Robert Shiller at Town Hall this Thursday.
Robert Shiller's going to be in town this Thursday at Town Hall.
http://seattletimes.nwsource.com/html/b ... ime23.html
http://seattletimes.nwsource.com/html/b ... ime23.html
Comments
Mr. Shiller is here to promote his new book -
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The Subprime Solution: How Today's Global Financial Crisis Happened, and What to Do about It - Robert J. Shiller
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.......Shiller blames the subprime crisis on the irrational exuberance that drove the economy's two most recent bubbles--in stocks in the 1990s and in housing between 2000 and 2007. He shows how these bubbles led to the dangerous overextension of credit now resulting in foreclosures, bankruptcies, and write-offs, as well as a global credit crunch. To restore confidence in the markets, Shiller argues, bailouts are needed in the short run. But he insists that these bailouts must be targeted at low-income victims of subprime deals. In the longer term, the subprime solution will require leaders to revamp the financial framework by deploying an ambitious package of initiatives to inhibit the formation of bubbles and limit risks, including better financial information; simplified legal contracts and regulations; expanded markets for managing risks; home equity insurance policies; income-linked home loans; and new measures to protect consumers against hidden inflationary effects......
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For those working at Microsoft, do a search for MS research speaker series and you can find the video.
Times: Economist Shiller says bailout is just the beginning (penned by Ms. Rhodes, unfortunately)
P-I: Crisis, fixes will shape future, economist says
I think the long-term solution is a national move to socialism, with enough capitalism to keep incentives for innovation, competition, etc. For examples, cap total pay at $20 million or so annually, and speeding fines are a percentage of net worth (like in Finland). That would probably stop the bubbles.
Is this socialist? I've always wondered what the arguments against this were because it seems pretty fair to me. The way it is now, if you just need to a pay couple hundred dollar fine for breaking the law it basically means if you are rich you can break the law as much as you want. I'm totally cool with rich people being able to get away with buying more boats and mansions than poor people, but being able to commit more crimes (even though they are lesser crimes) seems wrong.
While I agree with capping salaries, I don't think putting a fixed dollar amount is the solution. Then you will always need to be adjusting it to inflation. I think the better solution would be to cap pay relative to other pay, such as saying the highest paid person at a company can't make more than 10x the hourly wage of the lowest paid person. It seems reasonable to me to legislate that if you're paying some people $8/hr, the CEO shouldn't make more than $80/hr. If the company is doing well and the board thinks they can afford to give the CEO a raise, they'll have to give the lowest paid employees raises as well. Also, I wouldn't be against exempting stock options, or other performance based pay from this rule. It seems fair to give the CEO additional pay on the condition that the company does well.
I disagree on the performance bonuses above a cap. When there's unlimited pay for performance, achieving short-term gains at long-term expense is rewarded. That's what sunk WaMu.
$20 million or so a year in today's dollars should be enough for anyone's performance. If they don't want to perform above a certain level, that's their choice. I'm confident the benefits would outweigh the costs.
Problem is that options encourage the high-risk, double-or-nothing gambling that got us into this mess.
Any kind of limit is going to motivate CEOs to focus on getting around the limit instead of focusing on running their company. They can move the headquarters out of the country, or they can split the company and get the max for each, like the $100K limit on FDIC insurance. They will also give themselves lavish company benefits that will be harder to track.
A flat across the board cap will also not motivate the best leaders to make the personal sacrifices to take on the toughest jobs. They will just coast along in less stressful jobs. That means our economy will not be as strong.
I've never seen the government do anything particularly well, and setting salary guidelines is unlikely to be any better.
Do you think MSFT would be as huge as it is now if Bill G and Paul Allen didn't strike it ridiculously rich? I doubt it. Why develop a monopoly and destroy all competitors if you're going to get the same $20M regardless.
What really needs to happen, is that boards need to issue execs stock options with extremely far out time frames. You can't exercise this option in 2010, you have to wait 15 years. If that were the case, then the exec would do everything they could to make sure the company is still around and profitable in 15 years rather than squeeze every penny out during the next year and a half.
Of course, most of what's happened is based on the "myth of the super exec". This is the story where company X is doing poorly and the board says, if we had a really great exec like GE we'd be making $$$ hand over fist. This thinking bids up the "top" talent, even though there's no real evidence that such top talent exists. Most people probably think there's only a couple dozen people in the country who can really make a large company grow, and the real number is probably orders of magnitude larger than that.
Suppose a CEO who makes $100 million a year coasts when her total compensation is capped at $20 million by law. That just gives an opening to a bunch of other CEOs at the competition, including new companies that could take advantage of the opening. For every CEO who's making $100 million a year now for good work, I'm confident there are many other people capable of doing the same job, but the opportunity is closed to them.
I doubt it. An exec who is 50 years old wants that Gulfstream yesterday, not 15 years from now, when he/she might well be dead from all those fat-laden dinners.
Bingo.
Yep. Totally agree.
Another aspect on salary caps: at mega pay scales, it's mostly about the score, not necessarily what money can buy. I doubt most CEOs would coast to a point where pay caps cause more harm than good. I think it's more likely they'd focus on some other score, like stock price. (Whatever Ayn Rand thinks, I pretty much think the opposite.)
Imagine how different the world would be today if Bush wasn't able to make $500K+ per hour in speaking fees at corporate conferences starting 1/21/2009. Would he be begging the GOP to fund the bailout now? I doubt it. I doubt the Iraq war would have happened either.
Or the economy could be stronger, as more competition takes advantage of those leaders coasting. Instead of MSFT and everything else, we could have 5 big software companies and far better/cheaper operating systems to choose from.
Quintuple the current salaries of all in Congress and the President, cap their total compensation at that, and continue paying them those salaries for 10 years after they leave office with the cap still in place (they sign such contract when they take office). I think we'd see gov't working much better for the people. We'd have more true public servants; perhaps every one of them would be.
It's also true that there are a lot of very talented people, and the ones at the top are statistically unlikely to be the very best anyway, because there is inevitably some luck involved. However, if someone is comfortably pulling down $10M/yr, there has to be a major motivation to leave that company, take all the experience gained there, and take a big risk with leading a smaller company with a new idea and make it the next big thing. If people don't do that, the economy will be less vibrant since experience will not be spread around when people leave successful companies to transfer their skills to rapidly growing ones. That rapid transfer of skills is what made the California high tech economy win out over Massachusetts and the rest of the East coast. If we hamper that movement in the US overall, we will lose one of the most important advantages that the US has over the rest of the world in maintaining and growing its standard of living.
It could also be a bad thing. The problem, is you really don't know retroactively. We talk about 20/20 hindsight, but all we can really do is point out what worked or didn't.
It's entirely possible that with a cap on Bill Gs pay, MSFT would not have monopolized computing. It's equally possible, that the result would have been a fractured market with mass redundancy as dozens of OSes fought for market share and conflicting standards won out. Perhaps, you would not be able to share word processing files with your friends who used other OSes.
The problem, is you can't say one way or the other whether or not MSFTs monopoly has harmed or helped the overall economy and your way of life. This coming from a guy who dislikes MSFT in general.
Second, the free market should decide compensation... Just because you aren't making the zillions of dollars they are is just sour grapes on your part.
Third.. Do you all understand what drives people to create the successful companies that most folks in this country work at? They created the companies because they wanted to get rich. Nobody ever got a job from a poor man.
As for the speeding ticket issue. Just because your rich doesn't mean you can speed as much as you like. In all states I'm familiar with in the US, if you get a certain number of tickets in a certain time -- you lose your license.
On #2, if you give me a $billion in salary, I'll give $500 million to the RNC to ensure the Republican gets elected and then all my company's losses henceforth will be paid for by the taxpayers.
On #3, if it wasn't a few big companies controlling monopolies and oligopolies, it could be tons of middle-sized companies. I might have greater choices of employers, more competition for my skills, and a higher salary.
On the speeding ticket, you really don't see anything amiss with Gates getting only a $100 fine, just because there's a limit?
Per my earlier post, I don't really support government intervention in pay (although I do make an exception when taxpayers bailout a company, as we are now the owners).
That said, you misunderstand the moral dilemma faced by (and failed by) most top executives. They are hired in, and generally offered huge quantities of stock options that only pay off if the company "hits the numbers" in the moderately short term.
If I have $30M in options that mature in 3 mos, that is a huge incentive for me to mortgage the companies future for quick stock gains today. I could hide some expenses in accounting loopholes for instance, or sell off some assets that are vital to the companies future but make our numbers look better today.
I think there is a correlation between general market volatility, which is greater today than in the past, and executive pay which is based on options.
In fact, most companies would perform better if options only provided small bonuses for executives and the majority of their pay came from salaries. E.g. you make a baseline salary of $10M, and have about $500k of options maturing each year. That's enough money to make you want to hit the number, but not enough to make you sacrifice next years paycheck for this years options.
Further, all executive salaries for publicly traded companies should be "at will" contracts. Meaning, the board can fire you at any time for any reason and you don't get a dime in pay out.