Are Wall Streeters fighter pilots or bumper-car drivers?
Gabriel Sherman's New York magazine article about Wall Streeters and their pay is full of gems. But, partly because I've got efficient markets on the brain as I prepare to flog my anti-efficient-markets book, this passage interested me most:
A few weeks ago, I had drinks with a friend who used to work at Lehman Brothers. She had come to Wall Street in the mid-eighties, when the junk-bond boom spawned a new class of globe-trotting financiers. Over two decades, she had done stints at all the major banks—Chase, Goldman, Lehman—and had a thriving career directing giant streams of capital around the world and extracting a substantial percentage for herself. To her mind, extreme compensation is a fair trade for the compromises of such a career. “People just don't get it,” she says. “I'm attached to my BlackBerry. I was at my doctor the other day, and my doctor said to me, ‘You know, I like that when I leave the office, I leave.' I get calls at two in the morning, when the market moves. That costs money. If they keep compensation capped, I don't know how the deals get done. They're taking Wall Street and throwing it in the East River.”
Now, a lot of people in New York have BlackBerrys, and few of them expect to be paid $2 million to check their e-mail in the middle of the night. But embedded in her comment is the belief shared on Wall Street but which few have dared to articulate until now: Those who select careers in finance play an exceptional role in our society. They distribute capital to where it's most effective, and by some Ayn Rand–ian logic, the virtue of efficient markets distributing capital to where it is most needed justifies extreme salaries—these are the wages of the meritocracy. They see themselves as the fighter pilots of capitalism.
Actually, they may more closely resemble the bumper-car drivers of capitalism, spending more time tangling with each other than doing anything useful. When their numbers are relatively few, Wall Streeters probably do perform something like the capital distribution function outlined above. But as the financial sector gets more crowded and more frenetic, it always seems to reach a point where more activity—those calls at 2 a.m.—leads to a less efficient allocation of capital.
There's evidence for this, of a sort, in the computer market simulation that Brian Arthur, Blake LeBaron and John Holland ran at the Santa Fe Institute in the early 1990s (pdf). They found that when the "agents" in their market were slowpokes who adjusted their views only infrequently, the market settled into something close to a rational equilibrium. But when they upped the "learning speeds" of their agents, the market was much more prone to bubbles and crashes. So we might actually all be better off if Wall Street weren't populated by quite so many bright, hardworking (and highly paid) people.
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1
I am not normally a "blow it up and start over" kind of person, but based on this commentary I may make an exception for Wall Street. I know plenty of people who get awakened at 2AM by their Blackberrys (mine is typically around 10PM, and the person paying for a Blackberry for me is, well, me), and they don't get millions of dollars a year for their troubles.
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However, the point you are really trying to make is the other one, that Tom Wolfe's "Masters of the Universe" theme was not fiction. After all this time, they still really believe it. -
2
There's evidence for this, of a sort, in the computer market simulation that Brian Arthur, Blake LeBaron and John Holland ran at the Santa Fe Institute in the early 1990s (pdf). They found that when the "agents" in their market were slowpokes who adjusted their views only infrequently, the market settled into something close to a rational equilibrium. But when they upped the "learning speeds" of their agents, the market was much more prone to bubbles and crashes. So we might actually all be better off if Wall Street weren't populated by quite so many bright, hardworking (and highly paid) people.
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it doesn't seem to be the number of people, but the speed of information (and thus the speed of transactions), that is the real problem here -- the higher the "learning speed", the more "profitable" transactions that can be accomplished in a given period of time. Because businesses are supposed to maximize profits, they hire more people to perform the maximum number of transactions possible.
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Which is why I've keep advocating for transaction taxes in the financial sector that a "graduated" based (inversely) on how long an investment is held -- and/or higher taxes on financial industry profits that derive from transaction based fees. -
3
There are some jobs nobody in his right mind would take without proper compensation - say run GM for $200K/year + medical + 6 month severance, I doubt that there will be any serious takers.
And it is quite possible that nobody would take this person's job for less than $2m regardless of whether she is a "fighter pilot", a "bump car driver" or a just a tiny molecule participating in Brownian motion of the market particles.
However, a completely different matter is whether capitalism (or society for that matter) needs her job at all regardless of homw much she is making. And it seems that we can do fine without her - the primary function of the modern Wall St. is to facilitate corporate income tax evasion and it got so seriously out hand that it would be way-way-way cheaper to eliminate corporate income tax.
The next function in significance is running garden variety of Ponzi schemes through the financial markets, which is nothing but outright crime and has no value.
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4
It's funny how people always think their job is super important and they themselves are the only ones who could possible do it, whether it be this finance woman or the plant worker at GM.
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Now let's go save some newspapers by discussing their deaths online! -
5
"Bumper Car!".....and they got bumped into academia because in reality they have made a mess of the organizations they couldn't run. Chrin of JP Morgan to Leigh, Klein of Citi to Princeton, and Fleming of Merrill to Yale. Yale thinks "its a blessing". What are thinking? I'm grateful my kids aren't attending, there will be no accountability, ethics or knowledge in the classes they teach..just fluff.
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6
I find myself in agreement with "Curmudgeon57". Of course, her $2 million doesn't look like much for Summers' $100K per day payment as a consultant. That comes out to over $200 per minute? What on earth did he think they were buying, except potential future influence.
All this makes it far more likely that Simon Johnson is right, and there needs to be fundamental restructuing of the whole U.S. financial sector.
Whatever these people were paid for, it wasn't performance in any meaningful economic sense of the word.
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