The front page of today's Wall Street Journal features yet another article on the bonuses being paid to bankers at institutions recently bailed out, or essentially owned, by taxpayers. For those of us who aren't collecting these bonuses this is either infuriating, mystifying or simply mind numbing. It may be helpful to step back for a moment and look at why banking can be such a lucrative profession. Consider the following example:
Bob over at Silverman Slacks is setting up a deal to sell a package of derivatives to a group of hedge funds. An average investment banker should be able to get $1B for these securities. However, because of his superior acumen, drive, reputation, persuasiveness and network of contacts, Bob can do 0.001% better than the average I banker. In most industries a 0.001% advantage is insignificant. However, because of the scale of the transaction involved, in this case that 0.001% advantage translates into $1m in additional profit for Silverman. Or at least it would, if not not for the inconvenient fact that Bob understands the significance of his 0.001% edge.
In order to prevent Bob from taking his 0.001% advantage over the road to Morbid Stansted, Silverman has to cut Bob in on the additional profits his superior abilities generate. Assuming that Bob can reliably generate $1m in additional revenue on $1B deals then Silverman, assuming management is rational and the market for "talent" is competitive, should be willing to pay Bob $999,999 per deal. If they don't, Morbid Stansted will. With this kind of a compensation package Bob doesn't have to pull off many $1B deals to reel in a multi-million dollar bonus.
Wall Street types, who almost never suffer from a surplus of modesty, like to claim that they earn extraordinary bonuses with extraordinary performance. This is complete rubbish. The scale of transactions on Wall Street amplifies the effect of even incrementally above average performance. Meanwhile the personality driven nature of the business ensures that the rewards from those incrementally above average results flow disproportionately to the "talent" that provided the incremental advantage.
Note that this incremental advantage doesn't have to come in the form of higher profits for the banks. Incrementally lower losses are just as valuable. This is why banks are compelled to pay huge bonuses even when their results don't seem to merit it.
Friday, July 31, 2009
Friday, July 24, 2009
Borrow and Hope
Brad DeLong has come up with an interesting fiscal policy proposal (emphasis mine):
Sphere: Related Content
The fact is that the appropriate fiscal policy for the U.S, right now is to pass: (a) a bigger stimulus over the next two years, (b) a standby tax increase to return the federal budget to primary surplus by 2012, and (c) devout and lengthy prayers that confidence in the dollar doesn't collapse and send interest rates on U.S. Treasuries above the economy's growth rate--in which case the situation changes from its current value of "dire" to "catastrophic."I suspect we should be a little suspicious of any policy prescription that includes "devout and lengthy prayers" as a key component. Particularly when the other components seem designed to create the problem that the devout and lengthy prayer is intended to prevent. If I understand Brad's view correctly, the government appears to have two options:
- Continue on the current path and endure an extended, painful recession.
- Spend like a drunk sailor on shore leave, in which case things will either get better or confidence in the dollar will collapse, interest rates will shoot up and the economy will fall apart (those of us with limited faith in the power of prayer to influence economic trends would call this gambling).
Tuesday, July 21, 2009
One Small Step For Man . . .
Megan McCardle is rather disappointed with lack of followup to the moon landing.
The United States really went to the moon out of fear. Specifically the fear of Soviet domination of space. President Kennedy launched the Apollo project based on the advice of NASA deputy director Hugh Dryden's advice that a lunar landing was a sufficiently long term goal that NASA would have a chance to catch up with the Soviet's technological lead and actually get there first*.
By the time Neil Armstrong made his famous footprint, the fear of Soviet owned space had been thoroughly dispelled, and with it the driving force for human space exploration was lost. There are many legitimate reasons to criticize NASA's activities since the end of the Apollo program. However, exploring the rest of the moon, or putting a man on Mars, were not realistically achievable goals. The moon landing was a crash program put together in response to a perceived national emergency. That level of effort was simply not sustainable indefinitely. Adventurous spirit and scientific curiosity have never been enough to get political support for the kind of expenditures required to take further leaps into deep space.
It thus isn't really accurate to call the lack of progress since 1969 a failure of imagination and will. The last forty years have reflected the normal, frustratingly erratic, progression of most human endeavors. The 1960's was the aberration.
My other issue is with the, "What happened to the dream?" question. The idea seems to be that, in the absence of leadership from Washington, humanity's future in space has been put on indefinite hold.
In truth, the dream is in very rude health. The last decade has seen the birth of space tourism, the first private space flights and a burst of entrepreneurial enthusiasm. If you really care about space exploration you would do well to keep an eye on the development of the private sector rather than NASA press releases. If there is an economic return to be generated from commercial activities in space people will go there, even without government help.
We may very well see NASA astronauts back on the moon. NASA planing says 'yes', a realistic assessment of the federal budget outlook says 'not likely'. Even if NASA never makes it back I'm pretty sure somebody will. What's more, we may all have the opportunity to participate, not by paying taxes, but by buying stock.
As an aside, we could pay $100-$150 billion (optimistically) for NASA to put a base on the moon sometime after 2020, or we could put aside say $50 billion as a kind of super X prize to be awarded to the first organization to sustain a human presence there for 12 months. I know which alternative makes more fiscal sense for our cash strapped government.
* There are many non-fiction accounts of the 60's space program. However, perhaps the best way to capture the feeling of the time is to read Tom Wolfe's famous novel The Right Stuff. Or you can check out his recent Op Ed piece in the New York Times
Sphere: Related Content
There are a couple of problems with this sentiment. Foremost is the fundamental misunderstanding of what the Apollo program was really all about. The United States didn't go to the moon because of some insatiable human desire to "boldly go where no man has gone before". That is retrospective romanticism.What happened to the dream? Government mismanagement, yes, but something more than that, too, some failure of imagination and will.
The United States really went to the moon out of fear. Specifically the fear of Soviet domination of space. President Kennedy launched the Apollo project based on the advice of NASA deputy director Hugh Dryden's advice that a lunar landing was a sufficiently long term goal that NASA would have a chance to catch up with the Soviet's technological lead and actually get there first*.
By the time Neil Armstrong made his famous footprint, the fear of Soviet owned space had been thoroughly dispelled, and with it the driving force for human space exploration was lost. There are many legitimate reasons to criticize NASA's activities since the end of the Apollo program. However, exploring the rest of the moon, or putting a man on Mars, were not realistically achievable goals. The moon landing was a crash program put together in response to a perceived national emergency. That level of effort was simply not sustainable indefinitely. Adventurous spirit and scientific curiosity have never been enough to get political support for the kind of expenditures required to take further leaps into deep space.
It thus isn't really accurate to call the lack of progress since 1969 a failure of imagination and will. The last forty years have reflected the normal, frustratingly erratic, progression of most human endeavors. The 1960's was the aberration.
My other issue is with the, "What happened to the dream?" question. The idea seems to be that, in the absence of leadership from Washington, humanity's future in space has been put on indefinite hold.
In truth, the dream is in very rude health. The last decade has seen the birth of space tourism, the first private space flights and a burst of entrepreneurial enthusiasm. If you really care about space exploration you would do well to keep an eye on the development of the private sector rather than NASA press releases. If there is an economic return to be generated from commercial activities in space people will go there, even without government help.
We may very well see NASA astronauts back on the moon. NASA planing says 'yes', a realistic assessment of the federal budget outlook says 'not likely'. Even if NASA never makes it back I'm pretty sure somebody will. What's more, we may all have the opportunity to participate, not by paying taxes, but by buying stock.
As an aside, we could pay $100-$150 billion (optimistically) for NASA to put a base on the moon sometime after 2020, or we could put aside say $50 billion as a kind of super X prize to be awarded to the first organization to sustain a human presence there for 12 months. I know which alternative makes more fiscal sense for our cash strapped government.
* There are many non-fiction accounts of the 60's space program. However, perhaps the best way to capture the feeling of the time is to read Tom Wolfe's famous novel The Right Stuff. Or you can check out his recent Op Ed piece in the New York Times
Thursday, July 16, 2009
Like 10,000 Spoons......
The following is from Karl Rove's opinion piece in this morning's Wall Street Journal (emphasis mine):
Sphere: Related Content
"So what's a president to do when the promises he made about his economic stimulus program fail to materialize? If you're Barack Obama, you redefine your goals and act as if America won't remember what you said originally."Anyone who remembers the ex ante and ex post justifications for the Iraq war will appreciate the irony.
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