Little Sally's Epiphany

On Dec. 22 I posted an article about the doctrine of maximizing shareholder value, what former GE CEO Jack Welch called "the dumbest idea in the world." I shared the views of Steve Denning at Forbes who discussed the contradictions, to use a Marxist term, of management's blind allegiance to improving the net worth of shareholders. Denning, in turn, featured a new book by Roger Martin.

Martin has another article on this called "Little Sally Learns About the Toxicity of Shareholder Value Maximization." In it, Martin makes the case that corporations committed to maximizing shareholder value have perverse expectations of employees. Why would management expect, Martin says, employees to be motivated by a corporate culture that cares most about making mostly rich people richer, people the employees do not even know?

Martin's recognition of the basic psychology of employee motivation should sound familiar to the longstanding view, often held by progressives, that American corporate culture is short-sighted and less committed to improving its products than their bottom line. Recall that General Motors' management of yesteryear boasted that GM was not in the business of making cars, but of making money. GM's subtle indifference to product quality and innovation weighed heavily on it for a generation and nearly destroyed it. Its future remains uncertain.

There are, in fact, two separate arguments at play here; One is the Denning-Roger idea that management is inappropriately concentrating on short-term profits and boosting share price, practices which are systematically distorting management decisions. The other is that focusing on the interests of the investor class, the one percent, creates a bias against workers, community, and ultimately the corporation itself. It is a model best suited to maximizing wealth for a few; it does that very well.

The result is that US corporate culture has the deeply held tendency to treat employees as a mere input, an irritating expense that must be reduced, the abstract L for Labor in the cold computations of economists. It is this second argument which explains why, in the US more than, say, Germany or Sweden, the middle class is squeezed, why jobs are scare, but the investor class is richer than ever. It is the triumph of corporate profits as the centerpiece of American political economy, economics as if people didn't matter.

These are two different lines of argument, from different sources, politics, and traditions, that have dovetailed into a single unavoidable conclusion. I can only hope that we finally see a few inchoate signs that free market economists, free traders, and other purveyors of casino capitalism are beginning to realize the intellectual poverty of their ideology and the aching unsustainability of the American corporate model they have created and upon which they feed.

I leave you with an illustrative dialogue Roger Martin shared about Little Sally.

Sally: Daddy, my teacher asks me to listen carefully in class and do my homework every night. What does your boss ask you to do?

Daddy: He wants me to help him maximize shareholder value?

Sally: Huh? What does that mean?

Daddy: It means increasing our stock price to the highest we can make it go.

Sally: Why?

Daddy: Because that will make the shareholders happy.

Sally: Well who are these shareholders anyway?

Daddy: They are people who buy shares in our company.

Sally: What are they like? Do you know them?

Daddy: Actually we don't really know who they are. Every three months, we get a list of them but they buy and sell so often, the list changes routinely. And even the list we get is for organizations like mutual fund companies and pension funds that invest money on behalf of shareholders and aren't the actual shareholders.

Sally: This is getting a bit confusing. Are they at least nice people; these mutual funds and pension funds?

Daddy: It would be hard to describe them as terribly nice. They are really demanding and if we don't increase the stock price for them, they get pretty upset and sell our stock.

Sally: That isn't very nice. When they do that, do they sell to nicer people?

Daddy: No, typically they sell to people about like them - pretty impatient.

Sally: This sounds pretty weird. If you do get the share price to rise and the shareholders are happy rather than upset, do they do nice things for the company?

Daddy: Not really, Sally. What happens is that they then insist on us getting the share price to rise some more still. Or sometimes they sell their shares because the price has risen enough for them.

Sally: Whew. I must have this wrong but let me check. You go to work every day trying to increase your company's share price for people that you don't know, who don't act nicely at all, and if they are unhappy just sell their shares to some other people who you don't know either and are also not very nice. And if you succeed, they don't do anything for you other than put more pressure on you or sell because they are happy. They seem to sell whether they are happy or upset. That can't be much fun. Why do you do it Daddy? Why don't you try to do something a bit more fun?

Daddy: Well Sally, I know that it sounds kind of weird, but that is our capitalist system. It is our duty to maximize shareholder value, even if it is pretty unfulfilling and unpleasant. And I try to do the best job I can to help our CEO do that. And Sally, if I do a really good job helping my CEO, when he retires, he might appoint me CEO.

Sally: I love you Daddy and because of that I kind of hope that he doesn't make you CEO!

How They See Us

On Monday, 12/12 I wrote of at least one Republican who has finally decided to buck the tide and speak out against his party's lurch to the right, one that is both ridiculous, because proponents are twisting themselves into logical and factual contradictions, and dangerous, because they are opening the door to a fascist state.  

The European press has noticed the sum and substance of the Republican presidential candidates, leaving it both dismayed and amused. As Der Spiegel laments:

It's horrifying because these eight so-called, would-be candidates are eagerly ruining not only their own reputations and that of their party, the party of Lincoln lore. Worse: They're ruining the reputation of the United States...They lie. They cheat. They exaggerate. They bluster. They say one idiotic, ignorant, outrageous thing after another. They've shown such stark lack of knowledge -- political, economic, geographic, historical -- that they make George W. Bush look like Einstein and even cause their fellow Republicans to cringe.

The December 16 edition of The Week (print version), in an article entitled "The GOP makes a virtue of ignorance," summarizes European views. In addition to Der Spiegel, it references Lorraine Millot, of the Paris Liberation, who observes that the only Republican candidate who is relatively well-versed in diplomacy, John Huntsman, is also completely out of contention. This is not a coincidence. The others "careen to extreme positions that include starting new wars and abandoning old allies." Herman Cain tried to make a virtue of his ignorance of foreign affairs, which apparently sat well with millions of Republican voters. It was charges of adultery, not laughable ignorance of the world, that ended his campaign.

Max Hastings, of the London Daily Mail, notes that throughout much of red state America, you are viewed suspiciously as an elitist if you show interest in science or the world beyond America. "Say what you want about British politics, no MP of any party would dare to offer themselves as town dogcatcher while knowing as little about the world as the Republican presidential candidates...The American political system has seldom, if ever, looked so inadequate."

Finally, Matthew Norman of the London Independent predicts that Mitt Romney will eventually win the nomination even if he is "the slimiest, phoniest opportunist to run for president since...well, ever." And that is because Newt Gingrich is so widely despised.

We'll see about whether Romney does in fact prevail. But it is too early to count out Gingrich, though even he seems to be peaking, pretty much on the same timeline as the rest of them. Republican primary voters are the reddest of the red, but even they seem discomfited by this crowd.

All the Money Rich Bankers Could Ever Want

I believe the desire to hold the Federal Reserve Bank accountable to the American people is a major issue that progressives and disaffected right-wing populists, e.g. tea-partiers, have in common. Many do not seem to be aware of this shared interest.

The following is from Alan Grayson, former congressman from Florida. I have reproduced it in its entirety. The original is here. Mr Grayson is campaigning to win back his seat in 2012.

        The Fed Bailouts: Money for Nothing

I think it’s fair to say that Congressman Ron Paul and I are the parents of the GAO’s audit of the Federal Reserve. And I say that knowing full well that Dr. Paul has somewhat complicated views regarding gay marriage.

Anyway, one of our love children is a massive 251-page GAO report technocratically entitled “Opportunities Exist to Strengthen Policies and Processes for Managing Emergency Assistance.” It is almost as weighty as that 13-lb. baby born in Germany last week, named Jihad. It also is the first independent audit of the Federal Reserve in the Fed’s 99-year history.

Feel free to take a look at it yourself, it’s right here. It documents Wall Street bailouts by the Fed that dwarf the $700 billion TARP, and everything else you’ve heard about.

I wouldn’t want anyone to think that I’m dramatizing or amplifying what this GAO report says, so I’m just going to list some of my favorite parts, by page number.

Page 131 – The total lending for the Fed’s “broad-based emergency programs” was $16,115,000,000,000. That’s right, more than $16 trillion. The four largest recipients, Citigroup, Morgan Stanley, Merrill Lynch and Bank of America, received more than a trillion dollars each. The 5th largest recipient was Barclays PLC. The 8th was the Royal Bank of Scotland Group, PLC. The 9th was Deutsche Bank AG. The 10th was UBS AG. These four institutions each got between a quarter of a trillion and a trillion dollars. None of them is an American bank.

Pages 133 & 137 – Some of these “broad-based emergency program” loans were long-term, and some were short-term. But the “term-adjusted borrowing” was equivalent to a total of $1,139,000,000,000 more than one year. That’s more than $1 trillion out the door. Lending for these programs in fact peaked at more than $1 trillion.

Pages 135 & 196 – Sixty percent of the $738 billion “Commercial Paper Funding Facility” went to the subsidiaries of foreign banks. 36% of the $71 billion Term Asset-Backed Securities Loan Facility also went to subsidiaries of foreign banks.

Page 205 – Separate and apart from these “broad-based emergency program” loans were another $10,057,000,000,000 in “currency swaps.” In the “currency swaps,” the Fed handed dollars to foreign central banks, no strings attached, to fund bailouts in other countries. The Fed’s only “collateral” was a corresponding amount of foreign currency, which never left the Fed’s books (even to be deposited to earn interest), plus a promise to repay. But the Fed agreed to give back the foreign currency at the original exchange rate, even if the foreign currency appreciated in value during the period of the swap. These currency swaps and the “broad-based emergency program” loans, together, totaled more than $26 trillion. That’s almost $100,000 for every man, woman, and child in America. That’s an amount equal to more than seven years of federal spending -- on the military, Social Security, Medicare, Medicaid, interest on the debt, and everything else. And around twice American’s total GNP.

Page 201 – Here again, these “swaps” were of varying length, but on Dec. 4, 2008, there were $588,000,000,000 outstanding. That’s almost $2,000 for every American. All sent to foreign countries. That’s more than twenty times as much as our foreign aid budget.

Page 129 – In October 2008, the Fed gave $60,000,000,000 to the Swiss National Bank with the specific understanding that the money would be used to bail out UBS, a Swiss bank. Not an American bank. A Swiss bank.

Pages 3 & 4 – In addition to the “broad-based programs,” and in addition to the “currency swaps,” there have been hundreds of billions of dollars in Fed loans called “assistance to individual institutions.” This has included Bear Stearns, AIG, Citigroup, Bank of America, and “some primary dealers.” The Fed decided unilaterally who received this “assistance,” and who didn’t.

Pages 101 & 173 – You may have heard somewhere that these were riskless transactions, where the Fed always had enough collateral to avoid losses. Not true. The “Maiden Lane I” bailout fund was in the hole for almost two years.

Page 4 – You also may have heard somewhere that all this money was paid back. Not true. The GAO lists five Fed bailout programs that still have amounts outstanding, including $909,000,000,000 (just under a trillion dollars) for the Fed’s Agency Mortgage-Backed Securities Purchase Program alone. That’s almost $3,000 for every American.

Page 126 – In contemporaneous documents, the Fed apparently did not even take a stab at explaining why it helped some banks (like Goldman Sachs and Morgan Stanley) and not others. After the fact, the Fed referred vaguely to “strains in the financial markets,” “transitional credit,” and the Fed’s all-time favorite rationale for everything it does, “increasing liquidity.”

81 different places in the GAO report – The Fed applied nothing even resembling a consistent policy toward valuing the assets that it acquired. Sometimes it asked its counterparty to take a “haircut” (discount), sometimes it didn’t. Having read the whole report, I see no rhyme or reason to those decisions, with billions upon billions of dollars at stake.

Page 2 – As massive as these enumerated Fed bailouts were, there were yet more. The GAO did not even endeavor to analyze the Fed’s discount window lending, or its single-tranche term repurchase agreements.

Pages 13 & 14 – And the Fed wasn’t the only one bailing out Wall Street, of course. On top of what the Fed did, there was the $700,000,000,000 TARP program authorized by Congress (which I voted against). The Federal Deposit Insurance Corp. (FDIC) also provided a federal guarantee for $600,000,000,000 in bonds issued by Wall Street.

There is one thing that I’d like to add to this, which isn’t in the GAO’s report. All this is something new, very new. For the first 96 years of the Fed’s existence, the Fed’s primary market activities were to buy or sell U.S. Treasury bonds (to change the money supply), and to lend at the “discount window.” Neither of these activities permitted the Fed to play favorites. But the programs that the GAO audited are fundamentally different. They allowed the Fed to choose winners and losers.

So what does all this mean? Here are some short observations:

(1) In the case of TARP, at least The People’s representatives got a vote. In the case of the Fed’s bailouts, which were roughly 20 times as substantial, there was never any vote. Unelected functionaries, with all sorts of ties to Wall Street, handed out trillions of dollars to Wall Street. That’s now how a democracy should function, or even can function.

(2) The notion that this was all without risk, just because the Fed can keep printing money, is both laughable and cryable (if that were a word). Leaving aside the example of Germany’s hyperinflation in 1923, we have the more recent examples of Iceland (75% of GNP gone when the central bank took over three failed banks) and Ireland (100% of GNP gone when the central bank tried to rescue property firms).

(3) In the same way that American troops cannot act as police officers for the world, our central bank cannot act as piggy bank for the world. If the European Central Bank wants to bail out UBS, fine. But there is no reason why our money should be involved in that.

(4) For the Fed to pick and choose among aid recipients, and then pick and choose who takes a “haircut” and who doesn’t, is both corporate welfare and socialism. The Fed is a central bank, not a barber shop.

(5) The main, if not the sole, qualification for getting help from the Fed was to have lost huge amounts of money. The Fed bailouts rewarded failure, and penalized success. (If you don’t believe me, ask Jamie Dimon at JP Morgan.) The Fed helped the losers to squander and destroy even more capital.

(6) During all the time that the Fed was stuffing money into the pockets of failed banks, many Americans couldn’t borrow a dime for a home, a car, or anything else. If the Fed had extended $26 trillion in credit to the American people instead of Wall Street, would there be 24 million Americans today who can’t find a full-time job?

And here’s what bothers me most about all this: it can happen again. I’ve called the GAO report a bailout autopsy. But it’s an autopsy of the undead.

Courage,

Alan Grayson

Labor Day Blues

Labor Day seems like a good time to share this interesting link. It is called IfItWereMyHome.com. What it does is compare living standards from around the world. There are different ways to do it, but the most obvious, and most eye-opening for internationally-challenged Americans, is to compare the US with similar industrialized countries. Take Germany for example.

According to the site, Germans, on average,
    consume 50% less oil (!),
    use 47% less electricity,
    make 26% less money
    are 83% less likely to have AIDS,
    spend 48% less on health care, and
    live one year longer

To be sure, some of the stats can be misleading; the risk of AIDS in the US is not evenly distributed. And though the US continues to show high per capita income, that fact completely masks the reality of extreme income inequality experienced in the US. Outsized incomes on Wall Street, Silicon Valley, and in entertainment are the only reason average income in the US remains high.

Some trends consistently pop up when you compare the US with other industrialized countries; the US has much higher health care costs, terrible figures on child mortality, uses far more energy than most, and has a much higher class divide.  

But hey, those Labor Day parades. Makes you so proud to wave Old Glory and to see all those politicans who have done so much for labor, especially those Republicans, marching and waving and such.

They must really support working families. What more proof could you want?

US Corporate Model is Dysfunctional

Below is a video interview of political columnist Harold Meyerson. He addresses a topic that should be front page news everywhere, but isn't. He talks of America's dysfunctional corporate model and its negative impact on the economy.

In my view, and it is a subject I want to discuss more later, Meyerson correctly describes the US economic model as an obsession about the microeconomic needs and interests of corporations and shareholders, and not to the needs of communities, workers, or the broader interests of the nation.

Note Meyerson's references to Germany, which has a huge trade surplus, based on manufactures, and substantially higher wages and benefits than in America. Though he did not say it, Germany's per capita exports are about four times higher than America's. This in an a country where union membership is much higher and manufacturers are not given free rein to offshore production to cheap labor havens. This is a recipe for disaster, according to the Neo-Cons, Neo-Liberals, Wall Street, the right wing, virtually all Republicans, ideologues, and the endless stream of bloviating media shills.

I give them credit; they know how to protect their interests and get voters to care more about somebody's home makeover, scary brown people, or Wiener's wiener.  



It's a shame, really. Our politicians fight fiercely to protect US corporate interests, the corporate model, and the overclass that feeds off it. They talk to us of liberty, freedom to choose, and the horrors of industrial policy and government interference, even as they bail out Wall Street and subsidize Big Oil.

In return, their pockets are filled with cash to buy the next election.

Less Wall Street, More Main Street

I want to share a post by airmechild who captures much of what is wrong with the American economic model. I quote at length:

There is a show on one of the major networks, ABC I think, called the Shark Tank. Basically the show is about entrepreneurs looking for investment capital to start or expand their business. They pitch their ideas to a group of likely investors hopping to get at least one of them to invest money in their business.

In one show a business woman asked for an investment to expand her line of shoes into the next lower class of stores. Her shoes sold well in very upscale boutiques and she wanted to sell in stores like Nordstrom’s and Macys. All of which would require expanding her manufacturing and distribution base.

One of the “sharks” asked where she had her shoes manufactured. She replied Florida and Mass. His response was that she should moved it (manufacturing) to China. The show includes several minutes of bantering between investors and the client until a deal is reached. After all “you have to respect the money.” One of the investors will say during the deal making processes.

Simply, it’s all about the money. Wall Street, the unofficial indicator of “profitability” of Americas companies, has dictated it to be so. Over and over since Reagan came along we have heard the mantra “Wall Street says…” or “the Street…” as the gospel of business or the economy.

Remember this, if you learn nothing more about economics, Wall Street does not represent the American worker, businessman or America. It only represents the greed of the investors. In recent years many a business decision, work force cuts or outsourcing was made simply at the behest of Wall Street. Not one of these decisions bettered America, the economy or a worker (blue or white color.)

It has had just the opposite effect. Wall Street made pitting a company and its tax structure against communities and states for “competitive” tax rates. Another moniker for improved wealth to the investors. The next step was to pit American workers against Foreign workers. After all according to the “Street” our wages are to high.

So the contestant should move production to China? That's our investor class talking; if it can juice up profit margins, they are all for it. Lost jobs? Not my problem.

This infatuation with giving what the investor class wants is seriously undermining this country. They have convinced themselves, and apparently many others, that individual greed is all we need and the less one cares about others, the better off we will be. It is all about me and my profits. Labor is just an abstract, a necessity. The lower management can lower labor costs, the better investors like it.  

No wonder other countries are doing better than the US. Germans, for example, are in utter disbelief and think we are insane. 

Hat tip to airmechild. There is more at the original.

European Dismay

In my last post I referred to Tom Friedman's article on how badly the US is polarized and how deeply it has affected our ability to function on even a basic level. Thanks in no small measure to Republican obfuscation, we have become a bizarre parody of ourselves. It is almost like a skit on Saturday Night Live, to which Republicans would whine about how they are being unfairly stereotyped as being in the pockets of the rich. "We will not try to balance the budget on the backs of the poor," I can hear them say.  Except that they are. Slash social security and threaten to shut down the government if Dems don't give tax breaks to the rich? They want that too. How painfully obvious does it have to get before we realize today's Republicans are no longer the party of Eisenhower?

Unfortunately, there are too many Democratics who seem either resigned to events, and are not fighting back, or are actively assisting our transition to oligarchy.

Americans don't take foreign opinion into proper account account very well. As a result, too many Americans have increasingly indefensible views on our international role and rank. And thanks to our deeply compromised media, few Americans are hearing what others think about us and our government, and why it should matter.  

Our recent elections, a giveaway to corporate America disguised as economic populism, has dismayed many in Europe just as it did many progressives here.  How can it be, they ask, that Americans can be so narrow and forgetful as to vote back into power the same corrupt party that helped put the economy in the ditch just before Obama's term began in January 2009?

Europeans, the same people who have national health care of one sort or another, and pay less for it, have no desire to adopt America's for-profit, pay-through-the-nose model designed to enrich the insurance industry. Europeans get more for less, and they know it. They see our recent protracted effort to adopt universal health coverage as symptomatic of American ineptitude. They could see, just we could, at least those of us who didn't watch Fox News, that very high majorities of us wanted a public option.

Yet we couldn't get it done, despite public opinion and Democratic control of the House, the Senate, and the Presidency. Support declined only when it became clear that we would end up with an unworkable compromise that enabled insurance companies to continue dominating the process.

Steven Hill has written more on the European reaction. In a recent post at Alternet, Hill relates his own experience:

"While participating in a conference in Budapest in September, where prominent conservative leaders and thinkers were in attendance, including the president of the European Parliament and two prime ministers, some of the most eye-opening comments had to do with new perceptions about America. One speaker, Christian Stoffaes, who is chairman of the Center for International Prospective Studies based in Paris, stated the “United States is in disarray, extremely polarized. It is practically a civil war there, and you can’t count on it.” This theme was echoed by others speakers, who went even further. One said “We need to shift our emphasis eastward (towards Asia) and not wait for the Obama administration.” I found these statements to be surprising, and even vaguely alarming, given the importance of the transatlantic relationship in the post-World War II era. But there was a widespread view that the US is being consumed by the severity of the Great Recession, brought on by a broken Wall Street capitalism, as well as by the quagmires of the Iraq and Afghanistan conflicts, and an inability to change course."

 Regarding the failed Copenhagen Summit on climate change, Europeans saw that the US was not serious about climate change. Calling it a real wakeup call for the Europeans, Hill notes a sudden European epiphany:

...it wasn’t George W. Bush who was the problem, but something more profound about America’s broken political system that prevents any leader, even one as talented as Obama, from delivering.  That political system is marinated in money, is paralyzed by a “filibuster-gone-wild” Senate that has allowed a minority of Senators to obstruct all legislation, and is hamstrung by a sclerotic, winner-take-all, two-party electoral system that has left voters poorly represented and deeply frustrated." 

Ain't it just swell? Hill captures one more quotation that I must share here because it is a sentiment that many progressives share, including myself. German Finance Minister, Wolfgang Schauble, says "...The USA lived off credit for too long, inflated its financial sector massively and neglected its industrial base."

Exactly.

Bear in mind this is the same Germany that has higher taxes and more regulations, higher wages and higher unionization, and health care for everyone. It has paid vacations for all, generous maternity leave, more generous pensions, and much greater job security. And wealth is much more evenly distributed because of taxes. All socialist programs.

Just what Republicans insist would destroy the US. Yet Germany has generally better demographics, such as lower homelessness, lower crime, higher literacy, and longer life expectancy.  

Germany also has a massive trade surplus. And It does not owe $ trillions to China.

Republicans have their arguments completely backwards. But at least we have more billionnaires.