Something is deeply flawed with the world. A new dogma of the "virtue of greed" has sanctified inefficient flows of capital, allowing a very small minority to absorb disproportionate amounts of resources.
This diary is my attempt at explaining how dogma affects systemic capital flows. Every economist, at heart, is a philosopher of sorts, whether or not they choose to admit it. Beyond discount rates, market rates, yields to maturity and the host of assorted statistical measurements economists use to anticipate risk and predict the enigma of capital flows, human behavior serves as the principle driving force in the movement of capital. Statistical review can only show us so much. Cognitive interpretation, with clarity, must be used to see the entire picture of why capital flows become so lopsided and inefficient.
The Randian Army has seized global Asset Management. Now it could be argued that asset management has always been "Randian" to some degree, via the ruthless nature of men. However, the Randians have an entirely new dogma that separates them from their predecessors. They actually believe that greed is a virtuous quality and any and all criticism is collectivist drivel designed to give to the undeserving.
Previously, and thanks to St Thomas Aquinas' Divine Command Theory and Judeo-Christian Altruism, unbounded greed was by definition a sin. It was a source of shame, something to hide. It was a component of personal and group conscience and therefore an inborn limitation to the behavior of excess. In order for men to transgress the boundaries of perceived justice, they would have to engage in sin.
Fast forward to the 18th and 19th centuries. This fella Nietzsche says (paraphrasing) "Hey wait a sec... This God stuff is bumpkis. It's sole purpose is to guilt trip the conqueror out of his rightful spoils." Then this really strange Ayn Rand lady in the next century read that and said (again paraphrasing) "Hey I really like that, but I'll take that even further. Pure unadulterated incentive (read: greed) is the highest virtue and therefore a market with no rules whatsoever is sublime perfection and incapable of fault."
Naturally, a good deal of very wealthy individuals read these writings and heard these pronouncements, liked what they heard and shed the stigma of orginial sin from fantastic wealth. Not just that, hold on to your hats, what was formerly disgusting and outrageous was now virtuous! Unrelenting, ruthless avarice was a behavior to seek out, emulate, congratulate and sanctify! What a deal! The ideas became pervasive and the Randian Army was born.
Greed is no longer a sin, a source of shame. The new enlightened being disregards the ancient superstitions and embraces the new virtue of self-worship.
But how does this effect flow of capital?
Without the guilt of greed, there is no moral outrage at exploitation and/or increasing poverty. These things are seen as "good for" the poor and the exploited, because they provide the wondrous gift of incentive - which leads people like Rush Limbaugh to suggest that children dumpster-diving is a reasonable solution to the problem of poverty. How very Dickens of you Rush.
The free and untaxed market was billed to the American (and the global) community as the method in which flows of capital would reach its highest optimization. Economists argued that since demand is limitless (which is most certainly not), the only thing that slows down the flow of capital are the inhibitors to powers of finance and supply (taxation and regulation). This is quite possibly the biggest (purposeful) lie ever propagated through the halls of scholarly review since the "The World is Flat" (Thomas Friedman pun intended). It's a lie because of two very important factors - fraud and market power.
Fraud interrupts the flow of capital because it increases risk - exponentially. The idea that fraud is naturally filtered out of the market is laughable, because markets are always considered in the short term and fraud is usually an after-the-fact, long term discovery. By the time the market gets around to shining the light of investment truth on fraud, usually the principle offenders have long since absconded with the stolen wealth, washed it through and hid behind the corporate veil - only to resurface at some other later time when the short term memory of the market lapses into a new perception. The deregulated market has no defense what-so-ever against fraud except deflation, because of plummeting investor confidence. The question is how much does the market cannibalize itself before Rand's magical filter kicks in forcing a systemic change in behavior? The answer is - quite far if not potentially indefinitely, especially in an environment of orchestrated propaganda and political corruption.
This is where market power comes in. Market power enables business entities to have greater purchasing power, greater leverage and is threatened less by competition because of market share. That is the part written into textbooks. What's left out is the dirty (not-so) secret of corruption. Politicians are consumers too you know. What they demand is wealth. They are supposed to be public servants, statesmen (or stateswomen), but commonly at the end of the day they enter into "service" for the sake of self-advancement. This is a fact not lost on the managers of capital. The opportunity cost of not laundering money through lobbyists and into the coffers of politicians is substantial considering it is hundreds (or thousands) of times less expensive than paying taxes and/or making sure pollution is kept under control. Consider that Koch Industries, for example, takes in about 100 Billion Dollars a year in revenue and paid out figures in the tens of millions of political action/contribution dollars over the previous decade and the choice becomes clear. Even if the actual aggregate contribution total is quadruple (or more as I suspect it could be when all hidden and 'soft' costs are factored in) what is figured/listed it still is pennies on the dollar of what it would cost to actually adhere to a properly curved progressive tax schedule - not to mention the costs of environmental regulation. We're talking about billions of dollars (a year) in comparison to 100 to 200 million over a decade.
We progressives like to pick on the Kochs because they are the most out-front and active ideologues (and such criticism is absolutely warranted), but taxes and deregulation are not the full scope of corruption at the hands of market power.
Oh no.
All investors want to do two things when investing.
1) They want to minimize risk.
2) They want to maximize return.
Now the old fashioned way to do these things was a matter of diligence and research backed by experience. You know... Understand the market. Assess the risk. Define the cash flows. Form a Net-Present-Value... Unfortunately, that's not good enough anymore. Cheaters-do-prosper, apparently, and the en vogue method of cheating is to insure oneself against failure (derivatives) and then engineer the said investment for failure - thus taking money from suckers in a series of balloons and busts. The more and more the public fears the supposed eventual end of social security and (even more so) Medicare, the more they become in thrall to lifelong investment through the variants of funding. Only now, circa 2008 2.0 Wall Street corruption release, the capital managers have effectively solved the problem of investor confidence (created by systemic fraud) by socializing risk. If they make an oopsie, the U.S. taxpayer has their back. Nobody goes to jail. The thieves get paid - LARGE.
Excuse me GWB, but if I might borrow a quote (that you comically butchered)...
Fool me once, shame on you. Fool me twice, shame on me...
How many times now is it?
Oh, and if you're a member of the Tea Party... How much of a fucking moron are you? Less taxes on the "job creators"? Further deregulation (how much further than you get from zero)? I mean come on!
To quote a former employee of Koch Industries I met recently (who is now retired), these Tea Baggers are "shitting in their own shoes." I seriously LOLed when I heard that line.
Herman Cain? Really? You'd think with all the cash the Kochs have and as brilliant as they supposedly are, you'd think they might have actually vetted a candidate before dumping millions into the Tea Party engine and his candidacy, but I digress...
The problem with continually "giving" to finance/supply is that instead of an uninhibited flow of capital into a broad spectrum of opportunities (as was promised), capital flow is actually inhibited by the self-interest of concentrated power. The energy and insurance markets, in particular, are engaged in heavy price fixing, on Wall Street AND on Main Street, but that's only the beginning. When managers can use fraud without consequence, or at the very least filter out only the extremely low-risk, extremely high investments via things like the exploitation of foreign labor markets and geography with non-existent environmental standards, the end result is opportunities that are ordinarily very deserving opportunities get passed over. When these opportunities get passed over, capital doesn't flow to certain places where historically it's flowed to. The landscape changes, particularly, in the form of demand reduction. The places that get weaker streams have less to give back. Once direct labor in particular becomes reduced and redirected, liquidity in the originating market is reduced. There's less to go around - unless you're a manager of capital. Managers of capital are realizing increasing revenues and declining costs. Capital is flowing into the personal coffers of asset management increasingly and everywhere else decreasingly. Now the contra argument to that is the market is only rewarding the best competitors. However when one steps back and takes a humanist perspective, one realizes that what’s actually being rewarded is increasing poverty and the evisceration of public safety. Randian Objectivists claim those thing are filtered out naturally, while it’s painfully obvious those things are increasing.
Here's where I get back to dogma, back to philosophy. The Randian ideal of virtuous, unadulterated greed blinds managers of capital. Do you know how many copies of Atlas Shrugged circulate around Wall Streeters, Corporatists and GOP true believers alike? It's pervasive. There is no pause. No consideration of human cost. Not one thought of the lost flow of capital to places with historically great ongoing performance and/or potential. This is rationalized by the idea that these people will all listen to John Galt's speech, collectively realize their insignificance and seek to better themselves through the futile pursuit of indentured servitude to increasingly lower wages.
Somewhere along the lines, probably during the Reagan administration, asset/capital managers scrapped the idea of Stewardship and we see the result (Maybe I’m naïve to believe it ever existed). The role of an asset manager is not to vampire off of society to point of its destruction, but to expedite the flow of capital and be properly compensated for their contributions to that end. The role of an asset/capital manager is that of stewardship. Isn’t the primary goal of entrepreneurship service? No doubt that is a responsibility of paramount importance and those that perform that duty are entitled to their due, so wealth is not the problem. However, through and through, self-interest must be enlightened, for the sake of equitable and efficient flow of capital. The era of "virtuous greed" must finally and forever end. There is nothing virtuous about unbounded greed, macro-economically, morally and/or personally. It does not create the most efficient flow of capital.
There must be rules to the game. Fraud must cease to be a simple business decision and become the criminal act it is. The individual must be protected from the intrusions of market power. Checks and balances must be re-integrated back into our economic system. The corruption of money must be taken out of the electoral process. Collectivism should not be regarded as an evil in society. When metered into the capitalist system correctly, it properly protects aggregate demand by lessening the cost of living and increasing median income.
Any proper Steward of Capital recognizes the necessity of aggregate demand, which is also vital to the efficient flow of capital. They recognize the problems of politically gained competitive advantage. They know what fraud is and its effect on the economy. They understand the importance of the health of the overall economic system. This is not to say that stock valuation is not important, because it’s absolutely the focus of corporate management. More to the point, managers need to snap themselves out of short term fixation and consider the long term from time to time and that takes a bit of responsibility to do.