In an interview titled Exec compensation: "Heads I win tails you lose", The Real News Network Senior Editor Paul Jay and University of Massachusetts-Amherst Professor James Crotty get to the the heart of the cause of the recent financial collapse by examining not just the data points of executive compensation, but far more importantly, the mythology that makes us believe that the prophets of profit are our proper modern gods.
The transcription is my own. TRNN typically posts full transcripts within a few days.
PAUL JAY: Well let’s go back to the first question about the board—the relationship of the board of directors to the management.
In many companies, I would think most companies, outside share-holders appoint the board, and more often than not, even thought the CEO might own a lot of shares, it’s not the norm that the CEO and senior management actually control the board, share-holders do. In this situation, you take Goldman Sachs and the other big players, is it a case of senior management also owned most of the shares?
JAMES CROTTY: No, I don’t think that’s the issue. It’s just that the senior management, when the companies are doing well, have lots of power, and the share-holders , the representatives of share-holders, during the periods the financial system is doing well, are also doing well. So nobody complains about this.
If you held a share of Goldman Sachs, and you bought it in 1994 or 1995, by the time you got to 2000, you’d made tremendous capital gains, by the time you get to 2007 you’d made additional capital gains, this is also true of the other large companies. So during the expansion, normally, in the financial markets, the share-holders, including the institutional share-holders are quite happy with performance. They’re being told by everyone—the financial press, the government, economists—that this is a very safe situation, economists generally said, during the period of the bubble, from the mid-1990s to 2007—that this was all based on efficient financial markets, and these were long-term profits, and everybody was safe, they were told that by the Fed, they were told that by Bernanke, they were told that by Timothy Geithner, they were told that by Lawrence Summers. I mention all those people because they’re important in Obama’s administration. And so uh they were making enormous capital gains.
PAUL JAY: So in 2004, when they significantly raised the amount of leverage these banks could use, which increases their risk, everyone says, it’s ok, the government—the Fed is saying it’s ok, the government is saying it’s ok, and we’re in good hands and we’re making so much money who cares?
JAMES CROTTY: Right. And economists said it was ok. You can’t leave economists out of this. I mean basically, they were a lot of people who had a self-interest in seeing that this didn’t stop, and continuing the deregulation process, that was ongoing for a long time, but also everyone could legitimately say, that economists tell us that this is the right thing to do. That we should lightly regulate financial markets, that financial markets are efficient, that they price risk correctly. And um in the new system of the recent period where banks didn’t hold risky loans, they shipped them out to capital markets, that capital markets priced everything right.
PAUL JAY: OK, so, I’m a pension fund, I’m making lots of money; I’m a share-holder in Goldman Sachs, I’m making lots of money, what do I care what the executive compensation is if that’s if—if I’m doin’ fine, why does it matter?
JAMES CROTTY: I think that they didn’t care–
PAUL JAY: –But why should anyone care?
JAMES CROTTY: They should care because over this period of time the financial system got into an absolutely unsustainable condition, in which there was massive risk, there was massive leverage, we were in a situation where if anything went wrong in the system—if interests rates went up or housing prices didn’t continue to go up, or profits went down, or there were bankruptcies, the system was so leveraged and so stretched and so fragile because of the risk-taking that was done by the financial rain-makers, in order to pursue profits and revenues and therefore bonuses, that the system was ready to completely fall, if anything went wrong. As soon as housing prices stopped going up so rapidly, and eventually turned around, everything did start to go wrong, and we had a financial collapse that was spectacular.
And if governments around the world hadn’t intervened massively with billions and billions and trillions and trillions of dollars, to save the system, we would have had a complete financial meltdown and a new global depression, that’s the problem.
But again, it’s not just them, it’s the whole context of the conventional wisdom, supported by economists and propaganda from financial institutions, that if you let the financial markets alone, they will provide the services that will enrich everyone and make the economy work very well so that any reasonable person should support deregulation.
Anyone who wasn’t—who didn’t drink the kool-aid on this and was simply observing from outside would see that this happens over and over again, it’s happened over and over again for hundreds of years: if you deregulate financial markets, the markets eventually bubble, they bubble so large that at some point the can’t sustain themselves then they crash, then the question is, what do you do about it? Do you regulate them so they won’t do this, or do you rescue them and run the scenario all over again?
PAUL JAY: Well, it’s an interesting situation, where the Emperor can come out and someone can finally say, you have no clothes, but it hardly matters because the government brings you a bathrobe pretty quickly.
JAMES CROTTY: These guys make enormous amounts of money, they have enormous incentives to take risks, to increase leverage, to get their firms in trouble because when the trouble comes they still get big bonuses, and then the government bails them out.
PAUL JAY: Why is none of this considered criminal?
JAMES CROTTY: Well, it’s interesting, there are a lot of criminal activities which go on but no one is really prosecuting that, you know William Black, who’s written a lot about that, but mostly because the same people who are creating these what are fundamentally economic crimes are also the people whose influence writes the legislation which decriminalizes everything. If you don’t have regulations and you don’t have laws that restrict what you do, and you can get the Congress and the Administration to do that, then you’re not committing legal crimes, you’re just committing moral crimes.
PAUL JAY: In the next segment of our interview, let’s talk about the concept of “false value,” and how these executives created this essential mythology of profits to increase their bonuses and how that helped lead to the collapse.
Am I the only one who hears in this an echo of John Perkins describing the work of EHMs on Democracy Now! (June 5, 2007)?
AMY GOODMAN: John Perkins, talk about your transformation. You were making a lot of money. You were traveling the world. You were in a position where you were meeting presidents and prime ministers of countries, bringing them to their knees. What made you change, and then, ultimately, the decision to write about it?
JOHN PERKINS: You know, Amy, when I first got started—I grew up—three, four hundred years of Yankee Calvinism—in New Hampshire and Vermont, with very strong moral principles, came from a pretty conservative Republican family. And all during the ten years that I was an economic hit man, from ‘71 to ’81, I was pretty young, but it bothered my conscience. And yet, everybody was telling me I was doing the right thing. Like you said, presidents of countries, the president of the World Bank, Robert McNamara, patted me on the back. And I was asked to lecture at Harvard and many other places about what I was doing. And what I was doing was not illegal—should be, but it isn’t.
And then suddenly, I realized that this plantation had been built on the bones of thousands of slaves. And then I realized that the whole hemisphere had been built on the bones of millions of the slaves. And I got very angry and sad. And then, it suddenly struck me that I was continuing that same process and that I was a slaver, that I was making the same thing happen in a slightly—in a different way, more subtle way, but just as bad in terms of its outcome. And at that point, I made the decision I would never do it again. And I went back to Boston a couple of days later and quit.
And that in turn reminds me of Marcy Wheeler’s admirable elucidation of neo-feudalism. How have Perkinsian economic hit men created a secret global empire? By jacking us with the myth that they have the power to create everlasting profits, benefiting everyone, as long as we serfs and peons stay down on the feudum and let the lords of FIRE play MOTU.