CHANGING AMERICA’S MIND - Chapter 1 - Part 1
INVESTMENT – the word simply rings with respectability. It’s what those other people do, those pillars of the community. It’s what we should do. Save and invest. We all know this is the prudent thing, the responsible thing to do. It’s the way to get ahead, to build a future for ourselves and our families, to move beyond living paycheck to paycheck. We’ve been told this since our youth and the media extols the virtues of those who do. Not only do they do well for themselves; they build enterprises that provide jobs and new inventions and needed products and services for others. That’s the American Way. It built our country’s prosperity. Solid, respectable, responsible, important, trustworthy, and vital – those are some of the virtues attributed to investors. And those who truly invest deserve such admiration. But most Wall Street transactions are not investment; they’re speculation, gambling, and even theft. And not just recently; it’s been that way for a long time. It is built into the structure and nature of such markets and the eternal quest to make more money quickly by doing and risking less.
Think about it. Where do the proceeds from these Wall Street transactions go? When I ask my students where the money from stock trading goes, over half of them say that it goes to the companies whose shares are being traded. If that were true, it would be investment. But they’re wrong; the money does not go to the companies. And most of you likely guessed wrong as well. The difference is that my students are college seniors pursuing degrees in business.
So where does the money go? Let’s continue with corporate stock as an example. Almost all of the proceeds from publicly traded stock go from the buyer to the seller, with percentages going to brokers, financial managers, analysts, rating agencies, and insurers such as AIG. Beyond the Initial Public Offering (IPO) [more on that later], none of it goes to the company except on the rare occasion when the company raises additional capital by selling off a portion of its retained corporate stock.
Wall Street and all other financial markets are places where people can place bets on how well certain stocks will perform, particularly in terms of their value. Will the share price go up or will it fall? Unfortunately, this has very little to do with how the company is performing. It has to do with expectations about the prices of shares and these are often affected by irrational and emotional reactions from reading too much into “signs” about the economy, from putting to much faith in CNBC “experts,” and from giving too much credence to internet rumors. Most participants in the market make money by buying shares cheap and selling them high – and their bets are mostly about that. Few make money by investing in companies and providing funds that are used to make products and to produce jobs. Less and less of the money in the market is in it for the long haul.
This description is of course an oversimplification. There are many kinds of financial transactions in such markets and some of them provide more money to companies than do others. I will address these transactions in greater detail later in this chapter. For the most part, however, a majority of these transactions end up draining money from the productive economy, not providing money for it. Perhaps it should not, therefore, be called investment.
So what sustains the myth that these Wall Street financial transactions stimulate the economy? What sustains the myth that by cutting taxes for the wealthy, more money will flow into these markets leading to economic growth which results in job creation? For the most part, it is repetition. If certain slogans are said again and again, they start to be perceived as maxims, assumed to be true even when they are not. A few public relations professionals and political consultants have specialized in creating sound bites and slogans that can be used this way for political advantage. They simply make up some phrases that fit a particular ideology, test them in focus groups for emotional response, and then sell the “winners” to the political party that hired them. For the last thirty years, variations of this “investment” myth have been packaged and sold.
In this particular case, the packaged myth also caught on because it was once true that buying stock in a company provided the capital needed for operations and growth. It was true when such shares were bought and sold by people who knew each other, before the large impersonal public markets which I refer to collectively as Wall Street existed. It still is true when people start a small business or buy into one or invest in start-up ventures. But beyond the IPO when shares are offered on the open market, share trading is in effect the selling and buying of pieces of paper that function as demands for payment from the company either in the form of dividends or increased share prices, not an infusion of money into it. And most share traders do not care how the companies get the money to pay them. In fact, most shareholders do not even know which company’s shares they own. They simply participate in financial funds managed by specialists who make all the choices. Such “ownership” is anything but responsible.
NEXT PORTION to be posted this weekend - WALL STREET MYTH -
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Excellent! Of course, even this is, by definition, economics and it functions because people understand the economics of ever more expanding ways of putting others money into their pockets. "It is not from the benevolence of the butcher...that we expect our dinner, but from their regard for their own self interest." Somehow, we got the idea into our heads that this applies to large corporations, as well - and in a sense, it does. The problem is that they're eating *our* dinner! Another is that, while so many read "The Wealth of Nations," few read his "Theory of Moral Sentiments" - which is essentially a prequel to Wealth of Nations. If we don't have that one mastered, the other ends up....well, where we are.
ReplyDeleteDonna,
ReplyDeleteThanks for your comments. I agree about Moral Sentiments, however, I think I will be able to demonstrate that even in Wealth he very clearly did not imply that economic activities like those today could benefit any nation.
I'm delinquent in my response to Ch1 Pt 1. But here goes: As in so many things in a mass society, the individualized investment has been processed into convenient packages. Thus, while I go to a workplace daily to do my little niche-job, I seek ways to simplify the process of making my money work while I get more. Nothing wrong with that, albeit less responsible than lending money to nearest craftsman. To suggest that the population actually considers their investments as "bets," is indeed an oversimplification. Most "investors" look for convenient places to park their assets, with a degree of comfort & security and a margin of some growth over time. To characterize them as actively perceiving the underlying structure is giving the population more credit for perception than is real. I speak from decades of experience in dealing with people from exactly the point of view of a responsible broker/dealer: in the main, the client does not want to pay attention to the details of the various available transactions, and instead desires some "safe" results. I wasn't a major player, but I was a spokesman for a highly reputable group of professionals who saw their duty as taking high qualifications to the table and offering with that the ethical posture to care for fiduciary dependency. The result intended for the client was not "theft" or reduction of capital as described, but instead an attempt to provide services in a way that substituted for the degree of responsibility I see implied in this first text.
ReplyDeleteAs a small business person, and as an advisor to others, I commend the comments that apply at the grassroots level. Direct involvement is the "true" investment, whether it's time, effort, or capital. Still, not every person can or will do that.
So though it's dramatic, I view this opening salvo as condemning today's participants in the "impersonal" market. Lots of elements in our society today yearn for simpler times with simpler solutions, but short of mental withdrawal, won't find them. One answer among others lies (IMHO) with the advancement of character among professionals, which sort of internal control is avoided wholesale in other professions than this one.
Thank you for this thoughtful comment. I agree that most professionals want to go about their jobs and have someone else handle their investments. I also agree that most individual brokers and financial planners do their best to find relatively safe places to put their clients’ money that will achieve a descent return. I also, do not argue against securitization as a means for owning parts of something. In fact, most individual investors are even less aware, they are accidental ‘shareholders’ in that their ownership is of 401Ks that are in turn invested in various stocks and other financial instruments. I will edit my draft to reflect the intentions of such investors and those financial advisors who help them.
ReplyDeleteThe problem, however is that these earnest and honest efforts today are too frequently overwhelmed by big money speculation and by funds managers who are far removed from small individual investors. They represent financial forces that place inordinate pressures on CEO’s to ‘maximize shareholder return’ in ways that are too often harmful to everyone else’s interest – note the huge 401K losses suffered by small investors in 2008. Furthermore, the earnings that come from shareholding are only taxed at 15% as capital gains (many wage earners and small business people pay twice that rate) and this without any money going to the companies whose shares are being traded for further investments in growth and jobs. Given all this, I think it is important for all of us – small shareholders, brokers, and those with big holdings as well to take responsibility for the fact that our ‘ownership’ did not contribute anything new. We simply bought someone else’s property and did nothing to take care of it. We have seen plenty of this from slum landlords. Perhaps the answer to this problem is some form of duty imposed on these transactions that would plow money back into the companies to help them grow – just as is done for small businesses and startups by those who put money in them. I address the value of such true investments in Part 3 and Part 4. Please keep reading and commenting.