Lately there has been a big hue and cry from the usual sources about the continuing inequalities and failures of capitalism.

What they are pointing to are two statistics recently published. One which purports that the average compensation of executives in Financial institutions increased from below 100k to about $140,000.

The other is the recent very high quarterly profits reported by the same financial companies, many of whom took Tarp fund money.

This is presented as some sort of abomination, but it is actually a statistical artifact of the commercial crash.

Let me explain. When a Bank or other finance company is in a boom and making lots of loans it’s profits will usually be very low, that is because it is lending its assets almost as fast as it gains them.
But after the crash all of the following happened; The banks laid off workers thus lowering costs, they wrote off a lot of bad debt, so that is no longer dragging them down, and most important, they are no longer making many loans. Therefore they are gaining money from their outstanding performing loans but little of that cash is going out.

Profits therefore look good, but it really means they are slowly liquidating their companies, it is not a sign of health!

Consequently, they have laid off workers, that means they laid off most of their younger executives and kept the most experienced, ie. the people making higher salaries. In addition some of these salaries are tied to profits, so if the profits go up so does the compensation. So although they may have actually reduce payroll costs the AVERAGE compensation goes up. Again, not a measure of economic health but rather the opposite.

It is amazing that so many people get so worked up over things they do not understand.

Tags: finance