Quotes of the day

Corporate executives and managers, as well as some economists, like to think that the increasing pay of senior employees has to do with increasing returns for their specialized skills. Over email, [Emmanuel] Saez offered me a much less flattering explanation: it’s not that managers have become more valuable. It’s that, as he puts it, there’s no good way to measure objectively the productivity of an executive. That lends itself to what Saez calls “bubble phenomena” in their perceived value—to put things bluntly, they benefit from being seen as more important than they are.  If that’s the case and managers do not have some special growing value, then the same forces that have put pressure on wages lower down the ladder—labor mobility, ease of hiring and firing—will eventually apply to them, too. We may already be seeing the beginnings of that with CEO salaries. Whether in a slow seep or a big bang, every bubble will deflate.--Mark Gimein

Corporate governance experts should consider whether there should be real mechanisms to throw out and replace bad boards. Perhaps we need term limits for board members? At a minimum, there should be accountability and some metric to determine what constitutes a good board. We are seeing a search for accountability in the criticisms of the Hewlett-Packard and News Corporation boards for poor oversight. Again, though, we have no real systematic way to measure or monitor this conduct. Boards are also not a panacea and have serious institutional failings. Boards appear to be poor at taking decisive action. In the face of crisis, boards tend to resign or be taken captive by their advisers. Think of Dynegy, where the board resigned en masse after two failed sale attempts. And does anyone really think a board can substantively monitor systemic risk at a $2 trillion institution like Bank of America? Not only do boards need to be held accountable, there is the scary question of whether all of this power being provided to them is a good thing. If not, should this power flow back to the chief executive? This is not to say that corporate governance does not have value. It does, and I believe it has increased shareholder wealth. But this is a learning process. There is still a lot of work to do.--Steven Davidoff

I majored in communism and graduated magna cum laude. SO WHAT?--Jim Cramer, on CNBC today, who did this at Harvard

I’m not planning on going home.--Stacy Hessler, Wall Street Occupier, who has 4 children at home

[Herman Cain] is rising as more and more Republicans come to the conclusion that the Republican Party has found its Michael Dukakis, a technocratic Massachusetts governor running on competence, not ideology.--George Will

... when you’re a speaker, in the sense of public speaking, you can pick your topics. When you’re a would-be president, every topic picks you. Whatever happens this morning is the new topic. So, you have to have the ability to get briefed, very fast. Ideally, you should know a fair amount going in. And I think one of the Republican weaknesses has been that we rely too much on consultants and too much on talking points. And we don’t rely enough on actually knowing things. If you’re going to lead the country and change history, you had better know a heck of a lot before you start, because there’s not much time for learning on the job. And as Obama’s proven, youth and inexperience are interesting, but they can also be a disaster.--Newt Gingrich

[New York City Comptroller John] Liu also claims that public-pension funds are a better deal because they can take much more risk in pursuit of higher profits. But he all but ignores the fact that when pension returns fall short, it’s the taxpayer who must make up the difference. Skyrocketing pension costs have wreaked havoc with the city’s budget; they’re the driving force behind budget cuts, including fewer police officers to deal with more protests and gunplay alike. Yet Liu’s report merely says that concerns about higher taxpayer costs are “legitimate” -- and that’s it. Indeed, the report raises a question that the comptroller surely didn’t intend: If big pension plans offer better returns at lower costs, why not let city workers participate in such plans if they like -- but with only a small portion (maybe 20 percent of salary, instead of 50 percent) guaranteed by the taxpayers? Workers who want more money could contribute more and still benefit from scale. But the extra contributions wouldn’t carry a taxpayer guarantee. Anyway, New York City doesn’t have to guarantee such generous pensions to “work” its size. It could still use the leverage to fight for lower fees on 401(k)-style plans for its workforce. Liu’s report doesn’t advance the cause of fixing pensions. But it does remind New Yorkers of the stakes of the next mayoral race. It should remind them, too, that the current mayor is running out of time. If Mayor Bloomberg doesn’t get something done on pensions -- and soon -- he’ll leave behind a legacy of having left untouched a status quo whose costs are eating the city from the inside out. Sadly, plenty of his would-be successors think that’s just fine.--Nicole Gelinas

All models are analogies, and being analogies, they are limited in their scope. In physics you can describe ice, water and steam, and the phase transitions between them, with one unified theory, amazingly, and hence you can handle the extremes of freezing and boiling. In finance or economics we have nothing like that. Even beautiful Black-Scholes-Merton ignores volatility variations, illiquidity, panic, government regulations on shorting, to name just a few things that lie outside it. Therefore, when the world changes dramatically, every single model you can think of is likely to fail. I would like the following principle to be engraved on the foreheads of all financial and economic model users: All models are short volatility. When volatility changes a lot, the model is going to fail.--Emanuel Derman