RADICAL MANAGEMENT: Rethinking leadership and innovation
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For people wondering why the ‘Occupy Wall Street’ movement is spreading across the country, an article earlier this year in
Bloomberg by Danielle Kucera and Christine Harper sheds some light. It discusses the continuing disconnect between the amount of pay in finance and the value generated to society:
Wall Street traders still earn much more than brain surgeons. An oil trader with 10 years in the business is likely to earn at least $1 million this year, while a neurosurgeon with similar time on the job makes less than $600,000, recruiters estimated.
After a decade of deal-making, merger bankers take home about $2 million, more than 10 times what a similarly seasoned cancer researcher gets.
“I don’t think it’s healthy for the economy to be this skewed,” said Stephen Rose, a professor at Georgetown University’s
Center on Education and the Workforce. “I believe there’s some sort of connection between value added to the economy and pay. Everyone is losing sight of any fundamentals.”
Yet many bankers think they’re not paid enough
For those in middle class finding it difficult to make ends meet or for recent college graduates struggling to find a decent job, the pay numbers are truly eye-popping.
In the first three quarters of 2010, eight of Wall Street’s largest banks set aside about $130 billion for compensation and benefits, enough to pay each worker more than $121,000 for nine months of work. That’s up from the same period four years earlier — before the crisis — when the lenders set aside a total of $113 billion, or enough to pay an average $114,400 to each worker.
Calculated in dollars, average pay per employee has risen at Bank of America Corp. [
BAC] Citigroup Inc. [C], Credit Suisse Group AG [
CSGN] and
UBS AG [UBS]and declined at Deutsche Bank AG [DBK],
Goldman Sachs Group Inc. [GS], JPMorgan Chase [
JPM] and Morgan Stanley [MS] since the same period in 2006.
“The bottom line is all the people in investment banking understand that they work harder and are under more stress,” said Jeanne Branthover, a managing director at Wall Street recruitment firm Boyden Global Executive Search. “Many don’t think they’re paid enough.”
What is the basis for these financial rewards?
John Cassidy, writing in The New Yorker in an article entitled
What Good Is Wall Street? asked a banker how he and his co-workers felt about making loads of money when much of the country was struggling.
“A lot of people don’t care about it or think about it,” he replied. “They say, it’s a market, it’s still open, and I’ll sell my labor for as much as I can until nobody wants to buy it.” But you, I asked, what do you think? “I tend to think we do create value,” he said. “It’s not a productive value in a very visible sense, like finding a cure for cancer. We’re middlemen. We bring together two sides of a deal. That’s not a very elevated thing, but I can’t think of any elevated economy that doesn’t need middlemen.”
The [banker] is right: Wall Street bankers create some economic value. But do they create enough of it to justify the rewards they reap? In the first nine months of 2010, the big six banks cleared more than thirty-five billion dollars in profits.
It wasn’t always this way
It hasn’t always been this way. Cassidy notes that from around 1940 to 1980 things were different.
Economic historians refer to [this as] a period of “financial repression,” during which regulators and policymakers, reflecting public suspicion of Wall Street, restrained the growth of the banking sector. They placed limits on interest rates, prohibited deposit-taking institutions from issuing securities, and, by preventing financial institutions from merging with one another, kept most of them relatively small. During this period, major financial crises were conspicuously absent, while capital investment, productivity, and wages grew at rates that lifted tens of millions of working Americans into the middle class.
Banking of course wasn’t the only factor. This was a period when oligopolies were in charge of the marketplace and could charge pretty much what they wanted, even for products that weren’t particularly good. So they could afford to offer life-time employment with good salaries.
Since the early nineteen-eighties, by contrast, financial blowups have proliferated and living standards have stagnated. Is this coincidence?
For a long time, economists and policymakers have accepted the financial industry’s appraisal of its own worth, ignoring the market failures and other pathologies that plague it. Even after all that has happened, there is a tendency in Congress and the White House to defer to Wall Street because what happens there, befuddling as it may be to outsiders, is essential to the country’s prosperity. Finally, dissidents are questioning this narrative. “There was a presumption that financial innovation is socially valuable,” [a critic] said to me. “The first thing I discovered was that it wasn’t backed by any empirical evidence. There’s almost none.”
True, but banking wasn’t the only factor. This was also a period in which the big companies that used to be in charge of the marketplace, found themselves struggling to cope with global competition and the new power of the customer and could no longer offer life-time employment at high salaries.
One might have hoped that the banks would have provided an element of stability in a turbulent period. As it turned out, the net effect of the financial sector has been to aggravate the instability.
Slum lords in pin-striped suits
The case for bankers, if any, rests on the argument that their activities grow the economic pie. However, most of the income comes from extracting rents in a zero-sum game. Cassidy quotes Gerald Epstein, an economist at the University of Massachusetts:
These types of things don’t add to the pie. They redistribute it—often from taxpayers to banks and other financial institutions.
Cassidy’s overall take? He cites with approval
Lord Adair Turner, the chairman of Britain’s top financial watchdog, the Financial Services Authority, who has described much of what happens on Wall Street and in other financial centers as “socially useless activity”:
Many people in the City and on Wall Street are the financial equivalent of slumlords or toll collectors in pin-striped suits. If they retired to their beach houses en masse, the rest of the economy would be fine, or perhaps even healthier.
_________________
Steve Denning’s most recent book is:
The Leader’s Guide to Radical Management (Jossey-Bass, 2010).
Follow Steve Denning on Twitter @stevedenning
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Newscribe : get free news in real time Job growth fails to dent US unemployment rate Economy created 103,000 new jobs in September, but unemployment remained high at 9.1 per cent.
Al Jazeera and agencies
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| Frustrated with the ailing economy, protesters have staged #Occupy rallies in over 500 American cities [Getty] |
The US economy created 103,000 jobs in September, the labour department has reported, a much stronger figure than expected but not enough to lower the unemployment rate.
Economists had expected Friday's report to say that the economy only replaced 60,000 jobs in September.
The private sector accounted for all of the the gains, which were boosted in part by the return of 45,000 telecommunications workers who had been on strike in August.
"Job gains occurred in professional and business services, health care, and construction. Government employment continued to trend down," the labour department said.
Meanwhile, the unemployment rate was still stagnant at 9.1 per cent for the third straight month in September.
For African-Americans, the unemployment rate is 16.7 per cent - the highest it has been in 27 years and double the rate of unemployed whites.
Al Jazeera's Patty Culhane, reporting from Washington, explained that the number of unemployed and under-employed Americans is in the millions.
"There are still 14 million Americans who aren't working today, even though they'd love to have a job," she said.
"Beyond that, there are something like six million that have been unemployed for more than six months. That is a unique feature of this recession - how long people are staying out of work."
She said there are another nine million Americans "who are working part-time jobs because, quite frankly, that's the only job they can find".
Growing frustrationWith the underlying data still dire, Friday's news is unlikely to dampen President Barack Obama's calls for congress to pass a
$447bn jobs bill- which he says could create 1.9mn new jobs.
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In depth coverage of US financial crisis protests
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He said on Thursday said that America's growing
#Occupy protest movement reflected people's frustration with the American financial system and the country's declining economy.
"I think people are frustrated, and the protesters are giving voice to a more broad-based frustration about how our financial system works," he said at the White House.
Republicans, who oppose Obama's jobs bill, said the latest jobs figures were another indication of Obama's mismanagement of the economy.
"There were far too few jobs created this month, which shows the need to spend less time making campaign style speeches and more time trying to work together to identify policies that we both can agree will create an environment for job creation," Eric Cantor, the House of Representatives majority, leader said.
Al Jazeera's Culhane said that Obama is playing "campaign politics" by "going all around the country saying blame the republicans".
But, she points out, "no US president in recent history has ever won a second term with unemployment anything close to this high".
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HSBC's annual profits rose 15% to £13.8bn ($21.9bn) in what it called a year of "major progress".
