Re: Economists Revise 2nd Quarter GDP Estimates As Stimulus Effects Are Felt
El Perverto
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"Where the Payoffs Are Big, So Are the Paychecks"
By Steven Pearlstein
Friday, July 17, 2009
THE REST OF THE COUNTRY may be stuck in a nasty recession, but on Wall
Street, where it all began, business is booming.
This week, Goldman Sachs reported a record profit for the latest
quarter while J.P. Morgan Chase weighed in with record revenue, and
other banks are set to exceed expectations. Compensation levels in
some areas are returning to 2007 levels, and firms are once again
offering big salaries and guaranteed bonuses to lure away top traders
and investment bankers.
Good news or bad?
Certainly we're all better off now that some banks are healthy enough
to remove themselves from government life support and pay back the
Treasury loans. And if well-run banks can again earn an honest profit
by taking smart risks and restoring the flow of capital into the
markets -- well, that's what capitalism is all about.
Then again, it seems outrageous that the geniuses whose excessive risk-
taking brought on the crisis, and who had to be bailed out by the rest
of us, are the first to recover and could soon be earning what they
did before.
It's the pay, of course, that gets everyone up in arms. Most firms are
already revamping their compensation strategies to require that
bonuses be earned over the long run. However effective this
restructuring proves to be at dampening excessive risk-taking, it
probably won't reduce overall pay, which explains why Wall Street has
been so quick to embrace it. The real problem with Wall Street pay is
that these firms simply make too much money relative to the economic
value they create.
If other industries were to enjoy such excessive profits, these would
be eroded fairly quickly by competition as firms sought to increase
market share by cutting prices. But in many segments of the financial
services industry -- investment banking being the best example -- a
natural oligopoly has developed in which a relatively small number of
blue-chip firms dominate the market. These firms compete fiercely
against one another in every way except price, which allows them to
earn those extraordinary profits.
There are several reasons for this less-than-perfect competition.
The most obvious is that, in this market, the relative reputation of
the firm matters a whole lot more than price. If your company is
floating a $10 billion bond issue, having a dependable lead
underwriter sends a signal to most investors that you are a borrower
who can be trusted, and so it's worth paying an extra $10 million to
get Goldman Sachs to do it. Or if your company is trying to fend off a
hostile takeover by General Electric, you probably are willing to pay
a premium to get Bruce Wasserstein as your investment banker. There
may well be banks or bankers just as smart and capable as Goldman and
Wasserstein who would do the job for less. But getting it wrong could
prove very costly.
This is also an industry in which size and scope matter a lot, meaning
that the largest players have a big advantage. At Goldman Sachs and
J.P. Morgan, for example, much of last quarter's profits were made by
trading desks that bought and sold huge quantities of stocks, bonds,
commodities, derivatives and other securities for their customers, as
well as for their own accounts. Because so many trades pass through
their hands, these large trading desks have the best real-time
information about where markets are heading than anyone in the world,
and they use that information to great competitive advantage -- not
only earning a little more than everyone else on each trade, but
learning when to get into and out of markets.
Being big and having a good reputation don't guarantee success on Wall
Street-- just ask Lehman Brothers, Bear Stearns and Merrill Lynch --
but they surely help. That's why a Wal-Mart hasn't emerged and crashed
the Wall Street party by offering lower prices. In fact, what new
entrants there are tend to be boutique firms started by industry
superstars who trumpet their superior skills by charging more than the
industry norm.
There is one other reason for Wall Street's extraordinary profits --
the safety net provided by the federal government. Most firms would
have to pay a considerable amount of money to ensure a reliable source
of liquidity in the midst of a financial crisis. But as a practical
reality, big banks and financial houses have always gotten their
liquidity backstop at a huge discount, courtesy of the U.S. taxpayer.
Just because an industry earns outsize profits, of course, doesn't
mean that those profits will necessarily go to employees in the form
of outsize compensation. But that is often the case. That's what
happened in the auto and steel industries in the 1960s, when unions
successfully captured most of those industries' profits. It also
happened at nonunion companies such as IBM and Microsoft, in the form
of stock options and above-average pay.
On Wall Street, much of the surplus is captured by superstar bankers
and traders who generate a disproportionate share of those outsize
profits, just as superstar actors have done in the movie business or
superstar athletes in professional sports. And because these
superstars work side by side with colleagues with similar skills doing
similar work, firms tend to offer higher-than-market pay to everyone
else to assure a modicum of workplace harmony.
For a brief moment, the financial crisis interrupted this compensation
arms race as profits dried up. But now that profits are returning,
there is no reason to believe that the inflated pay packages won't be
far behind. Because the government's pay caps apply only to the firms
that have been unable to pay back their loans from the Treasury, the
effect of these rules won't be to reduce pay levels at Goldman Sachs
or J.P. Morgan, but to weaken the weakest firms even further as their
top talent is lured away.
In truth, the best way to restrain Wall Street pay is to restrain Wall
Street's profits, either by increasing taxes, reducing leverage or
inducing more robust competition. Trying to cap industry pay is like
trying to cap a volcano.
[Steven Pearlstein can be reached at pearl...@washpost.com.]
http://www.washingtonpost.com/wp-dyn/content/article/2009/07/16/AR2009071604161.html
Lamont Cranston
2nd Quarter GDP Positive?
Posted by Joseph Y. Calhoun, III
The release of the trade numbers today has a number of
economists rejiggering their 2nd quarter growth numbers. A
smaller trade deficit implies higher GDP growth (via WSJ
RTE):
Was the better-than-expected May trade report enough to
finally push GDP into the black? Macroeconomic Advisers
thinks so.
Prior to Friday's data (which showed a surprising narrowing
in the trade gap to $25.96 billion in May) Macroeconomic
Advisers expected a 1.6% GDP decline in the second quarter,
at an annual rate.
Now, the firm sees second-quarter GDP up 0.2%, a 1.8
percentage point upward revision. That would be the first
positive GDP result since the second quarter of 2008.
RDQ Economics also noted the potential for a positive GDP
number. "At a minimum, this suggests that the decline in
real GDP should be less than current forecasts (we think
that a drop of 0.5% rather than 1.5% in the second quarter
is now a central forecast for GDP) and there is a
significant possibility that real GDP could actually grow
slightly in the second quarter, which would further add to
our view that the recession ended last quarter," economists
said.
jose el fontanero
Gross Domestic Product (GDP)
Current Numbers:
1st quarter 2009: -5.5 percent
4th quarter 2008: -6.3 percent
http://www.bea.gov/newsreleases/glance.htm
The GDP is still crashing.
Lamont Cranston
Your own figures show that you are lying. It's obvious that
you can't read either.
http://alhambrainvestments.com/blog/2009/07/10/2nd-quarter-gdp-positive/
Posted by Joseph Y. Calhoun, III
The release of the trade numbers today has a number of
economists rejiggering their 2nd quarter growth numbers. A
smaller trade deficit implies higher GDP growth (via WSJ
RTE):
Was the better-than-expected May trade report enough to
finally push GDP into the black? Macroeconomic Advisers
thinks so.
Prior to Friday�s data (which showed a surprising narrowing
jose el fontanero
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My source is the US Government. And your source is?