Wall Street Number Theory

I attended a seminar this evening presented by one of our largest banks (name not mentioned to protect some friendships).  A middle manager introduced Eugene White, an economist from Rutgers.  “I earned nothing last year,” said the hard-working bank employee.  “Zero for 2008.  No bonus.  No options.  No stock.”

Over dessert and coffee I asked one of the guy’s subordinates if the boss wouldn’t also have gotten some sort of base salary.  “Sure,” he replied, “but maybe as low as $500,000 per year.”  How did that round to zero?  “Well, he might have made $12 million the year before.”

And you thought Peano arithmetic was challenging….

[What did we learn at the seminar?  Professor White showed a comparison of events 1920-1936 with events 1990-2009.  The similarities that lead many to say that we’re going into a Greater Depression were acknowledged.  White claimed that the main divergence is in monetary policy.  This time we lowered interest rates and expanded the money supply much earlier into the downturn.  White said that he was confident in an eventual recovery because we still had some productivity growth.  An attendee asked about risks from changes in government policy and taxation, noting that there was very limited productivity growth during the 1970s due to high taxes and limits on the ability of businesses to deduct (depreciate) capital expenses.  White did not have a convincing answer to any question involving Congress, taxes, and the expansion of government.]

5 thoughts on “Wall Street Number Theory

  1. Patrick: People asked about inflation and White said that he thought the Fed could and would control it. He said that wild government spending could not by itself generate inflation. In his view, you must have the Federal Reserve buying the government’s bonds in order to generate inflation. Hardly any serious economists seem to think that inflation is a possibility. They all have faith in the Fed. Of course, none of them were short the S&P 500 during 2008, so we probably can’t use their predictions for investment purposes…

  2. > “I earned nothing last year,” said the hard-working bank employee.

    Perhaps he meant “earned” literally. The $500k was just an honorarium for allowing the use of his name on the business cards.

  3. @2 >In his view, you must have the Federal Reserve buying the government’s bonds in order to generate inflation.

    Umm… how about $300 Billion?

    “Fed to Start Purchasing Treasuries to Unfreeze Credit”

    I’m definitely not a ‘serious’ economist, but as an arm-chair economist, it seems clear that the Fed will do everything in its power to ensure we don’t get deflation in the short term and is willing to gamble on being able to control the inevitable inflation on the other side of the crisis.

    Unlike the ‘serious’ guys, I have much less faith in the Fed… they’ve consistently brought too little, too late to the party and Greenspan’s actions after the .com crash almost certainly contributed (added Miracle Gro?!) to the current crisis.

  4. Hopefully, we will have (a little) inflation,

    Our problems are more emotional than real. If the risk of inflation forces capital off the sidelines and into active use, that by itself may go a long ways toward solving our current economic malfunction.

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