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Analysis/Comment Last Updated: Jul 24, 2011 - 8:30 AM


The "free market" in these calamitous times
By Michael Hennigan, Founder and Editor of Finfacts
Feb 22, 2009 - 10:19 AM

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RJ Matson, St Louis Post-Dispatch - - All Rights Reserved

Irish writer George Bernard Shaw is said to have remarked that Christianity might be a good thing if anyone ever tried it. A purely free market on an national scale wouldn't but in an imperfect world, in an economy untainted by cronyism, corruption and poor regulation, the delivery of most goods and services is better provided by competitive private sector firms than State-owned ones. However, the nexus between, the political and business sectors has been an enduring feature of most modern economies before the recent period of taxpayer bail-outs and in the US, Wall Street has for long provided the greatest example of the extent of the departure from free market principles.

Adam Smith, the father of modern economics, in his 1776 book The Wealth of Nations, identified the importance of individual self-interest, but contrary to what some critics have claimed, his emphasis was that you serve your own self-interest by serving the self-interest of others. It is not what is generally concluded because the last line of the following extract is what is most often quoted, in isolation:"In civilized society he [man] stands at all times in need of the cooperation and assistance of great multitudes, while his whole life is scarce sufficient to gain the friendship of a few persons. In almost every other race of animals each individual, when it is grown up to maturity, is entirely independent, and in its natural state has occasion for the assistance of no other living creature. But man has almost constant occasion for the help of his brethren, and it is in vain for him to expect it from their benevolence only. He will be more likely to prevail if he can interest their self-love in his favour, and show them that it is for their own advantage to do for him what he requires of them. Whoever offers to another a bargain of any kind, proposes to do this. Give me that which I want, and you shall have this which you want, is the meaning of every offer; and it is in this manner that we obtain from one another the far greater part of those good offices which we stand in need of. It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their self-love, and never talk to them of our own necessities but of their advantages."

To admit self-interest is a taboo in politics. In State-owned companies, staff generally also play down the self-interest aspect and present the mission as one of serving the public, when the reality is that the primary motivation is self-interest. The example of Ireland's State broadcaster RTÉ and at the ESB, Ireland's State electricity company, where the best paid staff, like the politicians, piggy-backed on the Celtic Tiger construction boom, to extract as much as they could get away with from the system, is not very different to those who have been revealed to have been Idiots of the Universe, rather than its Masters.

FINFACTS REPORT:

Irish Economy 2009: Talk to Joe! - - the asymmetric national agony aunt for confusing times - - and Cowen's €2 billion Budget

While self-interest is likely to be as common in public bodies as in private, a key differentiator is accountability.

Most work is repetitive and boring and every population has a reasonable number of people who have a propensity to be lazy. The proportions in the private and public sectors are likely to be similar. However, in for example Ireland, to have effectively a job for life in the public sector, with one of the best pension schemes in the world, it shouldn't be surprising that the level of work motivation would tend to be higher in the private sector and the rate of absenteeism lower.

FINFACTS REPORTS:

Lenihan says total cost of State pension for an Irish public sector worker hired after 2004 is 26.1% of pay

Crony Ireland and misperceptions on pay and pensions between Irish public and private sector workers

Three years ago, I wrote here on Finfacts, that Smith persistently worried that merchants and manufacturers pursuing their own self-interest, would orchestrate government regulation and patronage to their advantage. He saw the apprentice system as a means of restricting entry into various trades and nothing much has changed in the interval if one substitutes the term "professions" for "trades."

Adam Smith was an eighteenth century consumer advocate: "People of the same trade seldom meet together, even for merriment and diversion,but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices. It is impossible indeed to prevent such meetings, by any law which either could be executed, or would be consistent with liberty and justice. But though the law cannot hinder people of the same trade from sometimes assembling together, it ought to do nothing to facilitate such assemblies; much less to render them necessary."

What the "free market" is today, is difficult to discern. Some advocates have their snouts deep in the public trough and in Ireland, a pertinent example was provided in 2001, when the then Irish Farmers' Association (IFA) leader, Tom Parlon, forced the Government to agree compensation for land for national roadbuilding, which hiked the cost as a proportion of project costs to almost double that of the European Union average. Parlon then joined the self-promoted "free enterprise" political party, the Progressive Democrats, months later and as minister in 2003, he warned  that any change in the corrupt land rezoning bonanza for farmers, would be to the "left of Stalin."

I asked my mother onetime, why she didn't vote for the Labour Party, having found its leader Brendan Corish, an engaging man. "We were always farmers," she snapped  - - a generation that had endured the "skinning of the calves" and worse.

In 2008, over 140,000 Irish farmers were given welfare from EU funds, headed by beef baron Larry Goodman, who collects about €10,000 each week to cover the costs of his 1,600 acre estate.

FINFACTS REPORTS:

Irish farmland prices fall but remain highest in Europe - More than 4 times UK average and 10 times price in France

Irish Farmers and Sacred Cows - - including details on the land rezoning bonanza

What existed on Wall Street for years, was not a "free market" but what Adam Smith would have called a "conspiracy against the public" interest, with people who had enriched themselves hugely, in a corrupt self-serving system,  now relying on the challenged average American taxpayer, to bail them out.

On the CNBC business television network, the main promoters of "free market" capitalism, are well-known conservative commentator Larry Kudlow and his presenter side-kick, Melissa Francis - - a former child actress from the frontier "Little House on the Prairie" television series.

Their alter egos in 1934, would have been railing against the Social Security program as a Bolshevik conspiracy.

In December 2007, Kudlow, a former chief economist at investment bank Bear Stearns, was a fan of Goldilocks  - - the metaphor for an economy, which was neither too hot or too cold.

He appeared to have been oblivious to the US economy's crumbling foundations.

"There's no recession coming. The pessimistas were wrong. It's not going to happen. At a bare minimum, we are looking at Goldilocks 2.0. (And that's a minimum). Goldilocks is alive and well. The Bush boom is alive and well. It's finishing up its sixth consecutive year with more to come. Yes, it's still the greatest story never told," Kudlow wrote.

Francis opposes the Obama foreclosure plan and anything that smacks of "socialism" such as giving bail-outs to individuals who risk losing their homes. She was recently reported to have been nearly apoplectic at the mere thought that Wall Street executives might be spending time in security lines at airports if they were not allowed to have their corporate jets.

How long would her principles last if her current well-feathered nest was no more?

CNBC's Rick Santelli
Former bond trader Rick Santelli, who reports live from the floor of the Chicago Board of Trade, created a stir this week, by getting traders to express their opposition to a bailout for the 8% of
"irresponsible" people who have trouble with their mortgages.

Santelli is a good reporter and is the most competent of the American team to speak on European issues.

However, maybe the wealthy rancher beneficiaries of the most recent Farm Bill, would be a fairer target for his ire.

CNBC Interview: Larry Kudlow and Rick Santelli.

Today, US investors yearn for support from the US government, while regulatory failures in the US, Ireland and other countries, have triggered recessions. The impact of the Wall Street "grab all you can" culture, will be felt for many years.

Finfacts Report: Merrill Lynch 2008 loss: $27bn - - 700 staff paid bonuses of at least $1m each; Top four received a combined $121m

Free markets where feasible, with inspired but tough regulation, is imperative. However, in the countries where electorates continue to be tolerant of cronyism and corruption, there will be no long-term change. 

View of media multi-millionaire NBC "Today" show's Matt Lauer on US bank executive pay cap of $500,000: A lot of money "for the average person waiting on tables."

Would Irish media millionaires think likewise?

The following are transcripts of the bailout-related segments as they were aired in the first half-hour of the February 5th, "Today" show:

MEREDITH VIEIRA: And now to President Obama lashing out at Wall Street and clamping down on corporate fat cats. But just how much of an impact will it have? We have two reports, starting with NBC's Savannah Guthrie at the White House. Good morning, Savannah

SAVANNAH GUTHRIE: Good morning, Meredith. As you said, last week the President bashed Wall Street for paying itself those big bonuses while getting taxpayer bailouts. Well it turns out, that was the shot across the bow. Now he's following up those words with action.

[On screen headline: "Onto The Stimulus, Obama Pushes GOP Senators"]

BARACK OBAMA: The economic crisis-

GUTHRIE: With the Treasury Secretary by his side and Wall Street excess on his mind, the President unveiled tough new rules on executive pay.

OBAMA: For top executives to award themselves these kinds of compensation packages in the midst of this economic crisis isn't just bad taste, it's bad strategy, and I will not tolerate it as President.

GUTHRIE: An answer to the outcry over Wall Street executives who helped themselves to billions in bonuses after getting a taxpayer rescue. The new rules force companies that get big taxpayer bailouts to limit salaries of top executives to $500,000. Any bonus pay must be in the form of company stock that can't be cashed out until taxpayer money is repaid. But the rules don't apply retroactively to companies that have already received billions in taxpayer money. And as for controversial luxury items like corporate jets or lavish company parties, the new rules don't ban them outright, just force companies to disclose the spending publicly on their Web sites. The idea, shame the executives into better behavior.

ROBERT GIBBS: The transparent viewing of the practices of businesses that are involved in receiving assistance from the federal government I think will have a tremendous impact, as it already has, in changing the behavior of individuals.

SEN. RICHARD DURBIN: This is HR-1.

GUTHRIE: As the Senate debated his economic recovery plan for a second day-

SEN. LINDSEY GRAHAM: People are running scared in the Senate because this bill is stinking up the place.

GUTHRIE: -the President continued to court key republicans and wavering Democrats with meetings at the White House.

SEN. BEN NELSON: This is about jobs, jobs, jobs.

GUTHRIE: But he used tough talk, flexing his political muscle, reminding Republicans pushing tax cuts that he's the one who won the election.

OBAMA: I reject these theories, and by the way, so did the American people when they went to the polls in November and voted resoundingly for change.

GUTHRIE: Well despite all the wrangling in Congress, aides here still expect this package to pass by mid-February, and the President continues his sales pitch today, writing an editorial in The Washington Post saying this crisis could linger for years and be irreversible if this plan doesn't pass, Matt.

LAUER: Savannah Guthrie at the White House. Savannah, thanks very much to you. It sounds like common sense, but is the President's plan realistic? CNBC's Melissa Francis is here with that part of the story. Hi Melissa, good morning.

[On screen headline: "Bailout Salary Cap, Will It Change Things On Wall Street?"]

MELISSA FRANCIS: Hi, Matt. You know we have all been talking about excess on Wall Street for months. Well, now the President has taken a first step towards a solution and topping the list of questions that surround his plan, will it even work?

OBAMA: Top executives at firms receiving extraordinary help from U.S. taxpayers will have their compensation capped at $500,000.

FRANCIS: With those words, President Obama put fat cats on Wall Street on notice. No more cashing in on the bailout.

NEIL WEINBERG, FORBES MAGAZINE: The practices of the past, the egregious payment where people are getting rich in senior executive levels while the shareholders are getting poor is not going to be countenanced by our government any more.

FRANCIS: Will this shake up business as usual?

JEFFREY SONNENFELD, YALE SCHOOL OF MANAGEMENT: This is a very fair plan. The President of the United States is making $400,000 a year. The Chief Justice of the Supreme Court making $265,000 a year. To reach the $500,000 level is kind of generous.

FRANCIS: Wall Street has argued that it needs to reward its best and brightest or risk losing them. So, will some executives now jump ship to companies not covered by the new bailout salary cap?

[On screen headline: "Bailout Salary Cap, Will It Change Things On Wall Street?"]

WEINBERG: The question is, where are they going to run to and I think the answer is, there's not a whole lot of places that they really can go right now.

FRANCIS: But perhaps the biggest question, will this change the culture on Wall Street, given that these same executives will eventually have access to stock options?

WEINBERG: The bottom line is, these guys could still get filthy rich during this time when they're essentially operating on government money. The main benefit you're going to see here is the moral suasion, is the idea that the government is sort of, trying to show these companies, that you have to start reeling this in on your own.

FRANCIS: This concept of executive salary caps, of course, isn't new, but most economics agree that this time the President really had no choice. It got to the point, where especially from a PR perspective, something had to be done.

LAUER: Yeah alright and let's bring in your colleague now Dylan Ratigan. And, and let's talk about this folks. It sounds like common sense okay? But take, take the logic out of this for a second. Do you see any problems with this cap?

[On screen headline: "Bailout Salary Cap? Does Wall Street Get It"]

DYLAN RATIGAN: The only problem I see with this cap is that it doesn't go far enough. I feel like we're in a situation where we've put trillions of dollars of taxpayer money either directly into the banking system or to support the banking system, and yet, we're letting the people that ran the banks into the ground still operate the banks. So people get frustrated with the fact that they're like, "Why do they have access to our money, and yet, they're doing whatever they want?" So, it's almost a bad formula.

LAUER: Okay, but I, see I don't think anybody is gonna have any sympathy for a current CEO who's run a company into the ground getting his or her a salary cap.

RATIGAN: Which is, no question.

LAUER: But these companies need to be turned around

RATIGAN: Why? Why do they?

LAUER: Well wait if it comes to hiring someone else to run the company-

RATIGAN: Yeah? Yeah?

LAUER: -while it's still getting federal bailout money-

FRANCIS: You know what the problem. That's the problem.

RATIGAN: That's the issue, yeah.

FRANCIS: You hit on the problem right there, is that they're taking federal bailout money.

RATIGAN: Yeah.

FRANCIS: That's where this problem begins. Because once taxpayer money enters the situation, the government enters the situation, suddenly they're running the company.

LAUER: If you would rather have the best and the brightest CEO running one of these troubled companies-

RATIGAN: Right?

LAUER: -are you going to be able to attract that person from a company-

RATIGAN: Absolutely.

FRANCIS: (inaudible)...are still getting stock.

RATIGAN: Not only that but I take issue with the, with the assumption in your question, which is that these banks must be brought back. My goodness-

LAUER: Well some are gonna fail.

RATIGAN: My point is we need banks in this country, but the lie, the big lie is that these banks, particularly, must be supported. No, no these banks operated in a way that was egregiously risky and ran themselves into the ground. America needs banks and it is in the taxpayers' interest to have banks-

LAUER: But do we still-

RATIGAN: -but why is it the taxpayer's responsibility to resurrect these banks? I don't think it is.

LAUER: Once, once, once, well once we have an investment in these companies, these banks, do we not want them to be able to compete at the highest level?

FRANCIS: Well that's, that's what's called sunk costs. I mean we've sunk money into these banks to try and save them, but at some point you have to say, are there a few of them -- to Dylan's point -- that just need to go?

LAUER: Well of course there are but President Obama has articulated that.

RATIGAN: Right.

LAUER: He says some of these banks are gonna go away, but the others you want to succeed. And I'm just saying, can you attract top talent at a company? And you said, yeah they can still get around this with stocks.

FRANCIS: Well they're paying stock options. I mean Dylan said it doesn't go far enough and that is the truth. I mean it's $500,000 is the cap on cash compensation and for most of these guys that's a rounding error. Lloyd Blankfein made $68.5 million in 2007. $500,000 is nothing. But they still get stock. And you know there's no limit on that.

LAUER: We started the segment by asking, could, can the culture of Wall Street be changed? Let, let's just be clear here. Private jets, perks, lavish trips gone. Is it ever, are they ever gonna come back?

RATIGAN: No, not necessarily, I would-, absolutely. Here's the thing. Banking is something that is good for our economy. Taking deposits and putting money back out in, with good loans. We want that. Just as we want good cars, good medicine, good technology. Bad banking, banking where people make loans or sell insurance that they cannot pay for in order to enrich themselves and stick the bill for it, with the taxpayer, is something we in America don't want. So what we would like to see from our government is for them to encourage an environment that creates good, healthy banks that have good business practices and orderly disposition of the fools that ran the banks into the ground previously.

LAUER: But you know what's strange here. You're starting to see a bleed-over here. You're seeing corporations that are not on the public dole here, cut back those things like the jets and everything-, just for PR reasons.

FRANCIS: Just...

RATIGAN: That's a moment in time. That's a moment in time.

LAUER: So that's a blip, that's a blip on the radar.

FRANCIS: And it's also right now, and they can't really afford it. When profits are down it makes sense to cut those things. But they'll come back.

LAUER: Let, let-

RATIGAN: And if the three of us started a new bank and we actually were able to do a good job we could fly around in our private plane all we wanted.

LAUER: If I started a bank there would be no one putting money in that bank.

...

LAUER: Just going back to the beginning. We talk about $500,000 for these corporate CEOs. Let's just be clear-

RATIGAN: It's a ton of money.

LAUER: That's a lot of money. It's a lot of money-

FRANCIS: Yeah.

LAUER: -for the average person waiting on tables and...

FRANCIS: Absolutely.

LAUER: ...restaurant.

RATIGAN: Not to mention if you, if you ran your, if, if this show had, has, ratings went to zero-

LAUER: Don't bring this show into it.

RATIGAN: It's a beautiful show.

(laughter)

LAUER: Alright you know?

RATIGAN: I'm just saying.

LAUER: Oh, we're out of time. Sorry about that. Dylan Ratigan, Melissa Francis, thanks.

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