October 26, 2016

This new term–“populism”–is in the news every day now, here in the US, and also all over Europe and elsewhere. What is it? In the November/December issue of Foreign Affairs, Fareed Zakaria suggests it can best be understood as,”…suspicion and hostility towards elites, mainstream politics, and established institutions.” As Zakaria explains, populists can be liberals or conservatives–both can feel disenfranchised. A number of the supporters of both Bernie Sanders and also those of Donald Trump can be seen as populists. Both camps feel they have lost out–in jobs, wages, and protections.

When I was studying in London in 2012, my favorite professor and I had a conversation about the growing inequality in China (his expertise) and around the developed world, including the UK and the US. Neither of us could see anything politically feasible that offers a potential reversal of the trend in steadily rising inequality. He observed that the only solution would likely be revolution. That’s because no matter how good the arguments, the wealthy (who have the political power) simply will not agree to any meaningful form of redistribution.

Unfortunately, it isn’t only the resistance of the wealthy. Technology and globalization are also exacerbating inequality, reducing job opportunities for the under educated, lowering wages. And, there is another thing–the countries most experiencing populism advancing are also experiencing slow growth. Countries which are not experiencing slow growth generally are not seeing populist movements within.

In my opinion, this is evidence of the power of inequality.  Economists agree that inequality is likely to rise in periods of slow growth. Thomas Piketty wrote an 800 page best seller to explain this subject in 2013 (Capital in the Twenty-First Century). He forecasts a long period of slow global growth ahead, and explains why this will inevitably advance inequality. In other words, growth is necessary for reducing inequality.

The West is headed for a long period of slow growth ahead. The political candidates can promise more growth, but as Piketty explains in detail, it’s simply not gonna happen. Maybe for the US 2%, best case 3%, but we’re not going to see 4%, no matter who’s elected, no matter if Congress was completely aligned to do the right things (which they’re not). No matter the size of the Trump tax cuts, economists do not see growth stimulated. Tax cuts reduce government services which hurt workers more than the wealthy. This is a form of reverse redistribution–gains for the wealthy, net losses for the working class.

And, economists agree that while growth is necessary to reduce inequality, they agree it is not sufficient. That is, even if we had 4-5% annual GDP growth in the US, that alone would not reverse the advance of inequality. As Piketty explains, we would need redistribution. “Redistribution,” a word we haven’t seen in the political news. Not even Bernie Sanders has chosen to use this word. Redistribution is often misinterpreted as simplistically limited to “taking from the rich and giving to the poor,” or, as some Conservatives would say, “taking from those who worked hard and earned it and giving to those who want to live off the government.”

Of course, redistribution can take many forms, too many to try to list here. But consider that one might be to take from our military budget to increase our education budget. This way, there would be less wealth accumulation among the owners of the military industrial complex, but better opportunity for the underprivileged who currently cannot afford education, plus also better qualified workers for business, which helps the capital owners of the those businesses. This would be “redistribution.” Same kind of argument for infrastructure–improving it helps both the wealthy and the working class–they can get to work easier, afford housing a little farther out, and employers get access to more employees and better transportation for goods and services.

But, alas, there seems to be no appetite for considering even the most benign forms of redistribution. I belong to a group called “Patriotic Millionaires,” which argues that many of us recognize the dire problem ahead if we don’t regain some of our lost equality, and we’re willing to see our taxes increase if we see it going to advancing opportunity for the underprivileged. We feel our government has benefitted us and we are willing to contribute to redistribution. We don’t blame immigrants or China and Mexico for our problems.

Donald Trump is the leader of a populist party whose members are mostly on the Right side of our political divide. He’s trying to blame the lack of jobs and wages on immigrants, and appeal to nationalistic themes, especially targeting foreign countries for destroying our “greatness,” and promising a more powerful and decisive military which will annihilate any foreign threat. This is not the solution to the economic woes of his supporters, but they are so fed up with what “Washington” has (not) done for them, that they are ready to believe this demagogue.

Regrettably, in my opinion, it is just the politics and economics of the right that have controlled “Washington” for the last several decades and that’s why we are in the condition we are in. So in a way, the Trump Populist supporters are simply voting for return of what we have been experiencing.  They need to “pay no attention to the man behind the curtain.” (Wizard of Oz) They need to take a basic economics course.

My professor thought revolution will come, but he thought maybe in 50 years. Watching the enmity of our election process, it could be sooner.

October 15, 2016

Tim Sloan has been named to replace John Stumpf. Based on my knowledge of Sloan, he has the potential to be a better CEO than Stumpf. He is qualified to do this job.

But, there is still a problem which has not been resolved. The release of the former CEO is not sufficient to deal with the magnitude of the problem. Wells Fargo allowed some 2 million fake accounts to be opened and 5,000 lower level employees have been fired.

As I argued in my October 8 post in which I recommended the departure of Stumpf, there is more that should be done.

First I want to say I’m not among those who suspect bankers as intending to harm the public. I spent half my career in banking. Having spent 12 years at Wells Fargo in the 80s and 90s and time with two other major banks, I do not harbor suspicions that bankers are criminal or bad people. No one I have known in working in three banks was of this nature.

Further regulatory and legal examination will determine whether there was criminal action. I’m not expecting that. I’m doubtful anyone in management intentionally sought to line their own pockets in any way through this practice, including focusing on increasing stock value based on inaccurate growth statistics. And, I will be surprised if any member of senior management (those reporting directly to the CEO) actually directed employees to do this. If anyone down the chain of command in retail banking did, those managers should be fired, of course.

Nevertheless, the aggressive Wells Fargo sales culture was a major element of the Wells Fargo corporate strategy. That culture and the risks of that culture were fully known to the members of Wells Fargo’s direct reports to the CEO. I feel everyone in that small circle, the folks whose compensation appears to be in the range of $10 million per year (not including all stock benefits), should all be penalized. By way of illustration, reduce compensation by 50% for the coming year, by 25% for the following year, and by 25% for the 3rd year. That’s a start–recognizing by that management all failed in their fiduciary responsibility, regardless of their functional responsibility.

I’m sure this team had the usual meetings with the CEO, in which all functions performance and practices were reviewed. These managers are complicit, regardless of whether they fully understood. If they didn’t think of the risks, that’s fiduciary negligence. This is not a case of one rogue trader causing a large loss. In such a case, I would think those outside this function should not be held responsible. But in this case, it was a key element of corporate strategy. The risks should have been understood by all in senior management. All reporting to the CEO should accept responsibility and penalty.

Tim Sloan is a more difficult issue. Representative Maxine Waters and others argue that Sloan should not be the new CEO–that perhaps he should step down also, or perhaps at least someone outside the Wells Fargo management team should be recruited to be the new CEO, to assure independent investigation and correction of the culture problem. I respect this view, given the above argument. If all of senior management are complicit, then Sloan is clearly more complicit, because he was COO, presumably with enough responsibility to be ready to replace the CEO, meaning he needed to fully understand the major risks in all functions.

Here is what I would like:

Regarding Sloan: If he is to be the new CEO, I’d like to see him penalized more severely in compensation than the other members of senior management. And, I’d like to hear him make a complete statement in full honesty, explaining why he didn’t take action in his role as COO and why he should be trusted to fix the problem. I’d like to hear that. It needs to be convincing.

Regarding the 5,300 fired. I’d like Wells Fargo to offer a meaningful rehabilitation program to all but those who went beyond the pale–on the premise that management was responsible for pressures that drew these employees into inappropriate action, and for whom the dismissal severely damaged their reputations, careers, and lives. Rehabilitate them. Dismiss those above them who knew and provided the pressure.

Regarding the Board: The Board has to accept responsibility too. I think there should be significant departure from the Board, perhaps especially those who have been on for the longest time, and a number of new independent directors should be elected, with an eye to corporate social responsibility focus and experience.

Finally:  According to Glass Door, the multiple of CEO compensation to median employee compensation in large US companies has risen from about 20 times in 1965 to 200 times now, and often as high as 300 times. The Huffington Post reports that John Stumpf earned 473 times the salary of the median Wells Fargo employee. Average pay for retail bankers there is about $33,000. I’d like to suggest Wells Fargo lead the next era of corporate responsibility by establishing a new limit, and move to it immediately in 2017. I don’t know what that should be, but it’s not 473 times.  If median pay at Wells Fargo was $65,000 how about 100 times that as maximum for the CEO, “all in” (included stock benefits)? Does anyone think Wells would be unable to find a CEO to work and do a good job for $6.5 million? And his immediate subordinates for perhaps $5 million? I understand some candidates would take other jobs for more money, but I believe there’d be plenty of good people who would do great work for this pay–and I think those are the type of people who would not be compromising ethics and social responsibility.

October 8, 2016

Speaking today in Wisconsin, House Speaker Paul Ryan once again exhibited very disappointing behavior. He had yesterday criticized the just released sexist comments made by Donald Trump 11 years ago, but the did not ask the candidate to step down. He has compromised whatever values he had as an American, as a true Conservative, as a true Republican, and as a leader, by finding a way to support this demagogue as the Republican President for President of the United States of America. What a disgrace and what a tragedy Donald Trump’s election would impose upon our great nation! I expect better judgment of the Speaker of the House.

Ryan made his opening point today that we need to get people off welfare, back into jobs. Why do Republicans continue to complain about welfare and welfare recipients? Do they really think the preponderance of welfare recipients would rather “live on the dole,” than have a decent job with opportunity to advance and increase income over time? No one can know what the cohort with such a view is. It’s a matter left to one’s view of humanity. I am an optimist as to the essential nature of man. I believe that cohort is small. Most people want to work. And for those who do want to rely on welfare at this time, I am sure many of them only feel that way because they see the alternative as hopeless–no jobs or terrible jobs at minimum wages, such as the $7.25 per hour in North Carolina.

In my just previous post, I have shared my opinion of how we got here. The key problem that drives the voter frustration is lack of good jobs, lack of opportunity to change one’s economic status, and stagnant wages, while the rich have increased income and wealth dramatically and steadily since Reagan in 1980. Conservative policies (sometimes identified as neoliberalism) have advanced across this period, under both Republican and Democratic administrations. Social support programs have been reduced, starved, and eliminated across that period. Republicans and their policies strongly advocated foreign trade and globalism, without concern for the displaced American workers. Isn’t it ironic that the current Republican candidate for President is disavowing foreign trade–essentially–because his stated intent to “get tough” with our trading partners will only weaken our foreign trade. Foreign trade is a huge benefit to the US, and more so for the uneducated who are supporting Trump. They don’t understand. They’ve been deceived.

Wanting to get people off welfare is not a unique Republican policy. We all want that. If they want a distinct policy to define Republicanism, let them provide a detailed prescription as to just how we are going to provide good jobs for all welfare recipients. If it makes sense, I’ll change parties and become Republican. But, it’s not going to be easy. There are a number of structural issues weighing strongly against the creation of good jobs with good wages, especially for those without a college education. Here are a few:

Technology: In a previous post I estimated that some 4 million US jobs may be lost as vehicles of all types become self driving. Technology is eliminating jobs in search for greater efficiency, and lower cost. The benefits of technological innovation are increasingly going to smaller groups of founders and employees.

Globalization: Regardless of global populist movements to close borders, globalization and foreign trade will continue, because the money and wealth creation, capitalism drives it. This means jobs will continue to be lost to foreign countries which have cheaper labor.

Education: We have starved our schools, and we are experiencing a declining percentage or our population going to college. This at a time when technology and globalization demand increasingly well educated workers, and yesterday’s factory work is eroding to technology, outsourcing, and foreign competition.

So, Paul Ryan, “let’s get people off welfare” may play to some who have been coached to resent government and all its services. But it doesn’t play with me or those who understand the issues. If you want our support, display the specifics of just how you’d do this. And remember as you lay it out–most economists see slow growth ceilings globally for the foreseeable future. And furthermore, economists agree that without redistribution,  economic growth is necessary for reducing inequality, but is not sufficient. Other things must be done along with growth. The good news is that many of the positive actions to help the underprivileged do not hurt the wealthy much and help everyone to enjoy a better society. Just one example–fixing our infrastructure is one form of redistribution–helps everyone–but Republicans say no–let the bridges fail.

But Republicans won’t tolerate any form of redistribution. They want to rely on growth alone. It won’t work. Not likely I’ll be changing parties.

October 8, 2016

What interests and concerns me most today about San Francisco, the US, and indeed the whole world, is economic inequality.

What I write here today is mostly opinion. I believe I could back up most of it with confirmative research, but I’m not going to take the time and space in this posting. I have studied the issue deeply and am constantly reading and increasing my understanding. In my 2017 year in the Harvard Advanced Leadership Initiative, this is what I want to study further. I hope to find an avenue for influencing movement toward better equality and opportunity

Here in late 2016, approaching a critical election in the US, following a surprising vote in England (to leave the EU), there is confusion as to what are the causes of all the political anger that is resulting in these dramatic and troubling developments here and elsewhere. Some say it is caused by immigrants. Some terrorism and failed foreign affairs, or specific foreign countries–e.g., North Korea, Iran, Russia, China. Some say it is ISIS. Some say it is the Democrats and President Obama, who has been in office for  8 years.

I believe the root cause of much of the frustration is economic inequality. Yes, it wouldn’t be such a concern if there had been “trickle down,” where the rich get very rich, but everyone else gets steady improvement. But, in most developed countries, the second half has not happened. We’ve been stalled since 1980 when neoliberal economics started a steady global advance. Now a number of countries are experiencing record inequality, and in the US we’re back to the Robber Baron era around 1920.

Here is what I think would be better if we had economic inequality back to the level of the 1960’s when we saw a highly egalitarian country following the GI Bill and social programs launched following WWII:

If we had better equality and opportunity, we would have better jobs available, better opportunity, and gradually increasing real wages. I think this is the root of the problem. People are angry primarily because they don’t see how they can advance, or in many cases how they can provide for their families. They’re vulnerable to blaming targets politicians rail against.

Foreign countries as the source of our problems: This goes to what really is our problem? I think it’s primarily lack of good jobs, lack of opportunity, stagnant wages. Blaming the economic stagnation of our middle and lower class on other nations is nothing other than a convenient “nationalistic” political agenda to make the crowd angry. It wouldn’t be necessary to cause all the trouble with other countries if we didn’t have our own problems to blame on them. China has been a net benefit to the US–huge.

Foreign trade and globalization: Same. The US provides far less to help displaced workers than do other countries. We brought much of the frustration on ourselves as we led the race to globalization without any plan to help the displaced. If foreign trade ended now, the people who would suffer most are the middle class and poor, because they buy more of the cheaper foreign goods than do the rich.

Migration: If we had a somewhat more equal world, good income and opportunity in Somalia, Syria, Afghanistan and Iraq, people there would not be wanting to leave their homelands.

War: If we had more equality in the US and the developed world, I believe the vitriol which feeds the recruitment for ISIS, would lose a great deal of its appeal. War is often fed by jealously and anger over how certain people live in luxury while others can’t even feed their families.

Terrorism: Same. We wouldn’t need the wall or the massive border protection and TSA.

So, a lot of the anger people feel is directed to the wrong targets, as politicians try to stoke anger and make promises of “fixes.” But the real problem is jobs, wages, and opportunity for the middle and lower classes–here, in England, and in China and elsewhere.

It’s understandable to blame the current administration. Of course, it’s convenient to blame David Cameron for failing to sufficiently protect England vs. demands of the EU, and it’s convenient to blame President Obama for anything at all that is wrong in the US.But the administration of our country has three constitutional elements: The President in the Executive Office, Congress, and the Supreme Court. A Republican party brought us the economic crisis which the Democrats inherited under Obama in 2008. Obama’s administration for the last term has had two houses controlled by Republicans determined not to do anything to fix the plight of the lower classes. And up till the death of Justice Scalia, the Supreme Court was also weighted to the Right.

If the American people could understand these issues and vote in today’s Democratic ticket, control both houses, and the next few Supreme Court seats, I believe we might see some improvement, thanks in part to Bernie Sanders influence on the agenda. He’s wrong about foreign trade  which is largely good for us, but  he’s right about education and inequality.

Source

By the way, this writer is not recommending equality, everyone the same, just a better balance. Something like the 60s. My parents were poor, but they found opportunity and they advanced. During that time the rich got richer, but everyone else saw steady improvement also. Today all the incremental wealth and income is going to the rich.

October 7, 2016

My longest term of employment, 12 years, was with Wells Fargo Bank. I never forgot the great experience of working there.  I was proud to see the continued success, totally unblemished since the 90s when I left, while almost all major banks, nationally and globally, had major surprises, mistakes, some costing billions of dollars in fines, accounting losses, lost shareholder value, and reputation damage.

Most problems for others have involved wholesale credit losses, monetary exchange, trading, compromised customer data, failed acquisitions, and the like. Wells Fargo’s failure is different. But, like the others, it involves failed management, failed oversight, failed governance.

Wells Fargo has been able to operate conservatively, with tight underwriting and trading standards, avoiding the credit excesses that have caused others more aggressive to stumble and fall. One reason this strategy has worked so well and so long is that Wells put major emphasis on their retail operation, and less on international and wholesale activities–where the problems for others have mostly been concentrated. The idea is that with transactions in retail of such small amounts (vs. the millions and billions of individual wholesale transactions), there is less chance of a big problem. And, if the underwriting of credit cards and mortgages is kept conservative, there should be no problems.

But, we now see what can go wrong on the other side of the ledger–not the assets (loans), but rather on the sales side.We have certainly seen issues of this type in the past–e.g., the aggressive marketing of mortgages by some financial institutions, leading up to the 2008 financial crisis.

Somehow the aggressive high pressure sales culture in retail at Wells  ended up promulgating a systemic practice of opening fake accounts to meet sales goals. Managers might tell the branch team, “I need 20,” reportedly, meaning “find a way to open 20 new accounts today so we can meet our sales goals.” This led to more than 2 million fake accounts opened, ultimately resulting in 5,300 people being fired.

Who’s responsible for this? Could it really be, as originally asserted by Wells’ CEO, a group of “rogue employees.” No, no one believes that. There could not be 5,300 rogue employees.  On the other hand, I do not think this was a conspiracy. I doubt that opening fake accounts was encouraged or approved by the senior management. I don’t think this was an overt attempt to create more personal wealth for senior executives.  To that extent, I disagree with Elizabeth Warren. I would not favor a criminal investigation–unless it is discovered that some middle and top level managers knew about the practice and encouraged it. I doubt critics assertions that Stumpf and senior colleagues intentionally promoted this to line their own pockets.

But I agree with Senator Warren that certain members of senior management should be terminated, including the CEO. Regardless of intent, this was a huge failure in management. And I agree that there should be a clawback of bonuses and downward adjustment for a time in stock awards. I think it should be massive for those up the chain of command in retail, and I think the rest of senior management should have a lesser clawback–this is a management “team.” All of senior management should be financially penalized.

The promulgation of the excessive sales culture is not new–it has been developing at Wells since the 90s and it is endorsed by management all the way to the CEO. It’s a key element of the bank’s strategy. This cannot be blamed on 5,300 lower level branch employees.  Stumpf and those in retail responsible for the culture leading to this  should resign, or be terminated. I doubt the wisdom of asking past executives to return to right the ship–this sales culture was not developed under Stumpf. It has been there for decades, and only got out of control under Stumpf.

What to do about it otherwise? This will take some serious thinking. Wells says they are abolishing sales goals. I don’t think sales goals are necessarily wrong, or necessarily the problem. It’s how aggressive those goals are and how they are administered. There is a difference between encouraging, motivating, and rewarding sales accomplishment and putting so much pressure that employees cross the line to satisfy management. On the one hand, if Wells truly eliminates any sales goals (without substituting some other name for them, like “targets”), I would wonder about the future profitability of their business, because sales are the source of growth for every kind of business.  On the other hand, if they do substitute some other system that is just “goals” under another name, the pronouncement to eliminate sales goals is going to be remembered and brought to their embarrassing attention. There is no easy way out of this dilemma.

It’s time for capitalism and corporate America to take responsibility at the top. It’s time to stop firing junior people when they were led or directed, either by clear orders or by aggressive goals without attendant policy overseen to avoid excesses. Wells management either knew and didn’t do enough to fix it, or didn’t know. Either way, that’s a huge management failure.

Wells Fargo–please do the right thing.