CEO Pay Cuts Inadequate, Sweeping Reform Needed


David Callaway is right: This nation needs more than grilled millionaire on the menu. While intelligent reforms to executive compensation are essential — sweeping reforms and not mere dabbling — we must do more than audit the menu. It is time to reform the discriminatory nature of the meal club as well. Compensation guidelines are not enough. We must alter the means by which investment rewards in public markets are acquired. Systematic change requires modifying the financial architecture of finance capitalism.

The Federal Reserve has the unenviable task of maintaining an economy built upon a leveraged growth capitalism model. The regulatory reforms underway currently will not produce a satisfactory outcome because the financial architecture of our system is as wrongheaded as the underlying model of capitalism (for which the Fed and the U.S. Congress are both to blame).

The current capitalism model requires leverage, general inflation, asset price appreciation and economic growth. Call these, if you will, the Four Horsemen of the Apocalypse, for this is the probable episode to which they will bring the world within two decades. But while storm clouds approach for a providential cleansing, they will leave as well. As they depart their silver lining will become evident — the Apocalyptic calamity being the catalyst for a worldwide democratic consensus in support of better economics. The future will give us a meritorious sustainable capitalism, international peace, environmental goodness and lasting prosperity.

Disconcertingly, the budding economic recovery is both morally defective and fragile. It is widely recognized that wrongdoing was rewarded in jump starting this recovery. How unfortunate! Everywhere we look wealth is shifting from honorable, hardworking people who make valuable societal contributions to careless, incompetent, compromised and corrupt individuals who game the system and exploit the public domain. If Wall Street was the lone institutional culprit it would be bad enough. But the curse of profligacy is everywhere, even as the biblical oracle Jeremiah observed in forecasting repercussions (Jeremiah 6:10-15). Substantial segments of many professions including medicine, law, education and religion are infected with greed, ethical lethargy, and stubborn resistence to meaningful reform.

In regard to the fragility of the nascent recovery, it is increasingly evident that ‘as goes the stock market, so goes the recovery.’ Most of the money “invested” in the stock market today is not money that capitalized business enterprise. Instead, it is money dumped into a massive betting pool that functions as a mega-derivative institution. The variable level of stock indices no longer reflects the value of underlying assets but rather prices in a compilation of projections about economic growth, the prospective looseness of the money supply, consumer confidence, fund flows and the impending psychology of the game. Indeed, what is a ‘derivative’ but a financial instrument the price of which is derived from external metrics. So now the world bows before its idols — derivative style stock markets.

A leading element in the financial game is the activity of proprietary trading platforms. Many of these mega-trading systems use trend evaluation strategies. Every aspect of trend pricing is scrutinized by computer protocols. The data is mined to reveal the intricacies of price momentum, price equilibria, price-to-news response patterns, and price-to-metrics proclivities. Every aspect of pricing is scrutinized by the most robust statistical and intuitive means. As a result, financial elites are able to exploit price disparities, value discrepancies, monetary imbalances, portfolio weaknesses, market imperfections, and regulatory loopholes. Indeed, the public’s retirement savings is gamed by trend instrumented investment systems.

The Federal Reserve chair faces the daunting task of trying to engineer an economic recovery in an environment in which the cumulative effects of trend following systems may outweigh the consequence of central bank policy initiatives. When the mega-trading platforms become somewhat aligned on the same bandwagon — bull or bear — the weight of their trades creates trends that push prices beyond rationality. As the world witnessed twice in one decade (2000-2002 and 2008-2009), price logic means little during booms or busts.

It is easy to accept social conventions while glossing over what is important. It is absurd, even profane, to run an economic system where policy is readily trumped by speculative trends. When the amount of money in the stock market was small relative to the productive assets of the United States, the impact of trend following systems was muted. Not now. Wage earners and investors have placed trillions of dollars of earnings and savings into stock market betting pools. Based upon the assumption that economic growth would continue to attract retirement savings to the betting pool, speculators bid up stock prices, the effect being to grow stock values faster than the general economy could grow. Now, when stock index levels change dramatically, the effect massively increases or constricts the nation’s resource base. Thus, Wall Street comes to govern the money supply more than the U.S. Congress through its inscrutable agent, the Federal Reserve. (Yes, Rep. Ron Paul: audit the Fed!)

The current model of leveraged growth capitalism plays directly into the designs of elites intent upon creating a plutocratic backdrop for democracy. Other models of capitalism could be formulated that would be resistant to elite manipulation, economic injustice and the fracturing of world tranquility. While excessive leverage is a considerable problem in financial markets, reward by price appreciation is a more serious difficulty. Any proper model of capitalism will reward individuals who invest in public companies by means of income participation rather than price appreciation. The share price appreciation model shifts a great deal of power away from Main Street and into the hands of Wall Street barons.

The preceding point should be so obvious as not to need exposition. Yet, everywhere we look we see public opinion leaders urging the general public to deposit ample portions of their income into the share price appreciation game. Where are the true reformers? Intellectual honesty demands a redesign of public corporations so as to facilitate the broad populace participating fairly and sustainably in the rewards of corporate profitability. As it stands now the public participates marginally in the leftovers of share price movement.

Price appreciation (or depreciation) is the dynamic that makes it possible for trend evaluation systems to take our economy — really our lives and our children’s lives — on roller coaster rides that are neither necessary nor beneficial to the public good. Will the U.S. economy continue to rebound during the next twelve months? It depends upon whether stock index trends attract more money to equities so as to buoy confidence and create a multiplier effect in paper assets.

It is disturbing to consider that computer based derivative risk profiles helped create errant investment patterns that excessively leveraged the world and triggered the recent boom and bust. It is equally disturbing to contemplate that the fate of the current recovery may hinge upon the designs of super elites and/or the circumstantial actions of mega-trading platforms. It is absurd that the welfare of this planet — including our ability to capitalize eco-friendly infrastructure initiatives — is conditioned upon benign outcomes in gaming the system!

Political economy has now moved beyond mass public comprehension, putting the world at the mercy of the voluntary benevolence and public-spirited disinterestedness of mega-elites. What consolation can one find in this, especially when one considers the track record of the current battalion of world leaders, both neocon and neoliberal? If truly fair and sustainable systems are to be realized, we must draw our next generation of leaders from new soil — people with no inappropriate obligations to Wall Street. Any ideas?