Tag Archives: Financialism

Yes, He IS That Stupid? Economics for Ultra Dummies

It’s March 5th, 2018 and the occupant of the White House has just announced — by a tweet as usual — “He tweeted out Friday morning that for the United States, a trade war is “good” and “easy to win.” This is July 3rd, 2018 and evidently le crétin economique still believes this.  There are three very simple reasons why this belief borders on insanity:

First: Prices will go up.  Why? Because in order for prices to remain the same or decline the product must be manufactured in the “home country” at a level which would fill the gap between imported and domestic goods.  Buh, buh, buh but — then American manufacturing will increase to fill the gap! Hooray!!  Maybe eventually, and eventually is always the dearest vision of the economic theorist while the rest of us try to buy our beer in aluminum cans rather more immediately, and there’s another little sticky spot.  For some time now DB’s railed about “financialism” and the propensity of the financial markets to “manufacture” and sell “paper.”  DB’s howling notwithstanding, the US has been primarily a “service economy” for some decades (yes, that’s decades) now and while our manufacturing output and sales may be on the wane our “export” of service related products is definitely not.  As in last year we had a $243 billion services trade surplus. [CNN money]  Please don’t try to tell me Mr. “I went to U PA” just not the famous economics school therein… hasn’t at least grasp the nonsensical nature of starting a trade dispute with countries with whom we have service surpluses… oh, wait… he did already.

 The U.S. goods and services trade surplus with Canada was $8.4 billion in 2017. […] Trade in services with Canada (exports and imports) totaled an estimated $91.5 billion in 2017. Services exports were $58.7 billion; services imports were $32.8 billion. The U.S. services trade surplus with Canada was $25.9 billion in 2017. [USTR]

We could speak of regional trading hubs and re-exportation of goods at this point, but let’s not, it would only confuse him.

Secondly, interest rates could easily go up.  There’s already some pressure for increasing interest rates given the increases expected in the federal debt.  We know, that federal debt the GOP’s been screaming about for years? That debt.

“One thing keeping rates in check so far is the demand for US debt from overseas. America’s foreign trading partners, including China, are among the largest buyers of that debt. It added $127 billion to its holdings last year and now owns more than $1 trillion in U.S. debt, making it the largest foreign holder of our debt.

The trade deficit that President Trump decries is one of the reasons for those holdings. It gives foreign countries a powerful incentive to buy that debt, since they have to do something with the dollars they get back on those sales.”  [CNN money]

Shrink the trade gap = less incentive = significant increase in interest rates.

Third reason, American businesses will lose sales.   Much effort is expended reaching deals for the sale of everything from pharmaceuticals to auto parts.  Remember all those sales and marketing divisions? The ones in every major corporation in this country? The departments and divisions pitching products in every corner of the globe?  Let American products become less competitive because of trade restrictions, and then watch foreign buyers find new suppliers.  Business Rule #1: Losing customers is never a good idea.

So, what went on this week?

“Canada over the weekend imposed tariffs on $12.6 billion in U.S. goods in retaliation for U.S. levies on steel and aluminum. On Friday, China is set to slap levies on $34 billion in American goods like soybeans in response to a symmetrical imposition of tariffs by the United States on Chinese goods. Also last week, the European Union sent a letter to the Commerce Department threatening to implement tariffs on $290 billion in American goods if Trump follows through with his desire to crack down on foreign autos.”

Remember not so long ago when DB was bellowing about soybeans?  Yes, DB is back to bellowing about soy beans.

Threatening tariffs may be a negotiating tactic, but at some point the other party will reach a point at which they tire of the gamesmanship.  Reality sets in, deadlines come, and the skirmishes begin.  World Wars can with something as dramatic as the invasion of Poland or the bombing of Pearl Harbor; however, World War I began with an assassination in Sarajevo.  The US Civil War can be said to have begun with attacks and counterattacks in Kansas.  The problem with skirmishes is that unless they are carefully controlled they can spiral beyond retrieval, the results are usually not pretty.

There is also the poker element; eventually a bluff will be called.  We’re not far from the Canadians and Chinese calling our bluff, the EU as well for that matter.   Someone in a position of responsibility ought to have the wisdom to know when to (and not to) bluff; when to fold; when to up the ante.  In short, there has to be some adult supervision.  My way or the highway is almost never a strong negotiating position.  Bullies often have accomplices, but they rarely have wing-men.

Thus the Business Roundtable, the US Chamber of Commerce, and other organizations not generally perceived as bastions of liberal thought will decry the Administration’s tariff and trade policies, academics will refer to the Smoot Hawley Tariff Act of 1930, and citizens will watch the price of can of beer increase as the cost of the aluminum can increases.  And all because  le crétin economique thinks in bumper stickers.

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Filed under Economy, Politics

The Great Bamboozle: GOP Tax Plan Targeted Right At the Middle Of The Top 1%

There are some amazing feats of verbal legerdemain going on as Republicans try to explain why their Jam It Through Tax Plan isn’t a real bag of snakes.

Oh, don’t worry about our plan…people want to see an improving economy…people want to see more in their paychecks…now 90% of the people can file a simple return…there’s a lot of wishful thinking going on here, and most of it is wrong.  The political advertising is going to write itself in 2018.

Senator Maria Cantwell (D-WA) is correct to say that “haste makes waste,” and in its haste the GOP is about to unload both barrels into their own feet.

The tax cuts will explode the debt.  Remember all the times the GOP told us that debt is a problem?  It certainly can be.  When there was a Democrat in the White House the Heritage Foundation positively screamed about the impact of increasing the national debt:

Current and projected increases in government debt, cutting into future economic growth rates, also mean slower future growth of government revenues. Even as future interest expense rises as taxpayers are called upon to service all this debt, growth in government revenues will slow, leaving less available for other priorities, such as national security and economic security, education, and innovation-driving research.

The only difference now is that the accumulated deficits will be driven by a Republican penchant for rewarding the investor class with amazing tax cuts.  Now the argument is reversed: there will supposedly be More revenue, More innovation, More funds for national security and research.  No there won’t. And we don’t need to kid ourselves, because the same basic economic elements are going to underpin the new tax/budget structure that are girding the current one. 

Nothing in the tax bill reverses the current emphasis on short term gains. The GOP is fond of pointing to gains in the stock market as “proof” of its stewardship of economic growth.  There’s an obvious problem with this, as noted by the Chicago Tribune:

Nearly half of country has $0 invested in the market, according to the Federal Reserve and numerous surveys by groups such as Gallup and Bankrate. That means people have no money in pension funds, 401(k) retirement plans, IRAs, mutual funds or ETFs. They certainly don’t own individual stocks such as Facebook or Apple.

So, nearly half the population has Zilch invested in The Market. What about the others?  While people don’t generally have elephantine memories, 2008 isn’t that far in the rear view mirror, and that’s part of the reason about 54% of Americans have some sort of investments, as opposed to the 62% prior to the Big Crash of 2007-08.

Further,  there’s some recent research indicating the decline isn’t over.

Rosenthal and Austin’s main focus was the precipitous decline of taxable investment accounts. In 50 years, the amount of stock owned by individual investors and funds outside retirement and nontaxable accounts such as 529 college-savings plans has dropped off a cliff — to about 25% in 2015 from over 80% in 1965.

But wait, there’s more:

The other startling finding was the growth in foreign investment in the US stock market. What was once a small sliver of the makeup now accounts for a quarter of all stock ownership at $5.5 trillion. Part of this may be due to increasing wealth in foreign countries, but, as the researchers noted, it could also be influenced by corporate inversions, in which foreign-domiciled firms have large direct holdings of US-based stock.

So, we have a structural situation in which the percentage of individual investors is declining precipitously, the percentage of institutional investors is increasing, as is the percentage of foreign investors.   It doesn’t take much effort to perceive that the produce of stock market gains aren’t going to benefit most Americans, but should assist institutional and foreign investors.

But surely those institutional investors will be looking for long term investment prospects and will act as a curb on short term pursuits as exemplified by hedge fund operations?  Nupe.  That part of the structure hasn’t changed either.  It’s not happening:

Across the world, a clamor is rising against corporate short-termism—the undue attention to quarterly earnings at the expense of long-term sustainable growth. In one survey of chief financial officers, the majority of respondents reported that they would forgo current spending on profitable long-term projects to avoid missing earnings estimates for the upcoming quarter.1

Critics of short-termism have singled out a set of culprits—activist hedge funds that acquire 1% or 2% of a company’s stock and then push hard for measures designed to boost the stock price quickly but unsustainably. 2 The typical activist program involves raising dividends, increasing stock buybacks, or spinning off corporate divisions—usually accompanied by a request for board seats.

If corporations increase profitability I am hearing, “raising dividends, increasing stock buybacks, and mergers, acquisitions, and spin offs.  I am NOT hearing investment in plant expansion, workers’ wages, and company benefits.  And, I’m certainly not hearing anything about encouraging the promotion of taxable investment accounts, the kind that  puts revenue into the Nation’s coffers.

Nothing in the tax bill addresses wage stagnation.   And, no, this is not a myth:

“After adjusting for inflation, wages are only 10 percent higher in 2017 than they were in 1973, with annual real wage growth just below 0.2 percent.[1] The U.S. economy has experienced long-term real wage stagnation and a persistent lack of economic progress for many workers.” […] ” The portion of national income received by workers fell from 64.5 percent in 1974 Q3 to 56.8 percent in 2017 Q2.”

Ouch.  Somehow, the Growth Fairy is supposed to be so enamored of tax cuts for corporations and wealthy individuals that more greenbacks will float down and squirm into the pay packets of average American workers.  Probably not, and putting more dollars into the pockets of institutional investors — foreign and domestic — isn’t going to be all that helpful either.  So, not only does the tax plan not address short term-ism, it doesn’t really address paycheck issues either.

But Wait! How about increasing the child tax credits and standard deductions?  It’s no secret that those people earning $75,000 or less aren’t going to be the big winners in this tax bill.  “The tax bill Senate Republicans are championing would give large tax cuts to the rich while raising taxes on American families earning $10,000 to $75,000 over the next decade, according to a report released Thursday by the Joint Committee on Taxation, Congress’s official nonpartisan analysts.” [WaPo]

But, but, but…Your tax filings will be simpler!  Simple doesn’t matter if you aren’t getting your taxes cut.  And, if the tax preparation deduction is eliminated then there are going to be some mom and pop franchises in serious straits — those just happen to be local small businesses as well.

But, but, but…jobs won’t go overseas!  You can only dream.  The arguments get a bit into the economic weeds, into territorial taxation, but the bottom line is clear:

This might seem like a small difference, but the design of their global minimum tax creates perverse incentives for companies to offshore jobs and shift profits to tax havens—outcomes that a per-country minimum tax would avoid.

Perverse indeed, especially if one expects the new tax plan to provides incentives for companies to expand operations domestically.  Nothing in this plan actually and directly promotes domestic expansion in the economy — it’s all indirect and absolutely hopeful, perhaps even illusory if not downright delusional.

In the meantime, Medicare will be facing cuts of about $25 billion.  There will be calls to “reform” Social Security” in order to reduce the debt — translation: Higher requirements for fewer benefits.  There will be calls to cut SNAP programs — not a drop in the bucket needed to fill the debt hole; and, educational funding — another squeeze on programs that actually help people eventually earn higher wages.

This won’t prevent Republicans like Nevada’s Senator Dean Heller from enjoying the passage of a “great tax cut,” while he hopes to high Heaven no one in the state notices cuts to Medicare, Medicaid, Childrens’ Health Insurance, and no one talks about increased premiums in the individual health insurance market.  Perhaps no one will notice that graduate students at UNR and UNLV are supposed to pay taxes on tuition waivers while they’re actually earning minimum wages for part time jobs?  No one will notice the reduction in home mortgage interest deductions?  No one will observe the reduction or elimination of deductions for major medical expenses — much of which will be out of the pockets of the elderly.

My guess is that Nevadans will notice.  The political ads may, indeed, write themselves.

 

 

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Filed under health insurance, Heller, Nevada economy, Nevada politics, Politics, Taxation

Fantasy Island: GOP on Corporate Taxation

There is a mandatory mantra to be recited by all proponents of the Republican tax cut plan:  “It will make corporations more competitive. It will raise employee wages.  It will make corporations more competitive. It will raise employee wages. It will make corporations more competitive.  It will raise employee wages. This really requires some unique methodology and some very creative logic. [FC]

First, there’s the obvious proposition that when Republicans speak of “competitiveness” they are addressing a global market for goods and services. Further, being competitive usually means being able to offer goods and services at lower costs to customers and clients.  And, being able to offer goods and services at lower costs means having a grip on factors which increase costs — things like labor.  If there isn’t any obvious connection between “competitiveness” and increasing wages then how can the contentions be contorted to make the mantra lucid?  We probably can’t, at least not until we agree on what we mean by “competitive.”

Whether a nation is competitive hinges instead on its long-run productivity—that is, the value of goods and services produced per unit of human, capital, and natural resources. Only by improving their ability to transform inputs into valuable products and services can companies in a country prosper while supporting rising wages for citizens. Increasing productivity over the long run should be the central goal of economic policy. This requires a business environment that supports continual innovation in products, processes, and management. [HBR]

If we accept the Harvard Business School’s thesis, then the policies we should be adopting to promote competitiveness would be (1) conducive to research and development; (2) that which promotes greater efficiency in the delivery of services and the manufacturing of goods; and (3) that which promotes better management practices.  I don’t see “tax cut” in this list.

Tax policy that encourages research and development, promotes efficiency, and encourages better management practices, might be a start.  However, that doesn’t seem to be what the White House and Congress have in mind.  For example, there’s the tax repatriation scheme — which was tried in 2004, and the result as reported by the Wall Street Journal was:

“The 15 companies that benefited the most from a 2004 tax break for the return of their overseas profits cut more than 20,000 net jobs and decreased the pace of their research spending, according to report from the Democratic staff of the Senate Permanent Subcommittee on Investigations released Monday night.”

“Decreased spending on research” doesn’t fit the formula for increased competitiveness.  Far from it, as in antithetical.  How about promoting long term visions on the part of corporate management?

“Even as managers’ geographic horizons have broadened, their time horizons appear to have shortened. Shareholder activism, stock-based incentives, and declining managerial tenure surely injected new, needed discipline into American business and had some positive effects. However, financial markets and executive compensation practices that reward quick fixes and focus attention on “this quarter’s numbers” can tempt managers to move business activities to whatever location offers the best deal today rather than make the sustained, location-specific investments required to boost long-run productivity. ”  [HBR]

Returning to a consistent theme on this site, short term “financialist” perspectives won’t promote American competitiveness.  However, nothing in the guidance on tax cuts thus far  demonstrates any broad interest in long term productivity.  Indeed, it appears to move right along, in step, with the financialist rhetoric.

So, the Republicans and corporate allies argue that cutting corporate taxes will increase wages.  Before we get lost in the weeds there is a general point to be made about the corporate tax burden and employees:

“Three nonpartisan organizations — the Joint Committee on Taxation, the Congressional Budget Office and Tax Policy Center — all say the majority of the corporate tax burden falls on shareholders, not workers. The Treasury Department, which Mnuchin now heads, reached that same conclusion in 2008 during the George W. Bush administration.”  [FC]

To make a long story a bit shorter — if less of the corporate tax ‘burden’ is hefted by the employees, then the less of a ‘tax break’ the employees will receive if the corporation pays less in taxation.  Some work is required to make the data fit the results desired by the Republicans:

“…the CRS states that while “a number of more recent theoretical studies find that labor can bear the majority of the [corporate] tax burden” those studies “appear to rely critically on particular assumptions that drive the results. When these assumptions are relaxed the burden of the corporate tax is found to fall mostly on capital — in line with the traditional analysis.”   [FC]

Thus, only in the highly theoretical fantasy land of Republican economists will we find support for the notion that lower taxes automatically make our businesses more competitive, and lower corporate taxes will necessarily make businesses pay higher wages.

Unfortunately, none of this will stop the Republican propaganda machine from cranking up the volume and increasing the repetition of their mantra, until it is picked up by Republican members of Congress who will recite it in turn to their constituents.

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Filed under Economy, Politics, Taxation

Anti-Choice: The Rebirth of Deregulation

I don’t think anyone in the state of Nevada doesn’t know what happened the last time Wall Street was left unfettered.  The Bubble splattered all over the state.   The offcast included 167,000 empty houses. [USAToday]  Nevada’s unemployment rate soared to 12.8% by December, 2009.  By October 2010 the state’s unemployment rate was 14.4%.  And now the House of Representatives is on track to vote on H.R. 10, the “Choice Act” to dismantle the financial regulatory reforms enacted in the wake of the Housing Debacle and deregulated banking disaster.

Two procedural votes are on record to move this bill forward — House vote 290, and House vote 291 — and Representative Mark Amodei voted in favor of bringing this bill to a vote by the full House.   Watch this space for an update on the vote for passage.

Update:  On House vote #299, Representative Mark Amodei (R-NV2) voted along with 232 other Republicans to essentially gut the financial reform regulations enacted in the wake of the Housing Bubble debacle. (HR 10)

Representatives Kihuen, Rosen, and Titus voted against this deregulation bill.

Comment: Be aware of Republican representatives to frame this vote as one against Bank Bailouts and “Too Big to Fail.”   In a polite world we’d call this something euphemistic like “south bound product of a north bound bull.”  The Dodd Frank Act requires banks to have a plan for unwinding failing banks, and bankers have screamed to the heavens about provisions to allow outside oversight of banking management.  More simply, if you approve of the antics of Wells Fargo — then you’ll love the “Choice Act,” a bill which gives banks the “choice” to skewer its customers and investors.

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Filed under Amodei, Economy, financial regulation, Nevada economy, Nevada politics, Politics

Republican Myths and Legends

Good morning, another day another 24 hours of trumpster fires, lit by the tinder of well worn Republican mythology.

The Economy Works In Reverse.  Let’s guess that the whopping increase in defense spending will be covered by an increase in “economic growth.”  I doubt very seriously that my utility company would be much impressed by my assertion that increases in my power bill will be paid for by my getting up an hour and a half earlier every morning.  The argument would go “because I get up earlier I will be more productive, and if I am more productive then my earnings will increase. If my earnings increase then I will have more money to spend, and therefore my bills will ‘pay themselves.'”  Gee, perhaps if I aroused myself two hours earlier I could trade my vehicle in for a Cadillac CTS-V? Somehow, I don’t think my banker will be sufficiently enamored of my presentation to hand over the money.

There’s another facet of the administration’s fantasy economy which we need to discuss, at least two ways in which while waving its firearms it shoots itself in the foot.  Round one into the metatarsal — anti-immigration rhetoric and action.  Before theorizing about economic growth, the GOP might want to look at economic activity in our major urban centers, which depend in no small part on their immigrant communities.

Round two into the navicular bone comes compliments of heavy budget cuts. For the millionth time in this blog, there’s a formula for the gross domestic product.  Once more C+I+G + (Ex-IM) = GDP.  That G stands for government spending, and not just defense spending.  Want to expand the consumer economy? Then remember that every dollar spent on the SNAP program almost doubles in economic activity.

Round three into the phalanges: Seek to limit increases in the minimum wage.  Evidently it has not occurred to GOP economists that people do not spend money they do not have.  They can accumulate debt (which Wall Street is only too happy to securitize) up to a point, but the point is quickly reached. Delinquency happens, leading to defaults, leading to the unraveling of all those beautifully packaged tranches of securities.  We know what happened last time.

Round four into the cuboid, continue the progress of income inequality, the trends of which promote the accumulation of wealth into fewer hands, creating a surplus to be used not for corporate promotion and expansion but for the collection and trading of risk diversion securities or for corporate buy-backs which do NOT generate economic growth in the overall economy but bolster the financial sector.  Have I been railing about Financialism before? Constantly?

Four shots into the foot and we’re not walking, much less running, anywhere towards overall economic prosperity.  It’s the return of the old, stale, Trickle Down Supply Side Hoax nurtured and pampered by right wing think tanks and GOP orthodoxy.

And now, we should return to a discussion of why we need an independent commission to investigate the political and economic ties of the Trump-Bannon regime to the Russian government. We might also want to avoid the trap of calling for a special prosecutor, which would only have the authority to investigate outright crimes, when what we need immediately is an investigation into the possibly profound security risks in the executive branch.  But that’s a discussion for another post.

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Filed under conservatism, Economy, financial regulation, Politics, Republicans

The Warning Flags are Up: Trumpsterism and Corporate Debt

Corporate Debt Chart 2016

No, you don’t need to get out the magnifier to get the gist of this chart, but if you’d like to see the original click here.  Simply consider the trajectory of the blue line indicating the level of non-financial corporate business debt – as in UP.  Nevadans may want to gaze at this with some caution, because (to borrow and vandalize a fine old saying) the last time the national economy caught a cold, Nevada got pneumonia.  We can, and should, look at the comparison in the trends of corporate debt, government debt, and household debt:

Corporate Government Debt Levels

In the last five years government debt has dropped precipitously, (don’t show this chart to Uncle Fustian at your holiday dinner it’s likely to jolt his fact free universe) household debt has declined, and “business debt” is way up.  There are all manner of reasons for an increase in corporate debt, and some of them are very productive – such as expansion of plants and factories – others not so much.  We’re in “maybe not so much” territory.

Part of the pile of current corporate debt is the result of stock buy backs, a boomlet of sorts in recent times:

“Over the first six months of the year (2016) S&P 500 companies paid out 112 percent of their earnings in the form of either dividends or share buybacks. That, Damodaran argues, is the kind of figure you might expect to see when a recession had suddenly crimped company cashflows, not during a very long-running, if tepid, expansion.

The last time companies were paying out this much more than they are taking in was in 2008, when the financial crisis hammered revenues faster than companies could cut buybacks and dividends.”

… Certainly the very idea of buybacks has come under increasing scrutiny. While a share buyback improves per share earnings performance, it is a piece of financial engineering which increases leverage but does nothing to improve a company’s product offerings or market position, much less its long-term prospects. Indeed, the vogue for buybacks has happened at the same time as an otherwise puzzling lack of corporate investment, especially given that corporate profit margins are still high by historic standards.” [Time] (emphasis added)

There’s nothing too terribly “puzzling” about this state of affairs.   Why would companies indulge in “financial engineering” while profits are high?  Could it be that the “wealth” of the company is financially anchored rather than structurally? Consider this Household debt service as a percentage of disposable personal income  chart from FRED:

Household Debt trends 2016

Superficially, we could argue that the American consumer has done some belt tightening since the Recession of 2007-08 and there’s less money being paid out in debt service from the family coffers – but, we’d also have to be realistic and see that the debt levels are already too high.

Yes, household debt levels relative to the GDP have been declining, but it remains higher than it’s been for almost all of post-war history, and by post-war we mean World War II. [Slate]  

What else could be depressing loans? Other loans – such as Student Debts. Again, we have a picture of that from the Federal Reserve:

Student Loan Trends FRED

What we see here is an increase in student loans owned and securitized, which are outstanding: from Q1 2006 at $480.9670 to Q3 2016 at $1,396.3355.  Student loan indebtedness now exceeds credit card debt, auto loans, and other non-mortgage debt. [Slate] What’s happening here?  Perhaps those corporate profits aren’t predicated on the increasing number of consumers flocking to their doors?  Perhaps not when consumers have an annual household credit card debt of $16,000; a $27,000 average of auto loans; and $169,000 in mortgages? [Slate]

Then, there’s the matter of real household income in the US.  In the first quarter of 1999 it hit a high of $57,909 and hasn’t been back since. The current figure is $56,516. [FRED]   Little wonder there’s some “financial engineering” going on in the corporate world.   That “financial engineering” especially in terms of stock buybacks simply doesn’t make any long term sense:

“No matter how low-interest rates get, it is hard to justify the raising of corporate debt to purchase outstanding stock. Longer-term debt should be used for longer-term needs, e.g. capital expenditures. But from a macroeconomic view, raising stock prices does not figure in promoting economic growth or general well-being—it is simply financial engineering serving the interest of only shareholders and management. No new jobs are created and no new capital investment is undertaken in a world of corporate buybacks. Investors are simply bribed with their own money.” [FinSen] (emphasis added)

So, where does Trumpsterism come into play?  First, let’s assume, given the preliminary appointments to Commerce and Treasury, that the emphasis in this administration won’t be on reducing student debt and regulating the securitization of corporate debt.  Let’s also assume that a Corporate Tax Holiday in the form of “re-patriated” corporate earnings will be a feature.  How is that likely to be spent?

The Financial Times reports: “Much of the debt sold by companies in recent years has been used to buy back their own shares, pay out higher dividends or finance big mergers and acquisitions. While these buybacks funded by cheap borrowing have boosted earnings, a missing ingredient has been spending on investment to build their businesses.”

Why not? If the consumers (read the other 99% of the US population) aren’t clamoring to spend more (read creating demand) then the “financial engineers” will boost themselves by … buybacks, higher dividends, and mergers and acquisitions.  Or…

“A tax holiday that prompts repatriation of cash held overseas by global US companies, a move investors expect during the Trump administration, could help boost investment. Mr Milligan says it is unclear whether companies will plough any repatriated profits into capital investment or simply boost buybacks.“Repatriation could flow through fairly quickly and lead to a noticeable rise in share buybacks.” [FinT]

In less diplomatic terms – here we go again.  Corporations, getting tax breaks and subsidies, faced with a market in which there is declining or stagnating consumer capacity, find ways to engineer their financial statements.  Nevada has seen this movie before, and it didn’t end well for us.

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Filed under Economy, financial regulation, Nevada economy

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

Wall Street May Not Be The Enemy: It’s the friends we need to watch

“Wall Street” is an extremely elastic catch phrase, useful for politicians of all stripes.  For example, we have Senator Dean Heller (R-NV) reminding us at every possible moment that he “voted against the bail out.” And, we have politicians from the other side of the aisle excoriating the traders for all the ills of modern America.  Both are off the mark.

Wall Street sign

First, beware the thinly veneered populism of Senator Heller.  Yes, he did vote against the bailout – an extremely safe vote at the time – but, NO he hasn’t stopped being the Bankers’ Boy he’s always been.  Let’s remember that while he was offering himself as the Little Guy’s Candidate he was voting on June 30, 2010 to recommit the Dodd-Frank Act to instruct conferees to expand the exemption for commercial businesses using financial derivatives to hedge their risks from the margin requirements in the bill.  Then, on June 30, 2010, he voted against the conference report of the Dodd-Frank Act.  Heller wasn’t finished.

In 2011 he and then Senator Jim DeMint (R-SC) introduced S. 712 – a bill to repeal the Dodd-Frank Act.

“What S. 712 does is to (1) repeal measures which require banks to have a plan for orderly liquidation (another word for bankruptcy), (2) repeal requirements that banks keep records of transactions which would need to be transparent in case an “orderly liquidation” is in order, (3) repeal the establishment of an oversight committee to determine when a bank is becoming “too big to fail,” and is endangering the financial system — an early warning system if you will.  The new requirements governing (4) Swaps would also be repealed, along with the (5) Consumer Protection bureau.” [DB 2011]

Few could have been more obviously promoting the interests of Wall Street traders than Heller and DeMint. [DB 2012]  Few could have been more readily apparent in their enthusiasm to protect the financialists from the provisions of the Dodd-Frank Act including the Volcker Rule.

Volcker Rule

A word about the Volcker Rule:

“The Volcker Rule included in the Dodd-Frank Act prohibits banks from proprietary trading and restricts investment in hedge funds and private equity by commercial banks and their affiliates. Further, the Act directed the Federal Reserve to impose enhanced prudential requirements on systemically identified non-bank institutions engaged in such activities. Congress did exempt certain permitted activities of banks, their affiliates, and non-bank institutions identified as systemically important, such as market making, hedging, securitization, and underwriting. The Rule also capped bank ownership in hedge funds and private equity funds at three percent. Institutions were given a seven year timeframe to become compliant with the final regulations.” [SIFMA]

Yes, Senator Heller et. al., if the Dodd-Frank Act is repealed then the financialists on Wall Street may go back to gleefully trading all manner of junk in all kinds of packaging with no limits on bank ownership of hedge and private equity funds.  Let’s remind ourselves at this point that capitalism works.  It’s financialism that’s the problem.  Under a capitalist form of finance resources (investments) are moved from areas (funds) with a surplus to areas (businesses) with a scarcity of funds.  Under a financialist system capital (money) is traded for complex financial instruments (paper contracts) the value of which is open to question.  Not to put too fine a point to it, but the “instruments” seems to have whatever value the buyer and seller agree to whether the deal makes any sense or not.  The Dodd-Frank Act doesn’t forbid “financialism” but it does put the brakes on.

Notice, it puts the brakes on, but doesn’t eliminate the old CDOs.  Nor does it prevent the CDO with a new name: The Bespoke Tranche Opportunity.  It works like this:

“The new “bespoke” version of the idea flips that business dynamic around. An investor tells a bank what specific mixture of derivatives bets it wants to make, and the bank builds a customized product with just one tranche that meets the investor’s needs. Like a bespoke suit, the products are tailored to fit precisely, and only one copy is ever produced. The new products are a symptom of the larger phenomenon of banks taking complex risks in pursuit of higher investment returns, Americans for Financial Reform’s Marcus Stanley said in an email, and BTOs “could be automatically exempt” from some Dodd-Frank rules.” [TP]

Zero Hedge summed this up: “This is the synthetic CDO equivalent of a Build-A-Bear Workshop.” We’re told not to worry our pretty little heads about this because, gee whiz, CDOs got a bad reputation during the Big Recession of 2007-2008, when they were just “hedging credit exposure.”  Yes, and ARMs got a bad reputation when they were just putting people in houses… Spare me.

And, we’d think that after the CDO debacle of 2007-2008, some one might have learned something somehow, but instead we get the Bespoke Tranche Opportunity and a big bubble in really really junky bonds.   That would be really really really junky bonds:

“Junk bonds are living up to their name right now. As we have noted in the past, the lowest-rated junk bonds may have inflated a $1 trillion bubble at the bottom of the debt market. The thing is, it never should have gotten that way.” [BusInsider]

Indeed, back in the bad old days no one could issue CCC bonds.  Now, we have Central Banks supporting Zombie Companies, low yield Treasuries making investors look to more “speculative” debt, and more demand for high yields meant that purveyors of Junk found a market for their garbage. [BusInsider] And, of course, someone out there is hedging all this mess.

Lemmings Here we meet the second problem with financial regulation in this great country.  Not only would the Bankers’ Boys like Senator Heller like to go back to the days of Deregulation, but the Financialists are hell bent on Yield! High Yield!  Even if this means supporting Zombie Companies which should probably just die already; even if this means allowing the sale of Bespoke Tranche Opportunities; and, even if this means selling bonds no one would touch only a few years ago.  The quarterly earnings report demands higher yields (As in: What Have You Done For Me In 90 Days Or Less) and investors jump like lemmings off the cliff.

We’ll probably keep doing this until someone figures out that in these schemes the chances are pretty good that “getting rich fast” more often means going broke even faster.  Thus the financialists package Bespoke Opportunities and C (for Crappy) Bonds.

Said it before, and will say it again:’  What needs to be done is —

  • Continuing to restrict the activity of bankers who want to securitize mortgages, under the terms of existing banking laws and regulations.
  • Continued implementation of the Dodd-Frank Act.

To which we should add, “restrict the creation and sale of artificial “investment” paper products which add nothing to the real economy of this country, and instead soaks up investment funds, and creates Bubbles rather than growth.

 

Read more atSIFMA, “Volcker Rule Resource Center, Overview.” Desert Beacon, “Deregulation Debacle,” 2012.  Desert Beacon, “Full Tilt Boogie,” 2011.  Think Progress, “High Risk Investments,” 2015.  Zero Hedge, “The Bubble is Complete,” 2015.  Bustle, “Is the ‘Big Short’ Right?, 2016.  Bloomberg News, “Goldman Sachs Hawks CDOs,” 2015.  Huffington Post, “Big Short, Big Wake Up Call,” 2016.  Market Mogul, “BTO, Deja Vu” 2016.  Business Insider, “Trillion Dollar Bubble,” 2016.  Business Insider, “Bubble Ready to Burst,” 2016.  Seeking Alpha, “OK, I get it, the junk bond miracle rally is doomed,” 2016.  Wolfstreet, “CCC rated junk bonds blow past Lehman moment,” 2016.

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Filed under Economy, financial regulation, Nevada politics, Politics

Break Up The Bank Bandwagon, or how to be unhelpful?

Break Up Big Banks bandwagon  Much of the debate on the Democratic Party side of the primary silly season is related to Wall Street – easy to demonize, more difficult to understand, and altogether more complicated than  sound-byte sized portions of political coverage will allow.  In other words, H.L. Mencken was probably right: “For every complex problem there is an answer that is clear, simple, and wrong.”  Let’s start with the proposition that our economic issues can be resolved by breaking up the large banks.

Yes, 2007-2008 still stings. The Wall Street Casino that created financial market chaos was especially harmful in Nevada, one of the “sand states” in which the real estate bubble was augmented by avarice and the Wall Street appetite for securitization of highly questionable mortgage lending products, and practices.  Certainly, the call to break up the big banks resonates with a significant portion of the national as well as the Nevada population.   However, this “clear and simple” solution may not be the panacea on anybody’s  horizon.  Here’s why:

From a consumer’s prospective, big is not always “badder.”  I, for one, like the idea that my debit card is accepted in convenient locations throughout the country.  I’m technologically challenged so I don’t avail myself of many advances in remote deposits, and other mobile banking services, but I sympathize with those who do.  I also like making my primary banking decisions for myself, and I’m not – as a consumer/customer – particularly happy about the prospect of being dropped by my bank because it is “too big”, i.e. it has too many customers.   And, here we come to a second issue.

How do we define “big” and “too big?”  If we are defining “big” in terms of the amount of deposits then JPMorganChase, Bank of America, Citigroup, Wells Fargo, and USBankcorp  (the top five in total deposits) are targets for the break up.  Thus, if we “break up” any or all of these five based on the “size” – either the total assets or the total value of deposits – then how many customers must deal with the transition costs of moving their bank accounts?

Do we mean breaking up as in reinstituting the old Glass Steagall Act, and separating commercial and investment banking?  This action wouldn’t limit the banks based on assets or deposit values, but instead would constrict their banking activities.  This has some appeal, perhaps more so than just whacking up banks based on the size of their assets and deposits, but this, too, opens some questions.

One set of questions revolve around what we mean by “banking services?”  For example, if a person has an account with Fidelity investments, and one of the services associated with that account is a debit card or a credit card, then does this constitute a “bank-like” service?   There are banks offering brokerage accounts, and insurance services – reinstating the provisions of Glass Steagall would mean a customer would have to give up some services to retain others – or perhaps be dropped as the financial institution made its decision as to the camp it was joining – the commercial or the investment one.  If a person likes the idea of consolidating investment and commercial services, and doesn’t – for one example – have much if any need for things like certified checks, then an investment account with some “bank like” services could be the best option. For others, who like the idea of a “life-line” bank and the notion that some other ancillary services may come with it, then the traditional route would be more enticing.  However much a person may like the sound of “bring back Glass Steagall” there are situations in which this would mean some significant inconvenience and costs for customers and clients.

Another point which ought to be made is that all too often Glass Steagall and the Volcker Rule get mashed together as if they meant the same thing, or something close to it.   Let’s assume for the sake of this piece that what we all really want is a banking system which does not turn deceptive practices into major revenue streams, and which doesn’t allow banks to use deposits to play in the Wall Street Casino.

If this is the case, then it might well do to let the Dodd Frank Act have a chance at more success.  For all the political palaver about this 2010 act, it has been successful.  As Seeking Alpha explains:

“Dodd-Frank did several things that promoted the culture change and reduced the likelihood that a large American bank will fail: (1) annual stress tests that forced a focus on risk management not only among risk managers but at every level of the bank; (2) establishment of the Consumer Finance Protection Board (CFPB), which has primary responsibility for consumer protection in the financial field without the conflicts of interests naturally experience by the banking regulators; (3) the Volcker Rule that removed proprietary trading from bank holding companies, thereby facilitating the cultural reform that I referred to above, and reducing the level of risk in banks’ assets; (4) enhanced capital requirements for large banks, which addressed the major weakness that permitted mortgage losses to turn into a financial debacle in 2008; and (5) living will requirements for large banks, which while perhaps unnecessary, are having the salutary effects of increasing liquidity in stressful situations and decreasing organizational complexity and thereby making big banks more possible to manage.”

In short, if the object is to make banks safer, better managed, and less likely to get themselves into the liquidity swamps of the pre-Dodd Frank era, then the act does, in fact, make the grade.   Those who would like a return to the bad old days, when banks could wheel, deal, and deceive, will find solace in the slogans of many Republican politicians calling for the repeal of the Dodd Frank Act.

Yet another set of questions relate to what breaking up the banks is supposed to accomplish; or to accomplish beyond Dodd Frank.  It’s easy to say that if a bank is too big to fail it is too big to exist. However, we still haven’t dealt with exactly what it means to be “too big.”  Like it or not, we do have a global economy.   Let’s take one example: “Global businesses want global banks. This makes intuitive sense for companies that manufacture, distribute, and sell products globally. 3M, for example, derives a majority of its sales from outside the United States, operates in more than 70 different countries, and sells products in over 200 countries.” [Brookings]

What does 3M do? Operate through a system of regional banks? (and increase costs)  Or, does 3m start using a foreign bank?  What does this do to American market share in global banking? And, we’re not just talking about 3m, what about Intel (82.4% sales overseas), Apple (62.3% sales overseas), General Electric (about 52% sales overseas in Africa, Asia, and Europe), Boeing (58.3% sales overseas), and Johnson & Johnson (53.2% sales in Europe)?  [AmMUSAToday]

At the risk of sounding too nuanced for blog posts of a political bent, I’d offer that the Break Up The Banks bandwagon has been on the road long enough, and has been a distraction from issues that have cost the American middle class (and those trying to achieve that level of financial security) dearly in the last 40 years.

Breaking up the big banks will not assist in the organization of American workers so that the power of the owners is balanced by the power of the workers.   What we DO need are government policies which support the unionization of employees. Policies which increase the minimum wage. Policies which improve wages and working conditions. And, policies which make education and training affordable.

Breaking up the big banks will not assist in establishing fair trade with the rest of the world. What we DO need are policies which promote the interests of American manufacturing, by American workers, in American plants.  We need policies which affirm our support for environmental responsibility.  We need policies implemented which promote modern technology and modern energy sources; with American ingenuity and labor.

Breaking up the big banks will not reform a financial system which too often rewards its components for short term gambling as contrasted with long term financial vision.  It will not replace the transformed and corrupted Shareholder Theory of Value among managers.  What we DO need is a system which rewards investment and replaces the fantasy of “Trickle Down” economics.

Perhaps it’s time to find a new bandwagon?  One that’s going in the desired direction, and not merely headed toward a successful election day performance?

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Filed under banking, Economy, financial regulation