Tag Archives: Capitalism

Capitalism Won’t Be Saved By Republicans

For the sake of this argument let’s assume that while capitalism may not be the most egalitarian system of resource management and allocation, it’s the best one we have to date.  It’s a bit like the definition of democracy – it isn’t perfect, but no one’s come up with anything better.  So, with this in mind we can propose that capitalism is worth saving.  But, saving from what?  And here I climb back on the hobby horse – we need to save free market capitalism from Financialism.

What is Financialism?  If you’ve just tuned in, I’ve been operating with the Armistead definition:

“Financialism is an economic system where the primary activity consists of creating and manipulating financial instruments.  Financial instruments…are in their original form firmly linked to economic reality.  However, when financialism sets in, financial instruments become progressively further removed from their role in supporting commerce in the real world and develop a life of their own.”  [Armistead]

When this “life of its own” comes in to play there are some serious problems for the underlying economy.  Michael Konczal summarizes the issue as succinctly as anyone:

“If you want to know what happened to economic equality in this country, one word will explain a lot of it: financialization. That term refers to an increase in the size, scope, and power of the financial sector—the people and firms that manage money and underwrite stocks, bonds, derivatives, and other securities—relative to the rest of the economy.

The financialization revolution over the past thirty-five years has moved us toward greater inequality in three distinct ways. The first involves moving a larger share of the total national wealth into the hands of the financial sector. The second involves concentrating on activities that are of questionable value, or even detrimental to the economy as a whole. And finally, finance has increased inequality by convincing corporate executives and asset managers that corporations must be judged not by the quality of their products and workforce but by one thing only: immediate income paid to shareholders.”

That second paragraph is a summation of what we’ve been looking at for the last 20 years.   If we were discussing capitalism we’d be talking about economic growth predicated on development in manufacturing, housing, infrastructure, energy, agriculture, primary industries, transportation, etc.  However, we’ve not been talking about capitalism, especially in the media. We’ve been lathered up and shaved by financialism.

We barely know what capitalism is anymore.  What’s the first thing that comes to mind when someone says, “business news?”  If you said, “stock market report” that would reflect what the evening news gives you. Usually the Dow Jones Industrial Average comes first, and then ‘what drives it’ comes in commentary purporting to be analysis.  Consider the following reaction to inquiries about the strength of the economy in 2012:

“The stock market in the past has been a leading indicator, but that leading quality has weakened in recent years. Stock prices are driven by profits and profit growth. During the Great Recession, corporations have been able to maintain profitability by slashing employment to reduce costs. They have streamlined their operations and have squeezed more productivity out of their remaining workers. Thus, higher stock prices don’t necessarily mean a stronger economy, especially in terms of employment growth. That said, I do think the economy is on an upward path, with job growth of about 2 million expected for the national economy in 2012.” [SDUT]

And here we have an illustration of the third point Konczal was making:  Corporations are judged not by the quality of their products, the character of their work forces, the direction of their research and development – but by the immediate income paid to shareholders.

Couple this with the Shareholder Theory of Value, which Jack Welch once referred to as the “dumbest idea in the world,” and the financialist  incentive is to maximize productivity, prioritize immediate results, and ignore the stakeholders for the benefit of the shareholders.  Now, view the Epi Pen issue from the perspective of the shareholders – the object was to increase immediate shareholder value, but:

“While individual consumers may not have had a voice or recourse, the market did. Mylan may have improved its margins and ultimately driven higher returns and shareholder value, but within a week the price increase cost the company $3 billion in market cap and a stock tank of over 12% in 5 days.” [Fortune]

Ethics do matter, especially to stakeholders.  If there is a silver lining in this cloud it is that the stakeholders (individual consumers, school districts, emergency responders, local fire departments…) can place significant pressure on shareholders.  Breach the bounds of acceptable human behavior and the amorphous market will take a bit out of the corporate hide; illustrating former CEO Welch’s point precisely.

Now, let’s enter the political phase.  Republicans would love to dismantle the financial regulation structure which has curtailed some of the excesses of Financialism which precipitated the last Great Recession.  Out with Sarbanes-Oxley, Out with Dodd Frank, out with “excessive regulation.”   This is a recipe for disaster.  Regulation restrains, and restraint is what is needed to prevent capitalism from degenerating into financialism.

Again, a summation from Konczal:

“…the most important change will be intellectual: we must come to understand our economy not as simply a vehicle for capital owners, but rather as the creation of all of us, a common endeavor that creates space for innovation, risk taking, and a stronger workforce. This change will be difficult, as we will have to alter how we approach the economy as a whole. Our wealth and companies can’t just be strip-mined for a small sliver of capital holders; we’ll need to bring the corporation back to the public realm. But without it, we will remain trapped inside an economy that only works for a select few.”

Income inequality on steroids? More Bubbles? More volatility? And, more economic problems associated with those issues.  It will be up to Democrats to resist the financialization of the American system of capitalism because the Republicans are either trapped in its web or ignorant of its consequences.

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Filed under Economy, financial regulation

Clinton on Quarterly Capitalism

Clinton “We need an economy where companies plan for the long run and invest in their workers through increased wages and better training—leading to higher productivity, better service, and larger profits. Hillary will revamp the capital gains tax to reward farsighted investments that create jobs. She’ll address the rising influence of the kinds of so-called “activist” shareholders that focus on short-term profits at the expense of long-term growth, and she’ll reform executive compensation to better align the interests of executives with long-term value.” [Clinton]

I could happily live with this.  She had me at “… where companies plan for the long run.”  Let me start here, and then move forward into a familiar topic on this digital soap box.  I, too, have had enough of “quarterly capitalism,” and it is high time someone offered a cogent proposal to deal with the specter.

First, no one should try to argue that all short term equity and bond purchases are necessarily bad – there are some valid reasons for such trading. However, as in most other things in life it is possible to have too much “of a good thing.”  Let’s face it, high frequency traders aren’t investors – they’re traders, and shouldn’t be confused with those who are putting capital into the distribution system.    Too much short term investing (trading) in the mix and we’re asking for problems, three of which from the investment side are summarized by PragCap:

    1. A short-term view tends to result in account churning, higher fees, higher taxes and lower real, real returns.
    2. A short-term view often results in reacting to events AFTER the fact rather than knowing that  a well diversified portfolio is always going to experience some positions that perform poorly in the short-term.
    3. Short-term views are generally consistent with attempts to “beat the market” which is a goal that most people have no business trying to achieve when they allocate their savings.

If short term investing isn’t good on the investor’s side of the ledger, it’s not good on the corporate side either.  Generation Investment Management (UK) issued a report in 2012 on “Sustainable Capitalism,” [pdf] that emphasizes this point:

“The dominance of short-termism in the market, often facilitated and exacerbated by algorithmic trading, is correlated with stock price volatility, fosters general market instability as opposed to useful liquidity and undermines the efforts of executives seeking long-term value creation. Companies can take a proactive stance against this growing trend of short-termism by attracting long-term investors with patient capital through the issuance of loyalty-driven securities. Loyalty-driven securities offer investors financial rewards for holding a company’s shares for a certain number of years. This practice encourages long-term investment horizons among investors and facilitates stability in financial markets, therefore playing an important role in mainstreaming Sustainable Capitalism.”

Or, put more succinctly, short-term vision creates market volatility (big peaks and drops) which makes our stock markets more unstable, and undermines executives who are trying to create companies with staying power.  Instability and volatility improve the prospects for traders but not for investors, and not for the corporations and their management.

If we agree that “quarterly capitalism,” or “short-termism” isn’t a good foundational concept for our economy – from either the investors’ or the company’s perspective, then what tools are available to make long term investing more attractive, and to help corporations seeking “patient capital?”

rats rear end One tool in the box is the Capital Gains Tax. If only about 14% of Americans have individual investments in “The Market” [cnbc] why should anyone give one small rodent’s rear end about the Capital Gains Tax structure? 

Because:  The present capital gains tax structure  rewards investment transaction income more than on earned income. If we are going to allow this lop-sided approach, then there has to be some economic benefit in it for everyone?  The current system:  

“Capital gains and losses are classified as long term if the asset was held for more than one year, and short term if held for a year or less. Taxpayers in the 10 and 15 percent tax brackets pay no tax on long-term gains on most assets; taxpayers in the 25-, 28-, 33-, or 35- percent income tax brackets face a 15 percent rate on long-term capital gains. For those in the top 39.6 percent bracket for ordinary income, the rate is 20 percent.” [TPC]

Thus, if one’s income is “earned” by trading assets then the tax rate is 20% at the top of the income scale, but if the income is earned the old fashioned way – working for it – the rate could be 39.6%.  This is supposed to incentivize investment.  But note the definition of a “long term asset,” as one held for more than 12 months… that’s right: 12 months. 

Contrast that definition of a long term investment with the Clinton proposal:

Clinton Cap Gains Tax ChartNotice that in Secretary Clinton’s structure the combined rate on capital gains moves from 47.4% for those “short term” investments, down to 27.8% if the investor holds the assets for more than six years.  Five and six years fits my definition of “long term” much better than a “little over 12 months.”

Thus we have an incentive for longer term investments, which means less instability and less volatility.  This seems a much better plan to practice “Sustainable Capitalism.”

rats rear end

But, what of the executive compensation packages that are tied to short term stock prices?   Yes.  That’s a problem. [NYT] And yes, President Bill Clinton’s attempt to rein in executive pay back-fired. However, Secretary Clinton has proposed legislation to provide shareholders a vote on executive compensation, especially on benefit packages for executives when companies merge or are bought out. Her proposal would have created a three year “claw back” period during which the SEC could require CEOs and CFOs to repay bonuses, profits, or other compensation if they were found to have overseen – or been intentionally involved in misconduct or illicit activity.  Granted that doesn’t cover the entire landscape of corporate misadventure, but this could be combined with the following excellent suggestion for amending the tax code:

“Instead, Section 162(m) could be rewritten to allow a deduction for compensation paid to any employee in excess of $1 million only if the compensation is paid in cash, deferred for at least five years and unsecured (meaning that if the company goes bankrupt, the executive would not have a priority over other creditors). This approach would encourage corporate executives to act more like long-term bondholders and obsess less about short-term stock price movements.” [NYT]

Every bit of “encouragement” might help.  I’d be very happy to see CEOs thinking like long term bond holders (if long term means more than 13 months) and less like the traders/gamblers in the Wall Street Casino.

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Filed under Clinton, Economy, financial regulation, Hillary Clinton, Politics, Taxation

GOP Excuses, Excuses, Excuses: How the GOP Fights Tax Cuts for Middle America

GOP Excuses Radio

There’s an old saw, “Those who are good at making excuses usually aren’t much good at anything else,” and the GOP is offering up a vivid example of this truth.

No sooner does the President’s plan to cut taxes for middle class Americans and raise taxes for the top 1% of income earners come out – notice we’re not using the expression “wage or salary earners” – than the GOP cranks up the Whine Machine with all the old excuses.

Hoary Old Excuse Number One: It will hurt small business.  This topic has been covered before, when DB provided some myths, facts, and figures about Small Businesses in the good old U.S. of A.

“Here’s the point at which not all tax breaks are created equally.  Most firms in the U.S. are bringing in less than $500,000 in receipts annually.  Formulas based on the number of employees alone will necessarily benefit those establishments which may hire fewer than 500 persons, BUT which may also be generating receipts well over the common $500,000 threshold for receipts.”

The GOP played this game before, H.R. 9 back in 2012 gave a $46 billion loophole to the 1%, all in the name of “small business.’   Who would be the primary beneficiary of the GOP largess?  Try Hedge Funds and Lobby Shops.  Both have small numbers of employees, thus earning the categorization of “small business” from the Republicans, BUT small hedge funds are those with less than $100 million assets under management, medium sized ones range from $100 million and $999 million, and then there are the big ones – the ones with funds from $1 billion to $5 billion. [BusInsider]  Since when is a firm with $500 million worth of assets under management the same thing as the 76% of American businesses which have annual incomes below $200,000?  Only in Republican mythology would Mom’s Diner be in the same category as Mighty Mountain Megamoney Capital Management.

Hoary Old Excuse Number Two: “You’ll Be Next.”  Fear-mongering is one of the things Republicans do best. If we raise taxes on the incomes of the Top 1%, the “tax and spend” Democrats will come after you next.  Not. So. Fast. Remember the second part of President Obama’s proposal is a tax CUT for those who are among the vast 99% of the American public not basking in the upper reaches of income levels.  How does one explain ‘they’re coming after you’ when YOU (at least those of us in the 99% range) are to be the beneficiaries of a tax CUT?

Hoary Old Excuse Number Three:  Here they go again, “Are you going to actually grow the economy and jobs, are entrepreneurs going to be better off, are small businessmen going to be better off, with more taxes and more government? No!” he (Rep. Chaffetz R-UT) told CNN’s “State of the Union” show.”  [Reuters] This little mish-mash has all the basic GOP  elements tucked into a nice sound bite. The premise is that the economy won’t grow if taxes are increasedWrong. Under good old fashioned garden variety Capitalism, the economy grows as people make transactions in the REAL economy.  They manufacture things, provide services, transport things, sell things, buy things, and generally do so with cash or credit instruments.  The notion that more taxation at upper income levels will decrease investment pre-supposes that (1) all investment is located in or targeted to the REAL economy, and (2) all upper income investors will necessarily invest less in REAL economic prospects at larger taxation levels even though the investments may be high quality.  Both of these ideas are downright silly.

There is a whopping difference between investment in shares of common stock issued by General Widget and Gadget Inc. and investment in Mount St. Helen’s Volcanic Macro Hedge Fund.  One is capitalism, the other is gambling.   If you aren’t sure about this take a gander at what happened to the formerly very real Mount Everest Hedge Fund.  The fund bet the ranch on the Swiss Franc’s dropping – it didn’t.   This brings us to GOP conflation number four.

Hoary Old Excuse Number FourWe are punishing success! Nonsense. We tax income.  If we look at the top 1% there is a range of professions included, but focusing on the source of household income the scene is a bit different:

“We find that executives, managers, supervisors, and financial professionals account for about 60 percent of the top 0.1 percent of income earners in recent years, and can account for 70 percent of the increase in the share of national income going to the top 0.1 percent of the income distribution between 1979 and 2005,” [WaPo, WilliamsEdu pdf]

A person who is a successful carpenter, steelworker, teacher, firefighter, grocery store owner, salon/beauty shop owner, hardware store owner makes his or her income by working.  Those top earners? Securities, business equity, and investments.  At the risk of being a bit crude about it, we now tax the incomes of those who actually manufacture screwdrivers, transport screwdrivers, and sell screwdrivers at a higher rate than we tax those who assemble funds to leverage the hostile takeover of the screwdriver manufacturing company, sell off the assets of the screwdriver company to pay off the incurred debt, and then toddle off to their next financial adventure.   This shouldn’t be about “punishment” perhaps it ought to be about REWARDS – as in, how do we reward WORK. 

Win big in the local casino and you’ll probably have between 25% and 28% kept back for Uncle Sam, [turbo] but gamble in a hedge fund that bets on the British Pound and the capital gains tax is 15%.  Are we rewarding work or speculation?

No one minds rewarding success, but rewarding speculation is another matter entirely.

However, those enthralled with the now thoroughly debunked Trickle Down rationalization for the aggrandizement of the top 0.1% will still cling to their talking points.  It’s high time we stopped listening.

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Filed under Economy, Taxation

Let’s Save Capitalism

Adam Smith If we want to do something big why not craft a nationwide campaign to save capitalism?  Basic, dictionary definition capitalism:

“ (noun) an economic system in which investment in and ownership of the means of production, distribution, and exchange of wealth is made and maintained chiefly by private individuals or corporations, especially as contrasted to cooperatively or state-owned means of wealth.” [Dict.com]

Let’s declare, right out front, that capitalism is NOT a political system.  It does, however, require a political apparatus and infrastructure to maintain our economic institutions.   Let’s assume that Adam Smith was correct, that monarchical controlled monopolies and charters were counter-productive.  Indeed, Adam Smith was quite vehement on the subject of monopolies. He was particularly opposed to those guild members, shop keepers, and manufacturers who conspired to operate in the Wretched Spirit of Monopoly.”  [Kurz pdf]  He’d seen the results of  conglomerates such as the East India companies of Great Britain and the Netherlands – and he disapproved.   That critique hasn’t prevented the monopolists from mangling the message by adding a bit of  Mandeville here, adding a touch of Samuelson there; marinated in the toxic and sophomoric economics of Rand,  and devising a philosophy to justify unadulterated greed.

The problem for the Justification of Greed crowd is that at some point in the economic process someone has to buy something.  At least in the real world, someone must manufacture a product using primary products (minerals, timber, etc.) and then must transport the products to distributors (secondary) markets, so that ultimately a consumer will purchase the product at a price determined by the balance of supply and demand.  This, at its simplest, is pure capitalism.  We need more of it.

In America’s bifurcated economic system the financial sector, which once primarily facilitated the investment in the manufacturing, distribution, and selling of goods and services, has taken it upon itself to function for its own benefit – one all too often at odds with the Main Street economy it was meant to serve.

The financialists [Forbes]  discovered the gold to be mined from mountains of debt, and sought profit from the debt, the service of the debts, the trading of debt, the manufacturing of securitized assets based on debts, and they turned Adam Smith on his head:

“Adam Smith never espoused the beliefs that control our capitalist system today, that the only purpose of a business is to create shareholder value and that the unfettered market will effectively regulate itself. These two views have been widely adopted, without empirical foundation, by many influential financial and political policy-makers. They have been used to justify systemic deregulation and a maniacal focus on generating short-term earnings that are not necessarily real economic earnings.” [Forbes]

And, they’ve held sway for almost the last three decades:

“Over the last 25 years American capitalism has become financialism, which is primarily transactional, unrestrained greed. Financialism embraces the view that the only purpose of business is to create shareholder value, measured primarily by short-term results. The dominance of short-termism is evidenced by the magnitude of institutional stock “renting” for terms of 12 months or less, the volume of high-speed, high-frequency algorithmic short-term trading, the short average tenures of chief executive officers and the dominance of executive compensation tied solely to short-term results.” [Forbes]

In short, ‘faster and more volatile’ has replaced ‘visionary and more rational’ in our economic system.  And the politicians in place are either wedded to this financialism and actively abetting it, or they are such close allies that the differentiation is difficult to discern. Or to put it in harsher terms: The politicians are selling out the long term benefits of American capitalism for the benefit of short-term financialism.  What’s been the result?

“When the rate of return on capital exceeds the rate of growth of output and income, as it did in the nineteenth century and seems quite likely to do again in the twenty-first,” said Piketty, “capitalism automatically generates arbitrary and unsustainable inequalities that radically undermine the meritocratic values on which democratic societies are based.” [Piketty, Farrell]

We might simplify this statement by saying: When the financialists take over the field from the capitalists the economic inequalities they create unleash havoc on our real economy and our national values.  Who warned us about this?  None other than the patron saint of financialists – Adam Smith:

“The disposition to admire, and almost to worship, the rich and the powerful, and to despise, or, at least, to neglect persons of poor and mean condition is the great and most universal cause of the corruption of our moral sentiments.” [Piketty, Farrell

Smith wasn’t quite finished with the Greedy:

“The great source of both the misery and disorders of human life, seems to arise from over-rating the difference between one permanent situation and another. Avarice over-rates the difference between poverty and riches: ambition, that between a private and a public station: vain-glory, that between obscurity and extensive reputation. The person under the influence of any of those extravagant passions, is not only miserable in his actual situation, but is often disposed to disturb the peace of society, in order to arrive at that which he so foolishly admires.” [Smith; Theory of Moral Sentiments]

So, what have we done for the past 25 years?  We de-regulated the avaricious, we praised the vain-glorious, and we rewarded those harboring these “extravagant passions” with riches beyond their dreams.  Then we declared it “good,” and “American” and the culmination of “Free Enterprise,” when in fact the effect was to “disturb the peace of society,”  and create such income inequality that it is difficult to sustain the basic capitalism we say we admire.

Politicians need to make their positions clear: Do you support American capitalism or do you support Financialism?  If the former, you are deserving of our praise and votes. If the latter, you need to be out of any office of influence until you understand that you are destroying the very system you purport to value above all else.

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Income in America – The Hurrier We Go The Behinder We Get?

The average worker’s pay in the state of Nevada is $35,206 per year. The average CEO pay is $5,130,077.  That’s a ratio of 146-1 in favor of the CEO, a figure which rockets up to 299-1 if CEO compensation is compared to our minimum wage earners.   [Paywatch]  If we look to the 89101 Zip code specifically, the median annual compensation for a CEO is $736,318 or 21 times the earnings of the average worker.  The range in that area goes from $396,391 to $1.059,652. [SalWiz]  If we look north, the average CEO compensation in the 89501 Zip code is $732,846, with a range of $394,522 to $1,054,657. [SalWiz]  The problem isn’t that some individuals are paid more than others — the core issue is that there are economic pressures which continue to put a drag on our economic recovery, and some of these are the result of wage and tax policies which favor financialism over good old fashioned capitalism.

The first argument launched from the conservative side of the spectrum is that these numbers are necessarily flawed, and therefore of little utility in debate about wages, salaries, and compensation in general.  However many issues the Center on Executive Compensation , allied with the U.S. Chamber of Commerce, and the National Association of Corporate Directors, may have with the methodology, and with the proposed SEC rules on ratios, [Blmbrg]  the points remain — (1) Multinational and other large corporations really don’t want to disclose their CEO pay packages, and (2) They really don’t want the issue of executive compensation tied into the discussions of tax equity and fairness.

This is an interesting line because corporations generally have no problem reducing almost any issue by quantification, be it allocation of purchasing orders or labor costs and productivity.  One easily reached conclusion is that the quantification called for by the SEC under the terms of the Dodd Frank Act isn’t something the corporations want to do.

The second common assertion is that these are the “job creators,” and therefore should be immune from any additional taxation, and certainly from any increase in the taxation of capital gains.  We are continually told that any attempts to adjust the inequities via minimum wage increases or tax policy will have dire effects on small business.  Testing this contention requires looking more carefully at the old common ‘wisdom’ that small companies are the driving force in job creation.  There’s some evidence this may not necessarily be the case.

While it’s still true that businesses with 49 employees or less create the most jobs, the trend since 1990 indicates that large employers (over 500 employees) added 29% more workers between 1990 and 2011, while those with 50 or less added 10.9% more. [NYT BLS]  In short, what the large corporations do in terms of compensation of CEOs and employees is important, and become more so as additional jobs are the result of hiring decisions made by large firms.

Practical Matters

## As a practical matter, income inequality only becomes a problem when such a large portion of wealth is tied up in the hands of so few that the savings capacity of individual workers is reduced.  Obviously, at the theoretical level, the more workers save the more money becomes available for investment.  Practically, the more workers are able to save the less reliance there is on social safety net programs, and the more savings accounts of all varieties are available for (a) consumer spending — such as in retirement, and (b) investment by the banks and mutual funds which hold them.

One way to observe this in the real world is to look at what people are doing with their 401(k) accounts.  Now that housing isn’t the most apparent source of income, individuals and families are increasingly tapping their retirement accounts to meet necessary expenses.  In 2011, for example, Americans withdrew about $57 billion from their retirement accounts while home equity loans were down by 38%. [Blmbrg]*

At the consumer debt level, the Federal Reserve’s report on Household Debt Service and Financial Obligations ratios shows consumer debt which bottomed at 4.97 in the first quarter of 2012 is now back up to 5.14.  People who are borrowing aren’t saving, and if they aren’t saving then those funds are not available for investment.

Our debt levels are back up and our personal savings rates are headed back down.  The Federal Reserve chart shows an increase in personal savings during recessionary periods, a spike in December 2012, and then back down we went.

Personal Savings RateNothing says “squeezing the middle’ quite like watching (a) dipping into retirement accounts, (b) increasing consumer debt, and (c) declining personal savings.

## Income inequality becomes a problem when the funds which should be invested in the expansion or improvement of capital projects is diverted into ‘manufacturing’ financial products which add wealth to their holders and traders, but do not add assets, fixed or short term, to corporate enterprises.  Look at the following chart showing the trends in how banks earn their income:

US investment banking fee composition

(See Capital Markets Outlook – Deloitte Israel, Global Investment Banking Review – Thomson Reuters, both in pdf)

Trading in “equities” is earning a larger portion of banking revenues in recent days, from 17% to 48%, while loans have contracted since 2005.  And bonds, the old staple of the investment banking sector? Improving, but not as well as the equities column of the ledger.

If the tax on capital gains is only 15% then what incentive does an investor have to invest for the long term in manufacturing capacity?  For that matter, if funds are in the hands of institutional investors what incentive is there for long term investment instead of seeking short term gains?  In 1995 institutional investors held 140.8% of our GDP, in 2011 that number had increased to 211.2%.  In 1995 institutional investors held $11,223 billion in financial assets, by 2011 that figure stood at $24,220 billion. [OECD pdf]  And then there’s this chart — notice the increase in the column representing investment funds compared to that of pension funds:

Investment Institutions by typeIt isn’t a stretch to conclude that recent trends indicate there are more institutional investors and those investors are increasingly in the form of ‘investment funds.’  The small chart below shows the the increase in the number of hedge funds since 2000:

Hedge Funds

 

 

 

 

 

And, as we might guess, the smaller, newer funds are doing well, but they’re also more likely to ‘blow up.’ [FTAlphaville]  It’s necessary to remember that what’s good for the hedge funds and asset managers (short term gains) is not necessarily good for the rest of the economy (long term stable prosperity).   The focus of the money managers is, predictably, money. Money becomes the ultimate measure of wealth, not the fixed and other assets of other enterprises.

If we’re looking for the barriers to economic growth in the U.S. some attention needs to be paid to (1) the growing income inequality which puts pressure on individual and family saving capacity; (2) tax policy which rewards investment for the sake of ‘money’ rather than investment for the sake of long term corporate viability; (3) the role of institutional investors and their agendas in the financial markets; and (4) the declining role of retirement funds for their original purpose (retirement) and in the overall institutional investor landscape.

We’ll do better when we can return to the traditions of capitalism — in which wealth is measured not only by bank accounts, but by what those bank accounts can provide for the businesses and industries who build them.

* See also: Angry Bear Blog “Americans Raid 401(k)s” May 8, 2014; EPI, “The State of U.S. Retirement,” March 12, 2014; Naked Capitalism, “Even Harsh Frontline Program on Retirement Investments Understates How Bad They Are,” April 24, 2013.  CAP “What Can We Do About Retirement Fees Straining Middle Class,” April 15, 2014.

 

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Financialism at its Finest: The Flash Boys

If you haven’t already picked up Michael Lewis’s “Flash Boys,” please do so: “Now in “Flash Boys,” Lewis reveals how a new crop of investment firms has conspired with the big banks and the stock exchanges to use high-speed computers and complex software algorithms to skim pennies from the real investors who provide equity capital to the economy.” [WaPo]  Get that — about REAL investors?

Back in the not so good old days, the function of investment banking was to assist the distribution of capital from areas of excess (savings) to areas of need (loans) to commercial and industrial enterprises.

If we didn’t learn much else from the Mortgage Meltdown in the Wall Street Casinos of 2007-08, or from the Flash Crash of 2010 — we were given a rather stark reminder that the business of Wall Street is now Wall Street.

Note that in Flash Boys, the object of the game is to game the system and make money by skimming from REAL investors.  Remember those “job creators?”  Real investors buy stock, buy bonds, and otherwise provide the capital upon which our economy rests.  Financialists couldn’t care much less if the American Widget corporation makes a dime in profits from the sales of its products — but they do care deeply about the price of AW Inc’s stock.

In the interest of not giving away the story line, I’ll stop here and let you make up your own mind about the depths to which Wall Street has sunk into its own mire of manipulations.   Before listening to the chatterati on what passes for business news on cable — here’s some recommended background:

James B. Stewart, “Flash Boys, Gone in 0.001 Seconds,” New York Times, April 11, 2014.

Ted Kaufman, Delaware Online, News Journal, “Flash Boys should and will make your blood boil,” April 12, 2014.

Raju Kane, “Cracking the Money Code,” DNA, April 13, 2014.

Will Deener, “Telling the Ugly Truth,” Dallas Morning News, April 6, 2014.

If you’ve checked out these reviews, and are still inclined to accept the chatterati’s rationalizations for the “front-running” — read skimming — then the best advice might be to have the TV turned off, and consider that the explications tend to run toward vapidity like, “this adds liquidity to the markets….”

Any time you hear the word “liquidity” (a) remember that it just means cash/money, and (b) that it’s the standard line tossed out to the uninformed in the hopes that they will stay that way.

The second way to judge the pontification from the pundits is to ask yourself — Do I understand the point being made? If the answer to that question is “no,” then consider why — most likely because you were inundated in a tsunami of Wall Street jargon, and then told if you didn’t understand the mash-up you are obviously NOT a sophisticated investor and should switch to the Cartoon Network as a venue more suitable to your intelligence.

Another common Wall Street retort is that Lewis’s books are “popular,” as if explaining complicated processes in readable vocabulary isn’t “academic,” and therefore of less merit.  This line of petulance is most often associated with faculty commons and the interminable squabbling of the very academics who deplore ‘popular’ writing.  Merely because a person doesn’t douse you with algorithms doesn’t mean you aren’t getting the information.

And, when Senator Sludgepump or Representative Quagmire tell you that the Job Creators need Deregulation to enhance the liquidity of the markets and facilitate investment — remember that the deregulation and the gaming of the system by the financial sector are the elements skimming profits from REAL investors.

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Filed under Economy, Politics

Heller’s Platitudes on a Platter: With Charts and Pictures

Heller 2Quick! Someone get some valid economic information to Senator Dean Heller (R-NV) before he embarrasses himself again.

“The nomination of Jack Lew to be Secretary of the Treasury suggests that this Administration has learned nothing from the debt-driven economic policies of the past four years, and intends to move forward with more of its signature tax and spend policies.

“As the architect and defender of the President’s irresponsible budgets amid grave economic circumstances, Mr. Lew has failed to demonstrate the leadership and commitment to responsibility that this country needs in its chief economic advisers.

“While I respect the fact that Mr. Lew has remained a public servant for many years, I cannot support the nomination of an individual who does not share my commitment to treating taxpayers’ dollars responsibly,” Heller said. [RGJ]

Let Us Parse:

“….debt-driven economic policies of the past four years…”  OK, Senator Heller isn’t expected to be reading all the articles in every economic and business magazine and journal, BUT he could at least look at the pictures in Forbes.  We Repeat:

Obama spending forbes chart

Now what does the headline, “Slowest spending in decades,” tell us?

…signature tax and spend policies…   Here’s a heads-up for everyone. There are basically two things to do with tax revenues: (1) spend the money for government services, or (2) utilize the funds to reduce the federal debt.  However, if you’ve been reading this blog even for a short while, you know that already.

Of all the GOP talking points, the elderly “tax and spend” bumper sticker shorthand is the most hoary, and least accurate.  For example, the last time we had a budget surplus it was during a Democratic Administration.   Notice that the annualized growth in federal spending stood at 3.2 and 3.8 during the Clinton years.  Notice what it did during the two Administrations of George W. Bush, during the “Credit Card Conservative” years?  Those numbers are 7.3 and 8.1, even if the 2009 stimulus is assigned to the Democratic Obama Administration.

Secondly, during any recession, and we had a whopper when the Housing Bubble exploded all over the economy in 2008, government spending increases when AUTOMATIC STABILIZATION programs kick in to soften the damage to our economy.  Unemployment insurance benefits, food stamps (SNAP), and similar stabilization programs prevent recessions from becoming depressions.   The Tax Policy Center explains:

“Automatic stabilizers are features of the tax and transfer systems that tend by their design to offset fluctuations in economic activity without direct intervention by policymakers. When incomes are high, tax liabilities rise and eligibility for government benefits falls, without any change in the tax code or other legislation. Conversely, when incomes slip, tax liabilities drop and more families become eligible for government transfer programs, such as food stamps and unemployment insurance, that help buttress their income.”

Why keep repeating this basic bit of modern economics? Because it seems to have escaped Senator Heller and other radical conservatives, who believe that if we simply reduce taxation on the wealthiest Americans investment in domestic business enterprises will magically increase even if consumers don’t have the financial wherewithal to increase the demand for goods and services.

“…As the architect and defender of the President’s irresponsible budgets amid grave economic circumstances…”  There are several problems with this analysis, aside from the fact that it is vacuous and vague.  First, I thought one of Senator Heller’s complaints was that we don’t have a budget…that we haven’t passed a budget…that we are operating without a budget? [NPR]

Heller No Budget

All right, the President is functioning with numbers from the 2011 Budget Control Act, the response to the GOP threat to shut down the federal government in the debt ceiling fight of 2011, and the source of the Silli-quester we’re now engaged in.   So, is the “out of control” spending a function of the Congressional act of passing the Budget Control Act?

Frankly and bluntly, the phrasing adopted by Senator Heller is nothing more than a repetition of the Tax and Spend mythology from the first paragraph of his statement.   And, now to the second point.

What grave economic circumstances? For Whom?

Is he talking about economic activity in terms of the U.S. financial markets?  If he is then someone needs to get him a newspaper.  Here’s the graph of financial markets as measured by the S&P 500 for the past five years:

SP 500 march 2013

For reference, the index was at 683.38 as of March 2, 2009.  An 831.03 increase (or 121.606 % increase) in the S&P doesn’t signal anything “grave” to me about the health of our financial markets.  So, if a family’s income depends on investments then the past five years have been anything but “grave.”

If, however, ones personal wealth doesn’t come from investments, then indeed, the picture isn’t quite so pleasant. Consider the following information from The State of Working America (pdf).

Change in Wealth

Those reports about most of the increase in the nation’s wealth going to the upper echelons of American economic elites are accurate, and not only are they accurate they follow a pattern beginning in the 1980s in which the rich start becoming yet richer while the percentage going to the bottom 80% of the U.S. population begins to trend downward.

And, it’s not only wealth distribution which is increasingly headed toward the top, it’s income as well.  During the recovery we’ve seen most of the income going to about 15 counties in the United States.  [Forbes] Forbes has more:

“Galbraith’s not the only one who feels that way. Here’s the free market apostle Alan Greenspan in 2007 admitting that “you cannot have a market capitalist system if there is a significant mood in the population that its rewards are unjustly distributed.” Notice please the notion “unjustly distributed” from one of the policymakers who made it so.”

So, at this point it might be wise to ask if Senator Heller and his Republican colleagues in the U.S. Senate might be amenable to suggestions regarding how to devise a more just distribution, one in which more American consumers could be encouraged to support our manufacturers and retailers by spending more money?

The Real Questions

Does Senator Heller understand that, as discussed previously, aggregate demand and Gross Domestic Product are essentially the same thing?  And, that a reduction in government spending means the reduction in spending for everything from personnel costs to paper clips? From aircraft carriers and armaments to thermometers for food safety testing?  Some companies are manufacturing and selling these products — thus if orders decline so does our GDP.  [See more here]

Would Senator Heller and his associates agree with legislation to increase the minimum wage?  If you really want to put more money into more people’s pockets this is the easiest way to do it.  We can assume he would not be in favor of this remedy because he voted against raising the minimum wage in January 2007.  [H.R. 2 Fair Minimum Wage Act 2007, vote 18]

Since most of the wealth for those not earning most of the family income in the financial markets is tied up in the family home, would Senator Heller support measures to bolster the value of family residences and to help families facing foreclosure?  Judging from his voting record, it doesn’t seem so.  Senator Heller’s on record opposing the Home Affordable Mortgage Program (2011), and opposing modification to bankruptcy laws to help homeowners avoid foreclosures (2009). [OnTheIssues] Nor could he even find it in his conscience to support funding affordable housing renovation in “severely distressed public housing.” [OnTheIssues]

The Real Answers

Contrary to popular thinking among Republicans it really is possible to be Pro-Business and to also consider the needs of shareholders and consumers.  Being Pro-Banking doesn’t necessarily mean a person is Pro-Growth.   Growth, as former Federal Reserve Chairman Greenspan came to understand by 2007, requires a vigorous consumer base, which in turn requires protection for those who work in our factories and provide our services.  Consumers and shareholders do not benefit from policies which further exacerbate wealth and income inequities, nor do they benefit from policies and legislation which undermine the faith in our free market system.

Protecting the incomes of the economic elite does precious  little to prevent economic instability for the majority of American wage and salary earners.  Protecting the economic elite can never add to the total wealth of a nation as much as adding more willing participants in our markets…our housing market, our retail markets, our automotive markets, or in any other market.

In short, Senator Heller’s platitudinous palaver and vague rhetoric is bumper sticker speak obscuring the very real economic issues and the very real economic answers we should be discussing.

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Filed under Economy, Heller, Nevada politics

Cliffs, Hostages, and Charts: Passing S. 3412 is good policy

The one element of the current fiscal flap which has attracted most people’s attention is the expiration of the Bush Tax Cuts, and the reversion to the tax rates of the Clinton Administration.  Senate Majority Leader Harry Reid (D-NV) commented today:

“It took four months, but Republicans are finally realizing the way back from the fiscal cliff has been right in front of them all along.  In July, the Senate passed legislation to give economic certainty to 98 percent of families and 97 percent of small businesses – to every American making less than $250,000 a year.  For four months we’ve been one vote away from a solution to this looming crisis.  And for four months, House Republicans have refused to act.  Instead they have held the middle class hostage to protect the richest 2 percent of taxpayers – people who have enjoyed a decade of ballooning income and shrinking tax bills.”(Senator Harry Reid, 11/29/12)

The bill to which Senator Reid is referring is S. 3412, passed in the Senate on July 25, 2012 on a 51-48 vote.   Interestingly, Senator Dean Heller (R-NV) voted against the bill.  The bill has since languished in the Republican controlled House of Representatives.

To restate the obvious, since the end of July 2012 the Congressional Republicans have made it abundantly clear that they will not accept any tax increases on the upper 2% of American income earners.

Every pundit from Bangor to Chula Vista has opined about the various political implications and ramifications of this GOP position.  If we step away from the Chattering Cable-ites momentarily, we can see that tax policy is (1) a rather blunt instrument by which to manipulate economic behavior, and (2) while a reversion to the Clinton area rates is advisable, there really is more that can be done to better secure fiscal stability.

With all due respect to the mathematicians who have crafted all manner of elegant algorithms to predict economic behavior — even if the entire transaction is computerized there is still a very human element involved.  An algorithm is written with a human purpose.  In this case it might be to automate the purchase or sale of particular “things” at a specific price.  The essential problem with capitalism is that prices are determined by human beings who pre-judge the value of the “things” in terms of their own desires and motives.  The motive might fall anywhere along the spectrum from pure speculation to pure long term investment strategies.

Given this context, consider momentarily the currently popular Republican refrain that if marginal tax rates are “too high” investment will be stifled and economic expansion constrained.   The essential economic question at this point is not how many petulant plutocrats does it take to impede any political action in regard to tax rates — but, at what marginal rate does tax information become a significant factor in the investment decision?

As the chart from the IRS indicates, the marginal rate of taxation on the highest income earners has dropped since the mid 1960’s.  The taxation on capital gains is now below 20%.   The next question: What is the statistical relationship between marginal tax rates and investment?

The Congressional Research Service (pdf) studied the relationship between top marginal rates and private savings ratios and created these illustrations of the data:

If the data points look a bit scattered — it’s because they are.  The CRS drew the following conclusion:

“The bottom charts in Figure 3 show the observed relation between the private fixed investment ratio (investment divided by potential GDP) and the top tax rates. The fitted values suggest there is a negative relationship between the investment ratio and top tax rates. But regression analysis does not find the correlations to be statistically significant (see Table A-1 in the appendix) suggesting that the top tax rates do not necessarily have a demonstrably significant relationship with investment.”

Translation: While the charts tend to lead the eyeballs toward seeing a negative relationship, when we actually crunch the numbers the results could just as easily be the result of good old fashioned chance.

There is a place for anecdotal evidence from financialists whose self interest dictates the championing of lower marginal tax rates as a significant factor in their investment decisions, however it’s not in the midst of a rational argument about economics.   Therefore, investor extraordinaire Warren Buffet’s question remains valid:  ‘If I called you in the middle of the night and told you I had the best investment opportunity ever seen in the world — would you ask me about the tax rate?

This ragged relationship between effective rates on capital gains and the returns investors receive as a percentage of GDP is illustrated below:

The first points to note are along the pink line (circa 1996) when the average effect tax rate on capital gains was 25.5% but the trend line for realized gains was going up.  The ‘conventional wisdom’ held for the period between 1996 and 2000, at which point the trend lines no longer support the contention that lower average effective tax rates mean greater realized gains.  Between 2000 and 2004 the average effective tax rates decline, but so do the realized gains, and from 2004 until the last data available from the Tax Policy Center in 2007 the tax rates remain essentially the same but the gains increase.  Go Figure?  What we could conclude with more certainty is that the tax rates and the realized gains aren’t operating in tandem, and there’s more to “economic decisions” than considerations about marginal tax rates on capital gains involved.   Again, Buffett is probably right.

If reducing the effective tax rates on capital gains isn’t a sure fire way to increase earnings and entice yet more investment, then what about tax rates in general?  That doesn’t quite work either as illustrated by the following chart from Business Insider:

… and we know what happened in 2007 through 2008.  If a relationship cannot be demonstrated between lower capital gains taxes and the gains coming from economic growth AND we cannot demonstrate a relationship between overall marginal tax rate reduction and economic growth, WHY are the Republicans so intent on preserving the tax breaks for the top 2% of the nation’s income earners?  George W. Bush may have stated more truth than he meant when he quipped during the 2000 Alfred E. Smith banquet attendees, “This is an impressive crowd. The haves and the have-mores. Some people call you the elite. I call you my base.”

For all of Senator Reid’s efforts to move the Congressional Republicans into the real world of average Americans, nothing has worked thus far to convince them to abandon frivolous pledges from scions of anti-tax activists, which at this point serve little purpose other than to widen the income gap, and to deplete the capacity of middle income earners to generate the aggregate demand necessary to stimulate the economy.

It really can’t be argued that all economic decisions are dictated by human behavior, but neither can it be successfully asserted that an economy is not essentially a very human institution.   There are reasons well beyond the political optics of S. 3412 for Republicans to give serious consideration to pass the bill in the House of Representatives; it’s good economic policy.

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Filed under Economy, Heller, Reid, Taxation

Coffee and the Papers

Breaking News: Yucca Mountain is still dead. [Las Vegas Sun] The Clark County, NV Republicans are still in disarray. [KTVN] [Las Vegas Sun] [WaPo] [KOLO] and [LVRJ]  The Ron Paul supporters are seeking “genuine conservatives.” [LVRJ]  And, do click over to NVProgressive for a description of what’s happening in NV-04.

Hearts and Flowers:  If you can read the President’s remarks at the graduation ceremony for Joplin High School graduates without tearing up just a bit, check your empathy chip and replace if necessary.

Breaking the News:  The typical CEO in the United States was paid $9.6 million in 2011, that’s up 6% from 2010.  Or, to put it another way, the CEO’s were paid what it would take the typical American worker 3,489 years to earn.  [RGJ]  Not to get all attacky on the capitalists or anything, but the worker’s earnings aren’t keeping up with worker’s productivity:

“Manufacturing sector productivity rose 5.9 percent in the first quarter of  2012, as output grew 10.8 percent and hours worked increased 4.6 percent.  The increases in productivity and output were the largest since the second  quarter of 2010. Over the last four quarters, manufacturing sector productivity increased 2.5 percent. Unit labor costs in manufacturing fell  4.2 percent in the first quarter of 2012 and decreased 1.3 percent from the same quarter a year ago.” [BLS]

Productivity is a nicer way to say “working harder and longer to make more stuff” and in this case for the same pay or less for doing so.  In this case “unit labor costs” (wages and benefits) declined while production numbers increased.  Declining “unit labor costs” usually mean declining spending power; declining spending power usually means decreasing demand.

Meanwhile in Xenophobia:  Noted citizen of Xenophobia, Representative Steve King (R-IA), drew criticism for equating immigrants to dogs during a recent town hall meeting. [Politico] This might help to explain why President Obama holds a 61% to 27% advantage with Hispanic/Latino heritage voters?  [The Hill]

The Romney Plan student loan plan “By The Bankers and For The Bankers:”  Here’s the former MA Governor: “Reverse President Obama’s nationalization of the student loan market and welcome private sector participation in providing information, financing, and the education itself.”  Here’s a critique.   And here’s a problem for the defenders of free market capitalism:

One of the nicer features of free market capitalism is the notion that he who takes the risk shall be he who gets the rewards.  That’s why some loans have higher interest rates than others.  The greater the risk taken the more interest should be earned to compensate for taking that risk.  However, the old Bush new Romney version stands that principle on its head.

Under the Bush/Romney plan the banks got a subsidy for making student loans, and then the federal government (using taxpayer funds) guaranteed the loans, so that the Banks earned the interest without actually taking any risk!  What the Obama Administration did was remove the Middlemen.  Since the taxpayers (government) were the ones taking the risks, the taxpayers (government) should be the ones earning the interest.  Interesting how the bankers are now bellowing about losing their “privatized earnings” on the “socialized risks?”  And by the way, there’s no “nationalizing” involved, private banks still make student loans and are perfectly free to do so — they just can’t expect taxpayers to subsidize them and guarantee their collection of interest earnings.

There’s more over at the Nevada Rural Democratic Caucus blog.

Dispatches from the War on Women:  “Five female Democratic senators pressed for legislation Wednesday aimed at closing the wage gap between men and women. The Paycheck Fairness Act would bring up to date the Equal Pay Act, which was signed into law by President Lyndon Johnson nearly 50 years ago.” [Politico] What you should know about the Paycheck Fairness Act here.   Senate Majority Leader Harry Reid (D-NV) will bring the measure up for a cloture vote (Yes, the Republicans are filibustering it) during the week of June 4, 2012.

Dispatches on the Despicable:  One so-called charity on behalf of American veterans has already been revealed as fraudulent. [HuffPo] Worse still, almost half of the 39 veterans charities received failing grades from the American Institute of Philanthropy. [HuffPo] The AIP has a web site Charity Watch which will assist donors who want to make certain their contributions are not misused or squandered. The organization advises donors to beware of organizations which use as much as 80% of their donations for more fundraising. [CW] Charity Navigator also has a ratings guide for organizations.

About that Federal Spending Mythology: Two handy charts —

Bloggy Mountain Breakdown:   H/T to The Sin City Siren for the link to this nifty graphic of the War On Women.   Have you been checking in on The Nevada View lately.  (highly recommended)   If you missed this piece on small businesses and the battle with the Big Box stores at Blue Lyon, click over there now.

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Filed under Economy, education, Immigration, Nevada politics, Obama, Veterans, Women's Issues, Womens' Rights, Yucca Mountain

How Do Financialists Campaign?

We know what a Financialist sounds like, and we probably need to pay more attention during upcoming Nevada elections to how Financialists campaign.  The Financialist Agenda* is relatively simple, but requires a complex set of messages to be successful.   Several of those messages are already in the public domain of political discourse.

Agenda Item One:  The relaxation of regulation and oversight of financial markets.

Two messages are crucial for the success of this item. First, the American public must be convinced that the machinations of Wall Street bankers had little, if anything, to do with the financial crisis of 2008.  Opponents of financial oversight sought to spread the blame for the financial collapse all over the landscape.  Surely, they cried it was  (1) “All Fannie and Freddie’s fault.”  Not that these two institutions covered themselves in glory, especially when they reduced their underwriting standards and sought to find a niche in the burgeoning securitization sector.  However, other than to call for the privatization of the two GSE’s (which were already private) the conservatives offered no suggestions as to how to reform the secondary mortgage market, nor did they set forth specific proposals concerning how to restrain the chaos in underwriting standards  that reigned supreme during the Housing Bubble.

The Financialists also tried to blame the victims — (2) Surely, surely “the Housing Bubble was caused by Greedy People who bought houses they could not afford, and then didn’t want to pay for them!”  Not. So. Fast.   This argument requires that we indulge in massive collective amnesia, forgetting: “…the big subprime issuers (Ameriquest, Countrywide, New Century, IndyMac) were making money hand over fist on their subprime mortgages. Their profits and stock prices soared in the peak years of the housing bubble.”  [CEPR] Fannie and Freddie weren’t handing out those no-doc loans, nor were they issuing those infamous adjustable rate mortgages, which got warehoused offshore, repackaged into CDOs, and sold off, bet against, and otherwise manipulated by Wall Street banks.  Nothing in the Community Reinvestment Act required Wall Street financialists to perform these modifications on home loans.

The mortgages which eventually caused the Bubble to burst were made primarily to homeowners looking for “exurbian” properties [CEPR], the CRA requires banks to lend in inner city areas from which they take deposits.

“The Community Reinvestment Act is intended to encourage depository institutions to help meet the credit needs of the communities in which they operate, including low- and moderate-income neighborhoods, consistent with safe and sound banking operations. It was enacted by the Congress in 1977.” [CRA] (emphasis added)

If we missed the “housing boom” in inner city neighborhoods during the period from 2001 to 2008 it’s because it wasn’t there.   Thus the provisions of the CRA had little, if indeed anything, to do with the creation of the housing bubble, it just happens to be a convenient whipping boy for right wing fanatics who get their talking points from the American Bankers Association and the Financialists on Wall Street.

Secondly, the Financialists would have us believe that “onerous, burdensome, restrictive….” regulations are intrinsically bad for American capitalism.  There’s no small amount of irony in the continual clamor for “transparency and accountability” in government from the Right Wing while they just as enthusiastically beat their drums for less “accountability and transparency” in our financial markets.

For example, the conservatives and their allies in Congress are opposed to the Dodd-Frank Act which requires that major banks prepare a form of Living Will in case they are Too Big But Failing Anyway.   Now, why would bankers be taking exception to this prudent form of institutional financial planning?

“Those in the banking industry tend to take any sort of criticism of orderly liquidation authority as something akin to an insult to their mother, while many in the bankruptcy community draw rather unrealistic analogies between manufacturing plants and repos.”  [DealBook]

Returning to the central question: Why not be required to have and submit a plan for orderly liquidation?  Because then the bank would be required to tally up and report what positions it had in various financial transactions — positions they might not want other parties and counterparties to know.  This might be difficult for some banks which have un-priceable assets still stuck in their books or have taken positions against the interests of their own clientele?

The third proposition required in this narrative is a circular bit of illogical theory that because government agencies (FDIC, SEC, and OCC) didn’t stop the bankers from decimating the American economy by more than $10 trillion and the world economy by some $50 trillion when their Boom went Bust in 2008, then no government regulation will be sufficient — and so we shouldn’t have any.    This argument, of course, requires that we forget about the “regulator shopping” being done by financial institutions during the Boom, the inadequate resources allocated by the Congress to the regulators during the period, and the revolving door between the regulated and the regulators.

If our memories remain intact, achieving objective number one requires a relentless stream of negativity about “the greedy little apartment dwellers  or inner city people (read poor and maybe even African American) who victimized the nice bankers.  Ever more “horrific,” those nice regulators who were so cooperative during the Boom, are now tasked with making the financial system more “accountable and transparent.”

Agenda Item Number Two:  Conflate economic success with financial success.

Life for the Financialists will be ever so much more convenient and pleasant if we would all agree that everything comes with a price tag. They would be even more comforted if the Manic Mr. Market determined that price.

The Financialists have even provided a presidential candidate for whom financial success “proves” he’s a good businessman.   The following analysis from the Wall Street Journal is apparently what constitutes “success” at Bain Capital:

“Amid anecdotal evidence on both sides, the full record has largely escaped a close look, because so many transactions are involved. The Wall Street Journal, aiming for a comprehensive assessment, examined 77 businesses Bain invested in while Mr. Romney led the firm from its 1984 start until early 1999, to see how they fared during Bain’s involvement and shortly afterward.

“Among the findings: 22% either filed for bankruptcy reorganization or closed their doors by the end of the eighth year after Bain first invested, sometimes with substantial job losses. An additional 8% ran into so much trouble that all of the money Bain invested was lost.

Another finding was that Bain produced stellar returns for its investors—yet the bulk of these came from just a small number of its investments. Ten deals produced more than 70% of the dollar gains.

Some of those companies, too, later ran into trouble. Of the 10 businesses on which Bain investors scored their biggest gains, four later landed in bankruptcy court.”

Yes, Bain was “successful” in that it raked in revenues.  However,  note that only TEN deals yielded nearly 70% of those revenues.  Only 13% of Bain’s Big Deals produced 70% of the “dollar gains.”   The definition of “success” also calls for some careful clock-watching.  The Wall Street Journal continues:

“The Journal analysis shows that in total, Bain produced about $2.5 billion in gains for its investors in the 77 deals, on about $1.1 billion invested. Overall, Bain recorded roughly 50% to 80% annual gains in this period, which experts said was among the best track records for buyout firms in that era.

Some of the companies that ran into trouble did so after Bain was no longer involved and new owners had taken charge. Bain declined to provide information on when its involvement in its investments ended.” [WSJ]

Yes, one can have a “good track record” especially if one gets to unilaterally  determine where the track ends.  Mr. Romney was a good Financialist, and Bain was profitable, BUT does this automatically transform him into a good economic policy maker?

The example of Kansas City, Missouri’s Worldwide Grinding System isn’t as comforting.  In October 1993 Bain Capital became the majority shareholder.

“Less than a decade later, the mill was padlocked and some 750 people lost their jobs. Workers were denied the severance pay and health insurance they’d been promised, and their pension benefits were cut by as much as $400 a month.

What’s more, a federal government insurance agency had to pony up $44 million to bail out the company’s underfunded pension plan. Nevertheless, Bain profited on the deal, receiving $12 million on its $8 million initial investment and at least $4.5 million in consulting fees.”  [Reuters] via [ThinkProgress]

Success for Bain, obviously didn’t mean future success for Worldwide Grinding Systems, nor did it improve the future for DDI Inc., American Pad and Paper, Dade International, and LIVE Entertainment. [Think Progress]

For most people the notion of “being a successful businessman” means a person who founds a company, builds it, and then either sustains it for a lifetime or sells it at a profit.  Narrowly viewed, Bain fits this definition, until we note that the function and profitability of Bain Capital didn’t necessarily have much to do with the insuring of the long term viability of the company in question.   Bain’s financial function was to acquire companies, make the deal revenue producing, and after an industry average of 5 1/2 years wash its hands of the deals and move on.  This isn’t “economic policy,” it’s “financialist policy.”

There is a larger point to be made, beyond that of defining the width and depth of what constitutes business success — at some point we need to have the discussion Prof. Michael Sandel calls for in “What Money Can’t Buy.”

“The problem with being able to buy and sell increasing numbers of things is that we devalue the things we are buying and selling — including our foreheads, our health, our children’s education, Sandel argues. Ultimately this corrodes the ties that bind Americans together.”  […]

“The more things money can buy, the more the affluent can buy their way out,” Sandel said. “The affluent lose a stake in the public sphere, and increasingly we lead separate lives.” “That’s not good for democracy, and it’s not a satisfying way to live,” he added. [HuffPo]

Sandel is too polite to say that we are in danger of becoming a nation of cynics who know the price of everything and the value of nothing.   Let’s generalize the message to read, “the more things we privatize the more we devalue our communities and our sense of community,”  and see where this takes us.

Yes, the ultra-rich may purchase top-of-the-line home security systems, behind electronic gates at the perimeters of their estates, and hire additional private security guards for their properties.  The “market” sets a price for private security personnel and equipment.  Having bought all these accoutrements of security, what stake does the 1%’er have in the support of developing an efficient and effective local police force?

Yes, the ultra-rich may purchase the best education money can buy for the offspring.   It would be very instructive at this point to take a gander at the check list for “visiting a private school.”   It also doesn’t take much imagination to guess what the criteria are — smaller class sizes, extracurricular programs, programs to accommodate special needs, “appearance, structure, and composition” of the campus, athletic facilities, science labs, library and media facilities…  Precisely what we’d hope to find in public schools.  However, having secured these top flight schools by paying the price set by Mr. Market, what stake do the ultra-rich have in securing them for the other 99%?

Yes, the rich would have no difficulty purchasing every book they’d ever want to read.  But, what stake would they have in supporting local public libraries?  And, yes, the rich can purchase resort accommodations, so why would they feel the need for public parks?   If Sandel is correct, then the further the 0.5% move from the public sphere, the greater the incentive to privatize the components of that sphere.

If the market sets a price for home security, for education, even for recreation, then why not allow the privatization of all the components of public life such that the indebtedness of the corporations which run our security firms and prisons, operate our schools, and administer our parks can be securitized, shipped into offshore ‘warehouses,’ sliced, diced, and tranched into securitized debt obligations (CDOs) and sold in private placement markets?

What remains is a world without much of a public sphere, one in which the indebtedness of private sewer and water systems, private security firms, and private transportation systems can be monetized, securitized, and when the investors become dis-enamored of the deals in the average 5 1/2 year span the “government” can bail out the enterprise?  What if 22% of our water companies went bankrupt? Our private police forces? Our public libraries, our schools, or our fire departments?  Do we shrug and say — Gee, that’s just the market?

Unfortunately, the popular  image of former Governor Romney as “out of touch,” gives us a superficial impression of a man who has difficulty relating to the issues facing 99% of Americans.  A more complete picture might include an image of a man who has invested heavily in the financial sphere while opting out and dis-investing in the public sphere he seeks to administer.

 

*A financialist believes that finance is the core of capital markets, this doesn’t necessarily mean the core banking operations (the transfer of wealth from areas of surplus to areas of shortage) is the self-same core of operations.  In a financialist system the manipulation of financial instruments of varying levels of complexity becomes more important (as a source of revenue) than the efficient delivery and allocation of capital.

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Filed under 2012 election, conservatism, Republicans, Romney