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    Occupy Wall Street And The Endowment Effect
    By Michael W. Taft | October 26th 2011 12:44 PM | 41 comments | Print | E-mail | Track Comments
    About Michael W.

    Michael W. Taft is a student of evolution, psychology, and the capacities of the human brain. A professional researcher and writer for more than...

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    by Michael W. Taft

    It seems right now as if everyone has an opinion on the Occupy Wall Street (OWS) movement, which has gone nationwide in America and spread to many cities worldwide. OWS has incited praise, rage, donations, police crackdowns, hilarity, and kickstarted a new round of American political conversation. There have been many attempts in the media to understand the motivations behind the movement, and most of them, like this New York Times article, center on the perceived “anger” of the demonstrators. But what is the driving force behind OWS?

    Changing Demographics and Circumstances

    As you have undoubtedly heard, America is undergoing a massive demographic redistribution of wealth. The middle class seems to be shrinking for the first time in many decades. American industry and the prosperity that came with it had built a large and robust middle class by the end of World War II, a condition testifying to the reality of the American Dream. This, combined with the social entitlements of the Roosevelt era such as Social Security, ensured that the majority of Americans lived comfortable lives. By the 1960s, then, the expectations of average Americans had drastically expanded. Most people expected their children go to college, own homes, and have a much better quality of life then they themselves had had. As credit became increasingly more available to the public in the 1970s, 80s, and 90s, many Americans thought that it could help push them to upper-middle-class status even more quickly. Everyone seemed to get wealthier, at least until the bottom fell out of the credit bubble, and we all realized that we had been playing at prosperity.

    Endowment Effect

    And this is where the psychology gets interesting. In 1980, American economist Richard Thaler theorized that people value something more when they own it than when they do not. We think our stuff is worth more simply because it is ours. In Thaler’s classic experiment, researchers randomly divided participants into buyers and sellers. Sellers were given a coffee mug, and buyers were asked how much they would be willing to pay for the mug. The highest price offered was $2.87. The sellers, however, asked $7.12 for the mug. The mere ownership of the mug had magically doubled its perceived value to the owner. Thaler proposed that this difference was due to loss aversion: the fact that humans strongly prefer to avoid losing something they already have to acquiring something new. Just watch any episode of Hoarders.

    The endowment effect means is that it is much easier to not give somebody something in the first place than to take it away from them later. People find it relatively easy to accept the status quo, but after their lives have gotten much better, its upsetting to have those gains scaled back or taken away.

    Exit Dreams, Pursued by a Bear

    We are now in the third year of the largest economic downturn since the Great Depression. In September of this year, unemployment was at 9.1 percent, down a bit from its high of 10.1 percent in October of 2009. Last week the “misery index”— a combination of unemployment and inflation scores— hit its highest level in 28 years. People who want work cannot find it, many are living with their parents, and unemployment benefits are getting slashed. This is not what we have been lead to expect for the past fifty years. The Millennials (just to take the most recent example) were raised with a tremendous sense of entitlement, equal parts MTV Cribs and participation trophies, and expected that upon graduation the world would present to them their very own oyster. Getting rich without much effort, a la Zuckerberg, was the aspiration: an embodiment of Millennial optimism.

    And then there came the global economic meltdown, the country on course for bankruptcy, and a loss of jobs. People lost the homes they had bought during the boom, people lost the jobs (such as construction) that had increased their standard of living, and the Millennials lost the golden future they had been promised. College grads living in their parents’ basements, groaning under the weight of unpayable school loans have become the norm.

    Regardless of your personal views on the OWS movement—which you may see as populated by anything from “heroes” to “demonic loons”—or the validity of its political basis, it is easy to understand the source of the emotion underlying the movement. These are people who are not enjoying the lives they were told they were going to have. It doesn’t matter that those dreams were an illusion based on easy credit, the real estate bubble, and student loans, only that they seemed real. The deep hardwired parts of our brains don’t know the difference; we just hate to lose something we feel we have already gained.

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    Read more from Michael W. Taft and co-author Peter Baumann at Ego.

    Comments

    Halliday
    While what you say about the psychology of loss is true (the "Endowment effect" and such), there is, in my opinion, a far more fundamental base problem:  "The middle class seems to be shrinking for the first time in many decades."

    This is not about illusory dreams (based upon easy credit, "promises", etc.).  This is a real, structural problem that many have been seeing and expressing concern about for years.

    Now, one can certainly argue over the causes of this erosion of the middle class, but one thing that can be seen upon investigation of various past nations and civilizations:  When the distribution of wealth goes from unimodal to bimodal (or multimodal), the stability of such diminishes as the gaps increase.

    Just saying ...
    Gerhard Adam
    It doesn’t matter that those dreams were an illusion based on easy credit, the real estate bubble, and student loans, only that they seemed real.
    I'm sorry, but I find these kind of statements disingenuous.  It was certainly "real" enough when credit card companies were charging 30% interest rates, late fees, and over limit fees.  It was certainly "real" enough when loans were being written without validating income.  It was most certainly "REAL" when they came hat-in-hand, and borrowed $700 + billion dollars to bail themselves out (while simultaneously granting themselves bonuses).  So, I find it unhelpful that when the American people that have helped these individuals attain wealth beyond their wildest dreams are suddenly being patted on the head and told "there, there ... it was never real".  It is insulting and not true.

    The simple reality is that economics has become twisted beyond recognition and focuses solely on what is good for business, instead of recognizing that businesses (by themselves) do not make an economy.  As a result, our policies and models have all dealt simply with whether businesses were profitable and whether or not the fantasy called "Wall Street" was showing their pseudo-profits.  It has become standard political fare that as long as the wealthy are making money, then it is "real".  However, if the middle class makes money then it is unfair or hostile towards business. 

    I do find it interesting when anyone has the audacity to use words like "real" in describing anything to do with economics, since that is the one attribute that no economist would recognize as having any validity.  Virtually everything in economics is based on belief, faith, and confidence (a great deal of psychology), so when someone wants to explain how something in economics isn't "real", they are either lying or don't know what they're talking about.

    Without the consumer class, there is no economy and it's time for business executives and politicians to get their heads out of their respective "behinds" and recognize that unless they do something about it, they will be headquartered in a third world nation that isn't going to take kindly to a return to an aristocracy.


    Like it or not, the real threat in the world today is the corporate mindset which runs the very real risk of destroying the societies that allowed them to exist in the first place.  More people are recognizing that our elected officials and government have little to say that can't be superceded by corporate interests.  My biggest fear is that corporations will succeed where no government or conqueror ever did.... total world domination.


    http://www.boston.com/news/local/articles/2006/02/14/ad_watch_police_sponsors_put_littleton_cruiser_on_the_road/

    http://www.usatoday.com/news/nation/2002-10-30-ad-usat_x.htm


    Anyone see a problem with this?
    Mundus vult decipi
    vongehr
    "it is easy to understand the source of the emotion underlying the movement."
    Oh - how good that we have you, for whom, after analyzing all the news and also not bothering to go and actually ask directly, it is so easy to "understand" that this is all about spoiled former middle class kids not getting the promised cookies they feel entitled to. Good to know, because if it is like that, we also do not need to bother asking any deeper. How convenient, really, it is always amazing how self-serving and convenient establishment interpretation is for those who still feel they safely belong.
    Regurgitating what the media wants you to think isn't insightful. Adding a little Thaler's experiment does not make this 'sciency' enough for a science site. This seems to be going into the same direction as your previous article: US centric mediocre establishment blah blah without any insight whatsoever, no other use for this but your personal desire to belong and get some crumbs that fall from the table, hoping to maybe some day get thrown a bone, too.
    Hank
    They are indeed the 'Babied Boom' in America but we sold it to them.  I watched in horror as 20 years ago half of Congress declared a college education a 'right', which simultaneously devalued degrees and steeped young people in ridiculous debt.   Now they all have degrees in International Relations or whatever and can't get a real job.

    They seem to be blaming banks for that, primarily because they are clueless - the big government and unions that created the entitlement mess are on their side, they are being told.
    Gerhard Adam
    ...the big government and unions that created the entitlement mess are on their side...
    Let's not overlook the fact that every one of those financial institutions benefited enormously and saw absolutely no reason to raise any alarms or express concerns if that were an issue.  In fact, banks feel so entitled to their "normal" revenue streams that some now feel obliged to charge a fee for using a debit card to withdraw your own money.  So, while there's no question that the public was sold (and bought) a bill of goods, the people that profited the most, did so because they felt THEY were entitled (which is precisely why they felt justified in getting bail-outs).
    Mundus vult decipi
    Hank
    Sure, I just see it as second order effect.  Young people are frustrated because they are figuring out they are supposedly more educated but are taking jobs high school people took 25 years ago, they are living with their parents more than ever (though to those who said we need 'to be more like Europe' that is a good thing) and the people who caused the issue were the ones trying to help.

    When you and I were young, free checking took a very high balance.   We all want free checking now and that was paid for by merchants and the government decided to tell banks what they could charge for debit fees so now people are back to paying $5 a month again.  Well, boo hoo.  I have no problem at all with any bank charging $100 a month for a debit card if they want; if the system were unregulated instead of overregulated, banks would compete and the $100 a month banks would be hurt.   Instead, we created a system where we made it a hassle for a bank to turn down a home loan for people they knew could not pay and then guaranteed the loans.  Then they were so important they had to be bailed out.

    Now the president is playing sugar daddy when it comes to student loans for these young people, which is adding to their entitlement mentality. We can't blame banks for that.  George Washington University is still going to get its $200K but the taxpayers are only going to get $30K of it back - so universities are bigger handout criminals than banks.
    Gerhard Adam
    ...tell banks what they could charge for debit fees so now people are back to paying $5 a month again.
    Yes, but you see this is where we see the government protecting corporate behavior again.  What business model have you ever seen that allows an organization to arbitrarily change its contracts to benefit itself simply because they could use the revenue?  This has been a practice for decades, where any time some executive decided they needed more money, they could simply change the terms of their agreements to whatever was most favorable to themselves.  Arbitrarily raising interest rates, lowering credit limits, charging made-up fees; all simply because they wanted more money.  There's no problem if they wanted to pursue the same legal pathways that the rest of us would be expected to follow, but they were able to write their own laws and set their own terms.  Why should a credit card company be allowed to lower credit limits without cause?  After all, where is their incentive to ensure they grant credit to those that are credit-worthy?  The banks have simply become too greedy, despite whatever government incentives or regulations you want to argue into it, because they have always felt that they were entitled to the protections.  This was no different even in the mid 1980's when banks began charging outrageous ATM fees, simply because they could.  It was the same as when they took a massive write-off because of failed South American loans.  Each of these events was because of poor banking decisions that the customers and government were expected to make up their deficits for.

    Despite arguing that the banking industry is over-regulated, their actual behavior indicates that they have all the regulations on their side.  They feel so entitled, that even those that have to foreclose would rather hold property that rewrite a mortgage.  How stupid is that?  The get away with it, because they already know that any "real" losses will be covered by more taxpayer bailouts.  We've trained them to become reckless and enable their greediest level of self-interest.

    I have no problem with businesses that want to charge more for services, or anything else they provide, but they shouldn't be allowed to simply rewrite terms whenever it suits their fancy. 
    Mundus vult decipi
    vongehr
    They they they they - who Hank, who, and how do you know? Why does it devalue my perfect score degree if everybody else went to college, too? Free education steeps who into debt? Why would a democracy not flourish if democracy has something to do with wisdom of crowds? Why would resources not be freed up if unemployed went into education more than into jails? You are talking conservative nonsense, and it is not ugly for being conservative, it is ugly because it is convenient, self-serving nonsense.
    Whatever "they" you are looking at, I see first of all those people who never have been promised higher education breaching class divisions to join with people who already have endorsed education trying to make consensus (look it up) work in the Western world, being encouraged by modern IT developments that may (or may not) allow unprecedented transparency. "They" finally grasp the failure of the perverted democratic doctrine of Western 2-party facades. All you guys here contribute is a convenient "oh these spoiled kids" while writing articles on how you eat potato chips during the super bowl or the purported greatness of The Steve.
    Guys: There is Arab spring, there is tea party, there is China, there is OWS, there is sociology, there is evolution of information processing systems, there is never a century without worldwide war, there is environmental catastrophe in relatively closed systems, there is relative long term stability (punctuated equilibrium) with sharia law and Big Brother AI fighting for the upper hand inside a rapidly co-evolving human/silicone based substrate, and all you guys can come up with is Congress 20 years ago and the American dream in the 1980s to tell us that nothing happens but some spoiled kids craving attention? If you succeed with your self-fulfilling prophecy that this winter already there is no OWS no more, you will still be wrong. This is as over as Seattle is over.
    mhlongmeyer
    Why would resources not be freed up if unemployed went into education more than into jails? You are talking conservative nonsense ...
    Well, Sascha, there is nothing like "progressive" nonsense to counter conservative nonsense.  You appear to be arguing that one could divert potential criminals from their jail-bound paths by using tax dollars to offer a free college education to them.  However, most people sentenced to jail are not well-equipped to pursue a college degree.  To remedy that, tax dollars would have to be invested far earlier in the educational experience.  But wait, the United States already spends more tax dollars per high school student than all but two other countries and more tax dollars per primary student than all but three other countries, yet its jail population remains disproportionately huge.  How in the world would you conclude that devoting even more tax dollars to a free college education would change that?

    By the way, do you know what does correlate well with keeping kids from adopting a life of crime?  Growing up with a father in the house.  That requires little or no direct infusion of tax dollars, but (or maybe "therefore") most progressives prefer to view it as inconsequential.
    vongehr
    You appear to be arguing that
    No - but never mind - maybe my father was just not the true Scotsman it needs in a household.
    Sasha:
    What makes you think that resources would be "freed up" if the unemployed "went into" education. I'm assuming that you mean all the unemployed people went ot school instead of collecting unemployement benefits, but what, exactly, are the resources that are being tied up by the unemployed? And who says the unemployed go to jail??? I know several unemployed people who are not incarcerated nor have they ever comitted a crime.

    You say, "there is never a century without worldwide war", that is not true, the 6th, 9th, and 13th centuries did not have a worldwide war. Look it up.

    There is no sociology-- I don't know who is filling your head with such nonsense.
    Most college kids can barely spell IT, never mind get encouraged by the developments in information systems-- unlesss it means faster video games or more p*rn.

    When you say your perfect score degree, are you talking about when you recieved your masters in unicorn studies from Narnia Institute of Technology or your certificate of release from the local mental health clinic?

    Hank
    The Mongal invasion was not a 'world' war?  Well, America was not reachable, so perhaps.  The Crusades were still going on, pitting Europe against the Mid-East.  If those don't count, then there was no world war until 1939.

    Besides that, I think when he wrote 'worldwide' war he meant war all over the world, not a world war.  He's right, there is no period in recorded history without someone at war.

    Mostly, he is just being bombastic - if you claim you are not a Chinese jet pilot, he will find a way to contend you are.   I disagree with him that fixing problems rooted in past policy would not help; using his logic we would still have slavery and people putting feces in wounds to cure them.



    vongehr
    I disagree with him that fixing problems rooted in past policy would not help
    And you have some sort of quotation of mine perhaps that would back you up on this being my opinion? Not being blind toward that the future holds novel aspects at an increasingly accelerated rate is being bombastic?
    The media understands the movement, it is in contradiction to their own interest, so they will give as a muddied message as possible. The unifying issue is corporate wealth in elections, alot of which makes it to the media in the form of political advertisement sales...

    The whole country was infected by greed, from the rich to the middle class to the poor. There was a financial bubble that masked the lack of growth of productivity. It reached a peak in 2007, and wealthy people had huge paper gains from selling inflated stocks to each other, though they really hadn't gotten much richer.

    Then came 2008, the stock market crashed, and the rich people's fake inflated income disappeared.

    The private sector, rich to poor, has gone through the ringer.

    But the public sector hasn't. The public sector unions don't want to give back the big wage and pension hikes they got during the bubble. So they are supporting protesters to change the subject and imply that the whole adjustment needs to be made only by the wealthy. Sorry, even 100% tax rates on the rich won't raise the needed revenue, when many of the rich have seen their nominal incomes drop 70% since 2007. You can't tax bogus income that no longer exists.

    Those income inequality statistics you see all end in 2007. There's a reason for that -- that's when the bubble peaked, and reported wealth inequality peaked.

    Using 2008 as the end point would show no growth of income inequality since the 1980's. That's why you never hear numbers that terminate in 2008.

    Gerhard Adam
    Sorry, even 100% tax rates on the rich won't raise the needed revenue, when many of the rich have seen their nominal incomes drop 70% since 2007.
    Oh stop it.  Multi-million dollar bonuses are not being paid out in monopoly money.  In addition, even the proposed tax hikes are no higher than the level they were at a decade ago, so let's stop pretending as if this is an attempt to take away all wealth.

    It's ridiculous to claim that 100% tax rates wouldn't raise the needed revenue, and while I can appreciate your desire to exaggerate, let's not get goofy about it.  Of course it would be enough, because if it weren't that would mean that there isn't enough money in the entire country to cover the debt.

    Everyone likes to point out how almost 50% of the country pays little or no taxes, while 1 or 2 % control 95%+ of all the wealth.  Well, figure it out ... where do you think future revenue is going to come from?  From those that have nothing?  I have no problem with anyone (including the wealthy) avoiding taxes, but let's take off the rose-colored glasses and grow up a bit.  The wealthiest individuals already have more than enough resources to ensure that their tax liability is minimized, and I'm also tired of the outright lies that suggest that investments are being prevented by taxation.  That's just rubbish.  Taxes are only collected on the money that remains after deductions (i.e. disposable income).  So if the rich want to avoid paying more taxes, then they need to invest more.  No problem.

    Mundus vult decipi
    Couple responses to confused posters:

    "banks feel so entitled to their "normal" revenue streams that some now feel obliged to charge a fee for using a debit card to withdraw your own money"
    This fee increase was in direct response to an amendment Dick Durbin of Illinois snuck into the Dodd-Frank bill, capping the rates credit cards companies can charge vendors and reducing revenue by $2billion per year. For those of you with no economics background, this was an obvious microeconomic outcome that was predicted by everyone who analyzed the proposal. For the record, many liberals (see Slate) are in favor of the increase since it makes the fees visible and more open to competition.

    "What business model have you ever seen that allows an organization to arbitrarily change its contracts to benefit itself simply because they could use the revenue? "
    That can be done with any contract as long as that right is specified in advance, as it is with credit cards. If the consumer doesn't like it, he or she can take their business elsewhere, which is very easy to do with banks.

    " did so because they felt THEY were entitled (which is precisely why they felt justified in getting bail-outs)"
    No one felt entitled to a bailout, without TARP our economy would have collapsed! Did you know that Lehman Brothers paid half it bonuses in company stock, which went to $0? The CEO lost $1billion of his own money, he wasn't bailed out! All the employees who messes up were fired, so the people making bonuses now are not the ones who caused the problems.

    Gerhard Adam
    The CEO lost $1billion of his own money, he wasn't bailed out!
    You expect me to believe that fairy story?  Are you suggesting that the CEO is now homeless or is this the "wealthy" version of losing money (unlike that experienced by ordinary people).
    ...without TARP our economy would have collapsed!
    ... and?  That's what "free market" means.  It is always interesting how these companies are engaged in sound business practices until they screw up.  Then suddenly it becomes "our" economy.  So, please, explain why such a collapse would have been worse?
    That can be done with any contract as long as that right is specified in advance, as it is with credit cards.
    Which, of course, negates the whole point of having a contract.  Why does this rationalization sound suspiciously like that used to explain the role of the old "company store".

    http://www.cfo.com/article.cfm/3009118
    http://www.newstips.org/?p=1755
    http://open.salon.com/blog/zacherydtaylor/2011/01/28/federal_debt_to_the_company_store

    But, of course ... any criticism of corporations is misguided and anything wrong in the economy is due to that lazy class of citizens that feel "entitled" to make a living wage.  After all, modern economic theory clearly indicates that the only "entitlement" should occur to corporations and those seeking to collect bonuses while running those same businesses into the ground. 

    Mundus vult decipi
    On income inequality:

    Since 1985, the education level of the average American has not increased, for the first time in our nation's history. No increase in education=no increase in productivity= no wage increases. This is due to massive amounts of immigration of unskilled labor from cultures that don't value educational attainment as much as others and will continue to be a problem unless this somehow changes.

    Next, the wage gains from the 90's were based on an unsustainable bubble, so be careful of statistics that discuss "wage gains since 2000" because that was an artificial peak that pulled future wage gains forward (and we are now paying the price as we revert to the mean).

    Finally, 85% of college grads under age 25 ar employed, so be careful not to generalize based on outliers (the media LOVES to do this). Looking forward, college educated Americans have an exponentially better outlook for their careers than non-college educated workers do, so are they really the ones we should be doling out taxpayer money to?

    Gerhard Adam
    No increase in education=no increase in productivity= no wage increases.
    That is amazing.  I wonder what the mathematical miracle was that allowed the wealthier to control even greater amounts of wealth during this period of no growth.
    Mundus vult decipi
    Are you interest in discussing this rationally or are you just venting?

    Few points:
    TARP was necessary because the regulators did not have the authority to take a investment bank into receivership (this has since been remedied). Lehman collapsing was bad enough, if all investment banks had failed in that matter the banking system would have collapsed, probably creating a great depression. Virtually all the TARP money has been paid back by the large banks (Goldman paid a 26% interest rate!), while the stocks of most banks have collapsed even during this economic expansion. Few senior executives from before the crash are still in place, so the idea that the people who crashed the banks are still getting bonuses is simply not true.

    As for the CEO of Lehman, here is a link to a NYmag article discussing his loss of $1b http://nymag.com/news/business/52603/ . That is simply a fact, not a "fairy story."

    As for your other question, I'm not sure what you mean by "a period of no growth." That's simply incorrect. Also, wealth isn't "controlled", it is "created." Do you have any backgroud in economics? Larger, global markets are allowing elites performers to make more then ever before. Think about pro athletes and Hollywood actors, the same product reaches more people than ever, so wages at the top have increased more. This only applies to the top .01% thought, not really the top 1% (roughly $400k per year). For the record, the census bureau release some data in response to the Occupy Wall Street protests. When you look a the top 1% of wage earners, only 2.77% of them work in finance and about 6.5% of them are "executives." You are entitled to feel that finance professionals didn't earn their money ethically, but that only explains a tiny fraction of the structural inequality.

    Hank
    Lehman collapsing was bad enough, if all investment banks had failed in that matter the banking system would have collapsed, probably creating a great depression. 
    Meaning what, 20% unemployment? With the 'unemployed', being people who have applied for unemployment in the last 4 weeks, at 9.1%, that means the actual unemployment rate is 20% - just like the Depression.  We likely could have saved a lot of money not bailing anyone out. The only reason we had a moral responsibility to help was because the government forced all the regulations on them making them do 10X the paperwork to turn down a poor person for a mortgage as it took to approve them; and then the government guaranteed the loans.

    I agree the banks are a lightning rod and the OWS people are slightly clueless, since plenty of state and local government workers are in that 1%, along with plenty of union heads, etc.
    Gerhard Adam
    Few senior executives from before the crash are still in place, so the idea that the people who crashed the banks are still getting bonuses is simply not true.
    I would question that, since it is exceedingly unlikely that the current lot of senior executives hasn't been thoroughly steeped in this industry for decades.  I don't suspect that you're really suggesting that the bank executives of today all came from outside the banking industry and represent "new blood".  So, the notion that those "who crashed the banks" aren't in place, is a rather nuanced position, since the overwhelming majority of those that participated most certainly are still in place.

    It also isn't just about getting bonuses.  These are people that have been paying themselves millions of dollars for years, knowing full well that they were jeopardizing their organizations.  So, they get to keep their assets, and slink away into the night while the people that have to pay the cost are suffering real losses.
    The FDIC is seeking to freeze the assets of senior WaMu execs and their spouses, according to Business Week. And like many businesses, the banks (meaning: shareholders) paid for insurance policies to protect their directors and officers in the event of lawsuits. So it’s the insurance companies that are being targeted, given that the banks are insolvent.

    Oh, and the U.S. government isn’t even first in line for collecting the insurance money. “Any money recovered from [director and officer] policies will cover only a fraction of the cost of bank failures as claims first go to pay the legal costs of policyholders.” 

    In other words, it’s the lawyers who stand to get the windfall from the FDIC’s suits.

    http://www.globalpost.com/dispatches/globalpost-blogs/macro/us-sue-execs-over-bank-failures
    To add insult to injury, the responsible parties won't even be on the hook for the decisions they made.  They gained the equivalent of a multi-million dollar early retirement.

    For Congress, he was little better than a looter, pocketing millions as his company collapsed—$480 million over half a dozen years, another congressman charged. If that wasn’t enough pain, three sets of prosecutors launched investigations of Fuld and Lehman, probing whether shareholders had been duped. But Fuld is also, in some sense, a victim. He’d held on to 10 million shares of Lehman stock until the end and lost almost $1 billion...

    Most of the time, he lives in Greenwich, Connecticut, in one of his five houses. He can wander through the twenty rooms, eight bedrooms, the poolhouse, tennis court, squash court. Mostly, he sits and replays Lehman’s calamitous end. “What could I have done differently?” he thinks.
    http://nymag.com/news/business/52603/
    Yes, that is the "wealthy" way to "lose" money.  Perhaps you think I'm being too cynical about this, but I'm sick to death of listening to people that have pocketed hundreds of millions of dollars, suddenly crying about paper losses that have ZERO impact on them.  Maybe if these executives had to talk to people that really LOST money or assets, then they'd have a better appreciation of what the word "lose" actually means.

    Here's another guy that took a big "loss". 
    Having milked WaMu for, reportedly, more than $100 million in compensation (including $24 million in 2006), Killinger had good reason to want to keep the bank independent.
    http://articles.latimes.com/2010/apr/16/opinion/la-oe-lowenstein16-2010apr16
    Gotta love how these cases get "settled".  That's real "punishment" for these executives, or is the punishment interrupting their golf game?
    Settlement in the case, titled South Ferry LP #2 vs. Kerry L. Killinger et al, comes on the heels of another case, tentatively settled three months ago, in which another group of stockholders will receive $208.5 million, about half of it debited to Killinger and the execs but actually paid for by the bank's insurance company.

    Killinger took home $25.1 million in compensation that year before he was fired, including a $15.3 million golden parachute. Over the previous five years, as the bank began its slide to oblivion, he earned $103 million in cash, stock, and options.
    http://blogs.seattleweekly.com/dailyweekly/2011/10/kerry_killinger_other_former_e.php
    Also, wealth isn't "controlled", it is "created."
    As you well know, corporations have increased their pay to executives well above the rates that they have paid to the people that actually enable them to deliver their goods/services.  So, it is very much "controlled" in that sense.  Witnessing their recent debacle, it is hard to argue that these people are "elite" in any sense of the word when it comes to running corporations. 

    Here's another example of that "elitism"
    Alan H. Fishman, the recently hired CEO of the now J.P. Morgan-owned Washington Mutual Bank, will reportedly receive close to $20 million dollars IN CASH for his quick 17 days on the job.

    WM common shareholders and even debtholders are now left with nothing, but Fishman will walk away with nearly $20 million dollars.
    http://www.davemanuel.com/2008/09/26/washington-mutuals-new-ceo-alan-h-fishman-received-twenty-million-dollars-for-just-17-days-of-work/
    Mundus vult decipi
    MikeCrow
    As you well know, corporations have increased their pay to executives well above the rates that they have paid to the people that actually enable them to deliver their goods/services.

    So? People make an appropriate amount based on what they contribute, You don't get a $2/hr raise working at McDonald's because business is good. You might get extra hours, and if you are a good employee and work above your pay grade, you might get promoted and a raise from that. But most jobs don't come with profit sharing.
    Never is a long time.
    Bonny Bonobo alias Brat
    People make an appropriate amount based on what they contribute, You don't get a $2/hr raise working at McDonald's because business is good. You might get extra hours, and if you are a good employee and work above your pay grade, you might get promoted and a raise from that. But most jobs don't come with profit sharing.
    Why not?
    My article about researchers identifying a potential blue green algae cause & L-Serine treatment for Lou Gehrig's ALS, MND, Parkinsons & Alzheimers is at http://www.science20.com/forums/medicine
    MikeCrow
    Most jobs don't directly effect the bottom line. If your job does, you most likely already get bonuses.

    Most jobs pay an amount that's commiserate with the value added by that job. Want to make more, get promoted/a better job that adds more value.
    Never is a long time.
    Bonny Bonobo alias Brat
    Like the CEO of a company do you mean? So do you agree with the 97% of the shareholders who voted for Alan Joyce the CEO of Qantas to receive a 71% pay rise of last week from $3.8 million to over $5 million even when the QANTAS share price had fallen 65%? See
    http://www.abc.net.au/news/2011-10-28/qantas-defends-joyce-pay-rise/3607160

    The Australian Shareholders' Association (ASA) calculates that in the last five years, executive pay at the airline has continued to rise despite the company's share price falling 65 per cent and dividends falling from from 36 cents to zero.

    Mr Joyce also faced a grilling over the company's industrial dispute with pilots, ground crew and engineers and its strategic plans to push into Asia.

    He told the AGM the industrial action was costing the airline $15 million a week.

    But the hot-button issue remained Mr Joyce's pay rise, with the board booed, hissed and mocked as it tried to defend the management of the airline and wages for the board.

    Despite the industrial dispute, Qantas chairman Leigh Clifford says the pay rise for Mr Joyce is justified.

    "I think we all know what the world has gone through and airlines in particular over the last couple of years and I frankly think the CEO and management team have done a very good job," he said.

    Just after the vote unions vowed to continue their industrial campaign, with Australian Licensed Aircraft Engineers Association president Paul Cousins saying the executives did not deserve a pay hike given the state of the company and its share price.

    "Since Alan Joyce took over - in fact since Leigh Clifford's been in charge as chairman of the board - it's actually gone down to a third of the price," Mr Cousins said.

    "So here we are, two individuals that have been key playmakers in the fact that our share price has dropped through the floor, but neither of them will actually lead by example."

    My article about researchers identifying a potential blue green algae cause & L-Serine treatment for Lou Gehrig's ALS, MND, Parkinsons & Alzheimers is at http://www.science20.com/forums/medicine
    MikeCrow
    Yes, just like this CEO.

    I don't know whether his salary is commiserate to his "perceived" (which I should have added above) value or not. His boss thinks it is.

    In general isn't your boss one of the best people to estimate your value to his organization?
    If you talked your boss into a raise, would you like the janitors complaining you make more than they do? Or do you feel they should make as much money as they pay you?

    In many cases executives get a lot of their reported income in stock, that aligns their goals to the goals of the stockholders (who own the corporation). Lastly Qantas's is capitalized at about $3.5B (@$1.57/share), so the CEO managing a $3-7B investment, how much do you pay someone to manage that kind of money?
    Never is a long time.
    Bonny Bonobo alias Brat
    Well, I think that what it all boils down to here is that this QANTAS CEO and the shareholders who employ him, want to wherever possible stop employing Australians in unions in a democracy that allows the employees the right to negotiate and/or demand a 'fair' wage by threatening industrial action. Instead they naturally want to employ non-unionised, much cheaper, off-shore, Asian workers with few rights, living in non-democratic countries, who don't allow these same negotiations and demands for a 'fair' wage, in order simply to increase the QANTAS profits and idividends for share-holders. It doesn't bode well for the Australian workers because it is not a level playing field with equal goal posts and they are obviously not valued by their bosses as much as a cheaper, less troublesome and disempowered Asian workforce.

    What is happening at QANTAS is representative of what is happening all over the world, labour forces with long fought for union 'rights' in democratic countries cannot compete with off-shore cheap, almost slave labour. Just as fruit farmers in Australia cannot easily compete with cheap imported fruit from the same Asian countries, which is why we have recently sold our lychee farm and the guy who bought it then chopped down thousands of incredibly beautiful, 20 year old fruit trees, that were each capable of living for over a hundred years and which could have each potentially produce many tonnes of high quality fruit for many years to come.

    There was no way that we could continue to employ and pay local people even the minimum wage to pick the fruit, wash, pack it and then transport it to Sydney when the same markets could always buy less fresh, lower quality, cheap Asian lychees, for the large supermarkets at a quarter of the price that it cost us to produce our high quality Australian fruit. Nowadays when I visit the supermarket I often see rotting, tasteless, low quality foreign lychees that understandably few people want to buy. The average consumer of course has little if any knowledge about these problems affecting their fruit quality and availability.

    If QANTAS needs to move the majority of its operations and labour force into Asia to compete in the world markets then that is what will happen. However, one of its biggest draw cards for a lot of its passengers is its reputation for high standards and amazingly no fatal crashes which has been created primarily by an Australian workforce. Let's see if the Asian workforce can maintain the same high standards and safety record, I doubt it very much. I think that it is only fair that QANTAS will also have to change their logo from 'I still call Australia home'.
    My article about researchers identifying a potential blue green algae cause & L-Serine treatment for Lou Gehrig's ALS, MND, Parkinsons & Alzheimers is at http://www.science20.com/forums/medicine
    MikeCrow
    I sympathize with the loss of your farm, part of which was from low cost imported fruit, part due to your labor costs. That is the flip side to minimum wages, and union wages. Businesses that might ordinarily survive, don't.
    Never is a long time.
    Bonny Bonobo alias Brat
    Mi Cro, I take it you don't see any ethical problems with democratic Australians having to compete with undemocratic slave labour then? You think it is right that we should compete with Asian economies that pay their workers only a few dollars a day, to work excessively long, psychologically and physically unhealthy shifts each week, often living in  dormitories and only having a few days holiday a year and having no basic human right to withdraw their labour?

    I personally do not find it very reassuring to think of overworked, down trodden engine mechanics maintaining the safety of the plane I am flying in or sleep-deprived, dis-empowered underpaid pilots, with no rights or incentives to object to any known safety risks, flying the plane. QANTAS will regret moving their operations off-shore and if they do then I think that the Australian Government should withdraw QANTAS's license to operate within Australia and give it to another, more deserving Australian company that primarily employs Australians. Oh and they should also have to give up the kangaroo emblem and maybe have a picture of a bowl of noodles instead.
    My article about researchers identifying a potential blue green algae cause & L-Serine treatment for Lou Gehrig's ALS, MND, Parkinsons & Alzheimers is at http://www.science20.com/forums/medicine
    MikeCrow
    Would you take away an impoverished peoples ability to earn even a meager wage? Isn't there at least some ethical issues with that?

    The Australian Government, can do that, but what happens when QANTAS has to charge higher prices than their competitors, and start losing money? What do you do then?

    President Carter was unhappy with the price of gasoline, he thought the gov should mandate a price limit. But he could not mandate people to sell the US oil at a price that would allow a refinery to meet the gov's price. Gas supplies dried up, and with long gas line, we had to ration gas. Until the gov removed the price limits.

    You can't mandate higher wages or lower prices without usually negative consequences.
    Never is a long time.
    Gerhard Adam
    I don't think that wages have to be mandated.  However, your point about losing money to competitors raises an interesting and significant point.  The problem occurs because businesses want to take advantage of globalization to keep labor costs down, while they want to be local when it comes to market share.  As a result, we have a dichotomy between those providing the service and those expected to consume it. 

    If businesses do not utilize a workforce from their ultimate source of consumers, then the market will inevitably collapse.  It has nothing to do with competition, but rather it has to do with the symbiotic relationship required for a market to operate and for money to circulate.  Money cannot flow through an economy when it is detoured to segments of the population that are incapable of consuming the goods/services offered.  So every company that employs off-shore employees will keep their costs down, but they will be boosting the wrong economy. 
    Mundus vult decipi
    MikeCrow
    I agree to some extent. But we give a lot of money to third world countries to help the poor, we worry about over population, and with moderate out-sourcing, we can improve both of those issues, plus we free up capital to be used in other possibly more profitable areas.

    It does open our markets to populations that previously could not participate in them.

    I'll say again, the US has to push hard at moving beyond manufacturing jobs, they are a global endangered species.
    Never is a long time.
    Hank
    In America, the thing that led to runaway disparity between workers and CEOs was Sarbanes-Oxley.  It became political theater to yell at Enron, including the Chairman of the Board for no reason I can figure out, but the solution government came up with made it so dangerous to run a public company that companies are forced to pay a lot more to get a decent CEO.  The best ones are either overpaid wildly, which leads to overpaying all of them anyway, or they went to private companies that aren't bound by Sarbanes-Oxley and its onerous restrictions.

    There is no chance at all I would run a public company knowing that if I have a thousand employees and various people doing management jobs and I sign a piece of paper that turns out to be wrong I could go to jail.
    I don't disagree with you there, regulation absolutely initiated the bubble. Be careful with unemployment numbers though. If you adjust the current rate in some way, you need to adjust the rate during the depression in the same way to compare apples to apples. Unemployment is bad now, but it was considerably hire in the Depression.

    The senior executives of all the banks that collapsed are gone, as well as the CEO of Bank of America who didn't even partake in the mortgage business! There are many, many divisions of investment banks that had nothing to do with anything related to a mortgage, should those bankers be punished for the misdeeds of others? If you are a banker who brought in $10s of millions of dollars advising on mergers and acquisitions, do you not deserve to get paid a fair portion of that revenue because some mortgage traders you dont even know messed up? If not, who should get the revenue you generated? Remember, they've long since repaid Uncle Sam, so the government has no claim on it.
    I understand your disgust at people getting paid for failure- and I share it! My point is more that they didn't do it on purpose, they were simply wrong (as we're the regulators, politicians and everyone in between). Given the financial stakes these executives had in these companies, they had zero incentive to destroy their corporations for profit, they simply messed up. That's why no one has gone to jail, it's not against the law to be incompetent.

    Gerhard Adam
    The senior executives of all the banks that collapsed are gone, as well as the CEO of Bank of America who didn't even partake in the mortgage business!
    Well, I'm sure you realize that this fiasco wasn't the work of a few individuals, but of an entire culture of entitlement that felt that they could ignore the ups and downs of the market, because they were invulnerable.  This is precisely why the new group of senior executives are following exactly the same practices that their predecessors did.
    If you are a banker who brought in $10s of millions of dollars advising on mergers and acquisitions, do you not deserve to get paid a fair portion of that revenue because some mortgage traders you dont even know messed up?
    So, if you bring in short-term millions against wholesale losses that cost you the business, that's considered "deserving"?
    Given the financial stakes these executives had in these companies, they had zero incentive to destroy their corporations for profit, they simply messed up.
    Well, wouldn't it be wonderful if they were that understanding about the employees that worked for them when they just "messed up".  Unfortunately that doesn't work, so when the employees become hapless victims of these guys "screw up", they still lose their jobs, while the executives get their golden parachute because they were only incompetent, not malicious.

    How's this ... if you're running an organization that's "too large to fail", then it's also an organization that's "too large to allow screw ups".  Can you imagine an admiral that loses an aircraft carrier because he "messed up" and then gets promoted to head the Joint Chiefs?  "My bad" ...

    That's simply not an acceptable excuse and it simply adds insult to injury to still be rewarded for it.

    Ironically these same CEO's that feel they are so valuable are also the same ones pleading ignorance about what their corporations do when they are caught doing things that are illegal (i.e. Enron).  So which is it?  Are they deserving if they don't actually know what's taking place?
    Mundus vult decipi
    One last thing that is never fairly reported- all these golden parachutes are negotiated BEFORE an executive takes employment, they are not rewards handed out at the end. I don't know where the WaMu CEO was before he took the job, but here is a likely scenario- he was probably a senior, or chief, executive at another major firm and had a ton of company stock. To move to WaMu, a collapsing company that they hoped he could save, they had to guarantee him a large sum in order to buy out his company stock from his last firm (which he'd be giving up) and compensate for the high possibility that WaMu was unsavable. The reality is that he'd never take the job without an offer like that and obviously the owners of WaMu felt he was worth more than a less experienced executive that may have cost less. We can all be jealous of a deal like that, but it's simply the reality of the job market at that level. His excessive compensation has zero impact on my life, so I don't waste my time being resentful.

    You seem to be confused on CEOs, they are not being rewarded for failure. Some received payouts based on contracts they signed. Weren't you just arguing for the sanctity of contracts? The Washington Mutual CEO was brought in to try to save the company, he wasn't the one who made the mistakes. The of the ones who made the mistakes, like Dick Fuld of Lehman, lost everything.

    To say that the banks did what they did because of "entitlement" or a sense of "invulnerability" is simply disingenuous. Every regulator in the world (including more highly regulated Europe), all the politicians and the ratings agencies were all on board with this. It's easy to be a Monday morning quarterback, but virtually no one at any level saw this coming so while it may feel good to demonized bankers whom you are jealous of, it won't solve any problems because they were only one cog in a giant wheel of delusion.

    As for my mergers and acquisitions example you should re-read my post, you clearly missed the point. Some parts of these banks were run extremely well, made lots of profit and had nothing to do with the mortgage mess. Don't those employees deserve their bonuses? At Lehman, for example, they had a successful asset management arm that had zero contact with the mortgage group. When Lehman collapsed, the asset management group was taken private by a private equity firm and none of those employees lost jobs. In fact, many received retention bonuses to keep them with the new firm. If Lehman had been bailed out by the government, would it have been fair to deny these employees bonuses, considering they were clearly not responsible for the problems and were doing a great job? At AIG, the senior risk managers who collapsed the firm were immediately fired, but they had to pay bonuses to the traders to undo the bad derivative positions. If they didn't pay them market rates, they all would have left and gone to hedge funds. Distasteful? Yes. But also necessary.

    It doesn’t matter that those dreams were an illusion based on easy credit, the real estate bubble, and student loans, only that they seemed real. The deep hardwired parts of our brains don’t know the difference; we just hate to lose something we feel we have already gained.

    And then reality hit them like a ton of bricks. This is the result for spoiled children. I blame parents. /shrug.