of buying a product that is long the correlation of changes in fed funds and the 30 yr on a monthly/quarterly lookback basis? I'm asking because regardless of all these issues of printing there is a big ticket of demand for the back end due so long as banks are making losses on, well, everything and riding the curve up is the easiest way to build up one's equity. Once asset markets stop haemmoraging then that demand goes away and by that time the short end will be moving up as rate rises come through. What this means though is that there will be NO demand for the long end from anyone, especially once the budget is as trashed as its likely to be in a year or so. It would be nice if someone traded such products because it would be a lot, lot cheaper than shorting the long bond futures that are illiquid as all hell out more than a few quarters.

Nemo Incognito said...

oh yeah, and i covered this here but did not get any helpful suggestions thus far:

Donlast said...

And debt is wealth according to one Californian Congressman.
That is State debt is wealth as distinct from private debt which is not wealth.

Because the questioner earnestly sought enlightenment on this strange proposition he was threatened with being thrown out of the window.

Nic said...

If you missed that CA congressman its here ... very funny:

Poverty is prosperity hehe.

k1 said...

Naive and possibly stupid question for anyone willing to answer: I know that commodities are conventionally priced in USD, but have got to wondering about the China/Australia materials trade. When the Chinese buy boatloads of iron ore from Oz, do they pay for it in USD?

I've been trying to get my head around flows of funds in the currency markets, and the China trade poses an interesting model. Any insight would be much appreciated.

MW said...

@Nemo --- CMS spread options will give you correlation exposure.

But What do I Know? said...

I guess it's back to Room 101 for you, MM.

There is one relevant distinction between banker's and film star's pay that I would like to make--that the banking business has a component of "public utility" function which requires some regulatory intrusion. If a film star's new movie is a bomb, the only people hurt are the star and his/her backers. If a bank fails (especially the TBTF banks) then we are all affected. We don't allow the executives of electric and gas utilities carte blanche simply because their services are necessary and their failure is catastrophic; rather, their pay scales are subject to regulatory scrutiny. If the banks are TBTF, then they should be regulated; if they are regulated, the pay of their executives should be restrained and subject to outside review.

Steve said...

On the inflation issue, I just got back from a week at a resort 75 miles west of Montreal (I'm from NYC). We have been there every year at the exact same time.

This year: Dead. Unreal. Activities have been cut back, there were no guests to do them. Last year they had a barbeque every night in addition to the dining room; this year, only on weekends.

Got to the border to re-enter the US: 30 minutes in line. Last year: 2 hours. The border woman told me it had been dead all summer, no one is crossing the border.

Currency? Not really, the 12-week CAD moving average this year is 1.11; last year a bit above 1.05. That is a very small fluctuation.

Weather? Nope, we had very good weather this year.

Don't drink the koolaid. It's bad.

Anonymous said...

I agree we shouldn't manage bankers pay.

We also shouldn't manage interest rates, the mortgage market, car sales, home purchases...

If we stopped managing the markets there would be no reason to manage pay: the market would manage it.

oaxiom said...

Perhaps it's not ideal for governments to regulate bankers pay, but he current system is utterly utterly broken.

Banking was never supposed to be this interesting a career, it's supposed to be boring and dull. Lend deposits to borrowers for a small profit.

When banking begins to fill 40% of the economy and tax receipts something is going terribly wrong.

An entire generation of our best and brightest has been wasted on 'innovating' the movement of money from one pocket to another. Time to return banking to the realms of boredom and spend our efforts on more productive innovation.

Anonymous said...

What happened to the "market" in the financial sector anyway? How do these companies get away with wasting so much money on management? How come their shares aren't valued according to future dividends? Do they have no ambitious competitors who could do things more efficently?

zanon said...

oaxiom: Well said!

When movie stars start destroying trillions of dollars we can ask whether the billions they are paid are worth it.

Nic said...

Anon 2:18
Its appalling corporate governance (and the crony capitalist culture does not help either).

Macro Man bbry said...

Believe it or not, the large majority of people at banks did not contribute to losing trillions of dollars. .Many did their best to mitigate the damage. That is by the by, however, because most of 'em deservedly took a large pay cut last year and saw their net worths fall sharply. This was only fitting given the state of the world and that industry.

But to suggest that the government should decide willy-nilly what someone "should" get paid, rather than address the regulatory failure which alloweed the crisis to devlop is frankly stupid. And what the populist "screw em!" mentality naively ignores is the concept of the slippery slope: today it's bankers (some of whom may actually work for shops that nbever took a penny of government capital)....tomorrow it's lawyers, and the next day it's whatever job you do.

If you don't want bankers to be paid as much, design a regulatory framework that prevents from taking large and stupid risks. But don't arbitrarily set pay limits on someone as culpable as Ben Affleck, and who also happens to be a better actor. (Oh, and the film industry was knee-deep in the public trough via tax concessions way before the phrase 'bank bailout' was ever whispered in Washington.

Anonymous said...

The bankers pay move is largely to placate the middle class / working class / under class voting public. As MM says, the majority of bankers had nothing to do with taking on bad risks; let alone the mortgage brokers / rating agencies that played an equal role in the whole scenario.

Addressing the conflicts of interest is important - but witch hunts sell newspapers, and burning a witch makes you a popular government.

Anonymous said...

If most of the bankers would have managed risk appropriatly most of the banks wouldn´t be in trouble. We don´t have a few individual banks in a crisis, we have a systemic crisis.