These are tough times for Michael Bloomberg's free-spending "luxury city." High-end condominium speculators – long considered impervious to the mortgage crisis – are shivering in the bitter cold this winter. Four billion dollars in building projects have been postponed or canceled outright, in large part because Wall Street's bonus babies are getting a tad less than they are accustomed to.
Despite this, I would suspect most of America thinks Wall Street, and New York's financial community, has not suffered enough. Industry bonuses are still expected to total well over $20 billion – small compared to last year's stupendous $33.2 billion, but not an insignificant New Year's present for the very people who have played a crucial role in wrecking the world economy.
By one calculation, this sum breaks down to $137,000 per banker. For middling executives with eight years on the job, bonuses could average $625,000, 15 times the average income for American households. Without the infusion of taxpayer cash, it seems certain that these numbers would have been significantly less. Feel better now, America?
True, some high-profile top executives wary of facing Congress have announced they will not be taking their stupendous bonuses this year. But these people should be able to scrape by with the tens of millions they bagged last year.
However, some of the biggest losers – such as bailout-owed insurer AIG – seem to lack even a basic sense of shame. It appears AIG is handing out bonuses ranging from $92,000 to $4 million to some 168 employees. It wouldn't shock me if some of these fall into the pockets of the same folks whose actions have proven an unmitigated disaster for both shareholders and the country.
If only autoworkers, unemployed real estate agents and most of the rest of us, who are struggling to make our mortgage payments, had it so good. More important still, this state of affairs is not likely to encourage much faith in the capitalist system here or abroad. If free enterprise is worth anything, it should be about performance, risk and reward. By that standard, there is no justification for any bonuses on Wall Street this year.
"It's hard to believe they are still getting bonuses after wrecking so many lives," marvels Susanne Trimbath, a financial analyst at STP Advisors. "This no longer has anything to do with performance but has become an entitlement."
Critically, Trimbath reminds us, we need to remember that some of these same bonus babies are primarily responsible for the housing meltdown that helped undermine the rest of the economy. It was Wall Street's slicing and dicing of mortgage securities – not just McMansion-hunting suburbanites – that created the financial bases for the sub-prime loans and other excesses in the first place.
The whole bonus mania, Trimbath adds, contributed to the problem. It encouraged investment bankers to "push the [mortgage securities] crap out the door, because that's how they could earn bigger bonuses."
In the end, the remnants of Wall Street's legions are still richly rewarded for their handiwork in unraveling the economy. This scenario turns Milton Friedman's excellent point about the "social responsibility" of business on its head. Friedman correctly suggested that a businessperson's primary obligation was not to serve some conjured-up idea of the public good but rather to make money for their shareholders and investors.
One wonders what the late Nobel laureate would say to the same Wall Streeters who are desperate to get props for being green or socially enlightened but have no shame about devastating their investors.
This spectacle could have long-term consequences for Wall Street's future as an icon of capitalism. Someone in Congress (presumably not from New York) is sure to call for hearings once people learn of the big bonuses being doled out at bailed-out firms like Goldman Sachs. The class bent to enrich themselves with public largesse, it turns out, includes more than sleazy Chicago politicians.
A populist rube from the Atlanta exurbs or the Great Plains might even come up with the bright idea to stamp out new bonuses and expropriate some of the ill-gotten gains made in previous years.
The biggest push back will likely come from Robert Rubin disciples like Timothy Geithner, who will soon take over the Treasury, and the new National Economic Council chief, Larry Summers. Rubin will surely see the logic of Wall Street's compensation system, since apparently he made over $115 million at Citigroup (where he serves on the board) while the firm has lost more than 70% of its value.
Along with Bloomberg and Sen. Charles Schumer – aided, perhaps, by the star power of their proposed puppet Caroline Kennedy – these worthies will fight off any attack against the bonus babies. No doubt they will argue such action would harm New York's economy. Think of what smaller or no bonuses will mean to the dog-walkers, toenail painters, personal trainers and high-end travel and real estate agents of Manhattan.
ProPublica's frequently updated map of financial bailout recipients reflects a massive transfer of money from the rest of the country to New York. A few other places – Chicago, Minneapolis, San Francisco – also have licked clean the seemingly bottomless federal ice cream bowl. What about the rest of the country?
Even New Yorkers should consider whether bailing out Wall Streeters is so great for them in the end. Once among the most recession-proof economies in the country, the Big Apple's dependence on financial bonuses has made it increasingly subject to the market's boom and bust cycles.
Indeed, the perverse effects of the bonus economy may well do more harm to New York than its political leaders let on or even realize. For one thing, it doesn't create many new high-end jobs; even before the meltdown, industry employment from the last "boom" never reached peak levels hit in 2000.
What these bonuses foster, instead, is an ultra-expensive environment inhospitable to more middle-class employment, although it does create a boom market for low-end service workers. The cost of living in Manhattan is the nation's highest, standing at twice the national average.
Once a city of capitalist aspiration, New York's economy has devolved into a plutonomy where, in 2007, financial services employees gained a remarkable one-third of all income, much of it in the form of bonuses.
Meanwhile, the city's middle-class ranks shrink. The Big Apple now has the smallest percentage of middle-class residents – barely half – of any major urban center. Perhaps even worse, the flow of bonus checks has persuaded successive city governments that it's not necessary to diversify the economy or cut exorbitant costs.
Maybe it is time to end the whole way Wall Street operates – for the good of America, New York and indeed the reputation of capitalism. An insane system that overly rewards a few for being in the right place at the right time has outlived its usefulness. A more reasonable way of rewarding performance – and punishing missteps – needs to be put in its place.
I hope the financial industry takes the lead in making these reforms. If not, change will come anyway – likely in the ham-fisted way that comes naturally to Washington.
This article originally appeared at Forbes.
Joel Kotkin is executive editor of NewGeography.com and is a presidential fellow in urban futures at Chapman University. He is author of The City: A Global History and is finishing a book on the American future.