Page 1 of 3 THE SHAPE OF US POPULISM, Part 1 A rich free-market legacy - for some
By Henry C K Liu
The financial crisis that broke out in August 2007 has stirred a revival of the
latent populism that had been effectively suppressed by blanket anti-left
hysteria during the Cold War. Despite residual psycho-political phobia, such
indigenous populism has been simmering upward from deep-freeze depths after two
decades of debt-driven financial and trade globalization in the post-Cold War
era. Globalization of deregulated trade and finance has produced spectacular
wealth for an elite minority at the expense of the wage-earning majority even
in boom time all over the world.
Income and wealth disparities have been the legacy of free market capitalism,
dictated by the call of neo-liberal supply-side economic theory for
concentration of wealth to achieve indispensable capital formation. While
internationally, the United
States has been the clear beneficiary of "free trade" which dilutes the
authority of national sovereignty to institute defensive protectionism,
stagnant wages in the face of high corporate profits from outsourcing jobs
overseas have left US workers in manufacturing worse off than their parents.
Global cross-border wage arbitrage has succeeded in keeping wages low around
the world. But the decline in working-class fortune in the US had been masked
by an exponential rise is home prices in a debt bubble that provided temporary
phantom "wealth effect" to working families suffering the imperceptible real
wage decline.
Now with the bursting of the debt bubble, while the culpable financial elite
are walking away with equally spectacular severance packages after ringing in
billion in market losses, the investing pension funds of helpless workers are
unwittingly taking heavy hits and the social service entitlement for the
working poor are further squeezed by ruthless corporate restructuring.
Looking for culprits
In a congressional hearing on executive pay held on March 7 by the House
Committee on Oversight and Investigations, Republican committee members lined
up to defend the extraordinarily high executive pay accumulated during years of
handsome corporate profit made possible by the blatant global manipulation of
debt.
The Republicans dutifully rationalized that these executives also suffered
financial losses in the recent collapse of the debt market, albeit such losses
only reduce their departing compensation from high nine figures to low nine
figures. No executive has yet been forced to lose their second or third
vacation homes, while many working families are forced out of their primary
residences by the "bad judgement" of these executives.
The committee chairman, Representative Henry A Waxman, Democrat of California,
said in an opening remark: "There seem to be two economic realities operating
in our country today. Most Americans live in a world where economic security is
precarious and there are real economic consequences for failure. But our
nation’s top executives seem to live by a different set of rules. When
companies fail to perform, should they give millions of dollars to their senior
executives?"
Republicans on the committee reject the very premise of the hearing. Darrell E
Issa, Republican of California, asked rhetorically: "This is a hearing in
search of bad guys. Are there bad guys in front of me? I'm not seeing it."
Yet while Chuck Prince may not look like a bad guy to Representative Issa, the
Citigroup chief executive did tell the Financial Times on July 10 2007, 15 days
before the outbreak of the liquidity crisis, that "the party would end at some
point but there was so much liquidity it would not be disrupted by the turmoil
in the US subprime mortgage market." Prince denied that Citigroup, one of the
biggest providers of finance to private equity deals and collateralized debt
obligation instruments, was pulling back. "When the music stops, in terms of
liquidity, things will be complicated. But as long as the music is playing,
you’ve got to get up and dance. We’re still dancing," he said in an interview
with the FT in Japan. Things in deed got "complicated" two week later.
Representative Issa failed to understand that if he cannot see "bad guys" among
the movers and shakers of the market because they were merely playing according
to the rules of the game, then he does not enjoy the luxury of absolving
deregulated free market capitalism as the real culprit of massive financial
destruction. (Capitalism's
bad apples: It's the barrel that's rotten, Asia Times
Online, August 1, 2002)
Prince admitted in front of the committee: "Last fall, it became apparent that
the risk models which Citigroup, the various rating agencies and the rest of
the financial community used to assess certain mortgage backed securities were
wrong. As CEO, I was ultimately responsible for the actions of the company,
including risk models that eventually proved inadequate."
The error these risk models made was not taking into consideration the
possibility of massive market failure, a condition considered too unreal to be
taken seriously since it was expected that the Federal Reserve, the nation’s
central bank, would step in to keep markets functioning.
In a 1998 testimony before Congress, Greenspan said:
We should note
that were banks required by the market, or their regulator, to hold 40% capital
against assets as they did after the Civil War, there would, of course, be far
less moral hazard and far fewer instances of fire-sale market disruptions. At
the same time, far fewer banks would be profitable, the degree of financial
intermediation less, capital would be more costly, and the level of output and
standards of living decidedly lower. Our current economy, with its wide
financial safety net, fiat money, and highly leveraged financial institutions,
has been a conscious choice of the American people since the 1930s. We do not
have the choice of accepting the benefits of the current system without its
costs.
The risk of market failure was apparently a conscious
choice of monetary policy.
Systemic market failure was alluded to by several witnesses and committee
members in the hearing but the issue was deemed out of the jurisdiction of the
committee and the particular aim of this hearing, and was categorically brushed
aside unanswered.
Tom Davis, the ranking Republican minority member from Virginia, said that even
if the executives had been paid nothing, there would still be a housing crisis.
And Mr Issa emphasized that all of the executives were primarily rewarded with
stock, meaning they have suffered alongside shareholders as the value of
financial stocks has plummeted.
Yet it is a commonly known fact that executive compensation tied to annual
performance has become an irresistible incentive for top management to take on
increased risks for the companies they manage, at the expense of the long-term
wellbeing of the company and by extension, of the economy. The system has been
designed to push risk to the limit until it fails.
John Finnegan, chairman of Merrill's compensation committee, when asked why E
Stanley O'Neal, former chairman and CEO of Merrill Lynch & Co Inc, was
permitted to retire rather than being forced out for cause, replied that if
O'Neal had been fired, he would have forfeited the $131 million in stock and
options he had earned in prior years. Finnegan added that "cause" involved only
unethical behavior, not bad judgment. In other words, the fault was with the
system, not the individual who responds to the system's incentives. "To say you
don't have the tools, it means that even if someone performs badly there are no
consequences," Waxman retorted.
Emphasizing that the compensation process at Merrill was "appropriate" and
"independent", he said: "It is true that top executives at public companies in
the United States, especially in the financial services industry, are highly
compensated. But a great percentage of that compensation, certainly for me, was
and is at risk. When the business does well, all shareholders do well. But if
the business does not do well, the value of that compensation can plummet."
O'Neal of Merrill retained more than $161 million after he "retired" honorably
in October on top of the $70 million he took home during his four-year tenure.
The bulk of the exit pay was linked to previously earned benefits and exercised
stock options. Since his departure was deemed a retirement, O'Neal did not
receive any severance pay. Merrill Lynch, meanwhile, had announced write-offs
totaling more than $10.3 billion by the time O'Neal left, causing its stock
price go into free fall. The write-off was partly funded by profit earned under
the four "good" years of O'Neal's tenure.
Prince of Citigroup collected $110 million while presiding over the evaporation
of roughly $64 billion in market capitalization. He left Citigroup in November
2007 with an exit package worth $68 million, including $29.5 million in
accumulated stock, a $1.7 million pension, office with an assistant, and a car
with driver.
Citigroup's board also awarded Prince a cash bonus worth about $10 million for
2007, largely based on his performance in 2006 when the bank's results were
better. Citigroup announced write-offs worth roughly $20 billion in 2007 and
saw its share plummet over 60% from 2006 high.
Angelo Mozilo of Countrywide had taken home more than $410 million since
becoming chief executive in 1999, including several stock sales made under an
automatic plan while the company was buying back shares in an apparent conflict
of interest. Federal securities regulators are scrutinizing those trades, as is
the FBI. And in a report released on March 6, a day before the hearing,
congressional investigators found that the use of a flawed peer group and easy
bonus targets helped inflate Mozilo's pay. He also had been entitled to a $37.5
million severance package, though he forfeited that in January, shortly after
Congress requested that he testify.
Representative Elijah E Cummings, Democrat from Maryland, noted that, "We've
got golden parachutes drifting off to the golf course and have people I see
every day who are losing their homes and wondering where their kids will do
their homework."
And Mozilo, noting that "our stock price appreciated over 23,000%" from 1982 to
2007, said he received performance-based bonuses approved by shareholders and
exercised options as he prepared for retirement. "In short, as our company did
well, I did well," he said.
Waxman ended the hearing by complimenting the witnesses on their extraordinary
individual tales and for their service to their firms. But he added with a
straight face, "It seems like everyone is hurting except for you."
No one even on the Democratic side bothered to ask, while working families lost
homes that constituted a major part of their total assets accumulated over
years of hard work, why these executives who were responsible for such
disastrous results should not be made to disgorge their accumulated gains to
reimburse the victims of their manipulative perfidy. While populism is in the
air, it has obviously not infiltration to congressional committee hearing
rooms.
In prepared testimony, Prince focused on his humble beginnings, as the first
member of his family to go to college and O'Neal, an African American, revealed
that his grandfather was a slave. The two executives personify the admirable
socio-economic mobility in the US financial system. Yet one would expect that
people of humble origins and minority background to be embedded with
sensitivity about the powerlessness of the poor to protect themselves from
iniquitous manipulations beyond their comprehension, let alone control.
Apparently, social mobility is possible in US society only if one leaves behind
one's populist baggage.
Since last August, when the credit crisis exploded to spread over the entire
financial market that now threatens the US economy with a sever recession
exacerbated by stagflation that promises to be protracted, populist rhetoric
has been growing in volume in the final phase of the year-long presidential
nomination campaigns of both political parties, even by the front-running
candidates, with an eye to capitalize widespread voter discontent in November.
While the specifics of populist reaction to recurring financial and economic
crises over the ages are not congruent, as contentious issues and reactions to
them change with evolving new contexts and conditions over time, populism has
deep roots in US political and economic history along the theme of the people
being unhappy about perpetually getting the short end of the stick from a
system run by the elite.
Populism against giantism
Historically, populism in the US emerged as a logical reaction to the emergence
over a century ago of industrial capitalism, the abuses of which had left the
masses of working people a legacy not much better than slavery. The free
market, by not extending itself to include the labor market to equalize market
power disparity between capital and labor, has merely commercialized the
despicable institution of slavery, despite official emancipation.
Populism began as a movement to actively seek effective government regulation
over a pro-capital free market monetary
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