The article makes it look like bankers get paid for nothing. That is simply not true. Wall Street allocates capital. Somebody has to decide how the capital available in the US gets distributed. For startups, its VCs, for mature companies, it is large institutional banks and the stocks and bond markets. The salaries are large because of the sheer amount of money that floats around. Consider the banker(s) who decide whether to give a loan to GE or handle a mutual fund. Chances are good that that single transaction has several million USD attached to it. Even a few %age of that is a very large amount. The larger comercial banks like JPM and Citigroup have upwards of half a trillion dollars of deposits. Suddenly multi-million dollar salaries don't seem that extravagant anymore.
Furthermore, if top level execs were really overpaid, we would see competition from outsiders capable of offering similar quality at lower price. It is not unusual for corporations to hire outside the company. That executive pay is still high is an indication that maybe, CEOs really are worth a few million dollars a year.
This is further complicated by federal regulation surrounding this sector of the economy. Banking regulations make it nearly impossible to start a bank. Other financial institutions are similarly constrained (though maybe not to such an extent). This artificially decreases supply and therefore, increases prices.
Are there some abuses in pay? Sure, just like there are abuses in everything else. However, because business execs are paid X times the average American and some demonstrably bad CEOs are rewarded extravagantly for their incompetence does not imply that capitalism has failed and all high-level pay needs to be regulated.
You're wrong. The free market comes from the board of directors who approve such the "heads I win, tails I win" package. The board was not forced by any non-free-market laws. Thus, these compensation packages show the free market working.
"Free market" can mean a lot of things. I seem to recall that the robber barons were pretty forceful advocates of a "free market" (by their definition of course). However, my point really doesn't depend on that, and I don't want to dispute terminology, so I've revised the wording to say "entrepreneurial" instead (by which I mean something like rewards-following-value-creation).
You shouldn't have changed the wording, because you were right: the free market contains the seeds of its own destruction: in a free market manufacturers are free to form a cartel and deny others the chance to enter into their market. Which is exactly what happens when there's no government around to regulate the free market into, uhm, being more free.
The typical barrier to entry erected by many cartels in the US involves government action. The typical barrier to entry for non-regulated industries, like cocaine manufacture and exporting in Central America, involves firebombing a new market entrant's facilities and executing their families. Imperfect as it may be, I prefer the more heavily regulated version.
Yeah, that seems to be the historical lesson: free markets don't stay free on their own, so there's a limited role for government to play in keeping them free, much as there's a role for referees in sport. To me this isn't particularly controversial. But "free" is one of those words that easily leads to pointless arguments because people are working from different definitions. To me, "free" doesn't imply no government involvement, precisely because of the paradox you mention [~]. It has more to do with competition and meritocracy (may the best man/woman/product win).
[~] Edit: by contrast, npk's comment implies that "free" means "absence of laws". A different definition.
You shouldn't have changed the wording, because you were right: the free market contains the seeds of its own destruction: in a free market manufacturers are free to form a cartel and deny others the chance to enter into their market. Which is exactly what happens when there's no government around to regulate the free market into, uhm, being more free.
Yeah true, Wall St bankers provide the service of capital allocation and liquidity (and in a perfect world, they would be allocating capital efficiently, but that's a story for another day). However I think what rankles people is three things (and most of these were touched on in the article):
1. They don't risk their own money. The true capitalist risks his own money for some productive enterprise, and is rewarded if it comes off, or walks away with nothing if it doesn't. Most investment banker chiefs walk away with millions even if they run the company into the ground.
2. They don't produce anything tangible. Ultimately they just move money around. It's worth something, but multi-million dollar salaries? Probably not. Also, the things they produce don't have visible impacts on normal people unless it goes belly up.
3. The intrinsic value of an investment banker's production is arguably a lot lower compared to how much they are compensated. I'm not going to go into this, but how much is capital allocation intrinsically worth? In my opinion, the work they do is probably more comparable to the value of a tax accountant.
The article was about why people hate bankers. You've argued why the market values them so highly, but it doesn't necessarily mean that the vitriol of the common man is unjustified.
You don't get it. And, frankly, you sound like someone who played junior high football 10 years ago and is claiming that you're just a set of cleats away from playing for an 0-4 NFL team.
There are lots of people willing to do those jobs for a lot less money. The problem is that no one in a position to hire such people trusts the "lot less money" folks.
Instead, they hire the few folks who have demonstrated success on the ladder up to those jobs.
If you think that's easy, go for it and turn down the big bucks when it's offered.
This is all above my pay grade. But when I'm evaluating an argument, I tend to discredit folks who say that their opponent is "like" something stupid, rather than taking a position and defending it.
Absolutely not true. It seems that a lot Wall Street allocated the money where THEY would make the most profits. And this happen to be the housing mania. For few years the profit from housing was so juicy, that they decided to ignore the fundamentals, and their myopia brought us to this situation.
In a good scenario, wall street will be allocating money to where it is more efficient, in our case, they just shuffled money around in esoteric papers, and pinched a bit of it every time it changed hand, which contributed nothing to the economy, except their own pockets. Now the music has stopped, and a lot of these banks are left with hot potatoes in their hand, and brought us to this mess.
Actually this offers an interesting case study. Lets look at the results of this crisis.
Three major financial institutions (Lehman, Bear Stearns, and Merryl Lynch) had their shareholders loose most of their assets and are no longer operational or independent. The remaining two investment banks Morgan Stanley and Goldman Sachs abandoned this business models and are now on their way to become bank holding companies.
In all cases, shareholders have seen massive (>50%) declines in the value of their shares due to excessive risk taking.
Do you seriously think that any institution except for Hedge Funds will ever leverage themselves 30:1 based on shaky opaque assets in the near future (I say near because every ~10 years, wall street goes haywire).
Furthermore, you are happy bashing wall street but have you ever taken a look at the balance sheet of the US government?
Look at your own last paragraph:
"lot of these banks are left with hot potatoes in their hand, and brought us to this mess."
Capitalism at work. These banks took foolish bets and now they are paying for it. The biggest blot in this picture is the $700 billion bailout which is sponsored by ... the US government.
Furthermore, if top level execs were really overpaid, we would see competition from outsiders capable of offering similar quality at lower price. It is not unusual for corporations to hire outside the company. That executive pay is still high is an indication that maybe, CEOs really are worth a few million dollars a year.
This is further complicated by federal regulation surrounding this sector of the economy. Banking regulations make it nearly impossible to start a bank. Other financial institutions are similarly constrained (though maybe not to such an extent). This artificially decreases supply and therefore, increases prices.
Are there some abuses in pay? Sure, just like there are abuses in everything else. However, because business execs are paid X times the average American and some demonstrably bad CEOs are rewarded extravagantly for their incompetence does not imply that capitalism has failed and all high-level pay needs to be regulated.