I've discussed the grossly inadequate financial reform proposal by Senator Dodd. One of its many glaring omissions is the failure to ban proprietary trading practices by banking institutions. Instead, Dodd's bill merely grants the Federal Reserve an opportunity to research the topic and draft a rule proposal to implement. Basically, it's a do-nothing bill.
In the previous blog, I noted that I see only two potential factors that could put U.S. banking policy back on the track it ought to be on: (1) Buffett and Munger making a media blitz in favor of the Volcker Rule, that will in turn put pressure on Congress to do the right thing, or (2) European lawmakers beat us to the punch and pass landmark financial reform before we do (European lawmakers support the Volcker Rule).
There appears to be an emerging third hope: a Washington politician actually shows some leadership and stands up to the Wall Street lobbyists and proposes true financial reform.
Senator Kaufman of Delaware displays his breadth of knowledge and understanding of a difficult issue, in his latest piece that can be found on his website. Among other things, he explains why he favors the Volcker Rule. Kaufman gets it. Thankfully, someone in Washington does. I will link it below. I encourage you to read it. Here is a snippet from his piece that I appreciate because it captures a faulty argument I hear all the time from those who want to keep the status quo on Wall Street. Please read:
"I start by asking a simple question: Given that deregulation caused the crisis, why don’t we go back to the statutory and regulatory frameworks of the past that were proven successes in ensuring financial stability?
And what response do I hear when I raise this rather obvious question? That we have moved beyond the old frameworks, that the eggs are too scrambled, that the financial industry has become too sophisticated and modernized and that it was not this or that piece of deregulation that caused the crisis in the first place.
Mind you, this is a financial crisis that necessitated a $2.5 trillion bailout. And that amount includes neither the many trillions of dollars more that were committed as guarantees for toxic debt nor the de facto bailout that banks received through the Federal Reserve’s easing of monetary policy. The crisis triggered a Great Recession that has thrown millions out of work, caused millions to lose their homes, and caused everyone to suffer in an American economy that has been knocked off its stride for more than two years.
Given the high costs of our policy and regulatory failures, as well as the reckless behavior on Wall Street, why should those of us who propose going back to the proven statutory and regulatory ideas of the past bear the burden of proof? The burden of proof should be upon those who would only tinker at the edges of our current system of financial regulation. After a crisis of this magnitude, it amazes me that some of our reform proposals effectively maintain the status quo in so many critical areas, whether it is allowing multi-trillion-dollar financial conglomerates that house traditional banking and speculative activities to continue to exist and pose threats to our financial system, permitting banks to continue to determine their own capital standards, or allowing a significant portion of the derivatives market to remain opaque and lightly regulated."
http://kaufman.senate.gov/press/floor_statements/statement/?id=aca5b91a-6e51-4d6b-a367-414ad9641500
Kaufman really does get it. Now, if we can just get a majority of the dumb herd in Washington to follow along, we just might avoid another financial securities calamity.
On another note, I am considering starting a Group on Facebook that will be open to those who are interested in following along with my investment trades. Currently, there are a few of you who are already following my trading activity through texting. Given the fact I am SLOWWWWW at texting, I think I can improve upon the way I pass on my investment trades. Utilizing a Facebook Group may be the better approach. Through it, I can send private messages to the group when I enact a new trade. A message notification will then be sent to your email account. Many of you have Blackberries so you can receive an email notification through your phone. At that point, you can enact your own trades should you choose to follow along. As a few of you know already, within the next couple weeks I will be closing my investment position in a biotech that I own; it should at that time reach what I have estimated to be its fair value. Because of the biotech investment, my portfolio is up just over 300% in less than three months. An amazing year so far to say the least -- I give thanks to God for giving me the opportunity. There are more opportunities on the horizon. I will likely re-enter the biotech stock at a later date (along with a few others) but in the immediate term, there is a more traditional company that I believe is poised to release blockbuster numbers in the coming weeks, and I want to be invested in it as it is currently severely undervalued in comparison to its rivals. Keep a look out for a new Facebook Group in the near future, and feel free to follow along with my trades. Together, I am confident, we can beat the 'pros' on Wall Street.
Sticking with the investment topic, awhile back I started a series on how to invest intelligently. I haven't forgotten about the series and I do plan to finish it at some time in the near future. Law School and Bar Prep will keep me occupied over the next few months, but I will pick back up with the series soon. I will also include an outline of my investment strategy, and how I applied it to increase the value of my portfolio over 300% in less than 3 months. There are some lessons to be learned from these experiences that I think may also benefit you.
“God, give us grace to accept with serenity the things that cannot be changed, courage to change the things that can be changed, and the wisdom to distinguish one from the other." - Reinhold Niebuhr
Peace
Jeremy
Wednesday, March 31, 2010
Thursday, March 25, 2010
Bye, Bye Miss American Pie
Don McLean's folk song "American Pie" comes to mind this morning while reading through Chris Dodd's financial reform package. The proposal is a shameful sellout to the American big banker, shorting the hopes of the American worker. Bye, bye Miss American Pie.
Democrat Senator Chris Dodd recently released his 1300 page proposal coupled with an 11-page summary, the content of which claims to "restore responsibility" on Wall Street. Folks, I'm sorry, but I'm going to have to use a word that I keep finding myself coming back to over and over again in the middle of this economic crisis -- it's bullshit. Dodd's bill is a big pile of bullshit.
It is curious that in the midst of Dodd's unveiling of the financial reform bill, and even as Tim Geithner made a *veiled* forceful call for Congress to act quickly on financial reform, that Wall Street has responded so positively in market action during the month of March. There is a reason for Wall Street's glee. The bulls are on parade because Wall Street owns Washington.
The longer Dodd and Company keep working on the financial reform bill, the more watered down the damn bill becomes. There is much I do not like about his latest proposal. The biggest gaffe is its handling of the hedge funds operating inside America's banking institutions.
For some time now, I've been talking about the necessity of the Volcker Rule to put an end to banks from operating hedge funds and engaging in over-leveraged bets on risky securities. This activity was the primary reason for the TARP emergency bill of 2008 that was used to bailout failed bets made by Wall Street bankers. The Volcker Rule is endorsed by Warren Buffett, Charlie Munger, many European leaders, and five former heads of the Federal Reserve. [Read Charlie Munger's "Basically, It's Over" for what will happen from failure to pass the Volcker Rule]. The bankers opposed the Volcker Rule from the outset because it would signal an end of the profit boom they have experienced over the past 10 years since the repeal of the Glass-Steagall Act.
What the latest Dodd proposal does with the Volcker Rule is put the idea on a shelf of more ideas to be researched further by the Federal Reserve. Because Congress doesn't have the balls to stand up to greasy big dollar donors on Wall Street, it now looks like it will not enact plain language statutory prohibitions of dangerous derivatives trading. Instead, under Dodd, Congress is looking to make a pass and dish it over to the Federal Reserve to deal with the issue. Yeah, the Feds will "deal" with the issue like pro sports deals with steroids. What is the Federal Reserve going to do with the Volcker Rule? It will spend a year or so on so-called research, shaped largely from skewed data offered by bank lobbyists, and in the end it will propose what it calls the "Volcker Rule," but in actuality is nothing at all like it. It will be a wolf in sheep's clothing and a thief in the night. [The Volcker Rule calls for a total ban on hedge fund operations within banks, and further calls for a regulated derivatives market to oversee independent hedge fund operations].
Under the Volcker Rule subheading of Dodd's report, it reads, "Regulations will be developed after a study by the Financial Stability Oversight Council and based on their recommendations."
Basically, it's game over.
Dodd is basically giving bankers all over the country and in every Congressional district in the U.S., a free-license over the next year to ramp up hiring in their respective hedge funds, err I mean, investment divisions. [Bloomberg.com recently reported Citigroup, for instance, is on a hiring spree in its hedge fund operation]. And in each District, bankers will make the case to the politicians running for elected office in November that these highly-leveraged securities investments are necessary to keep pace with financial innovation overseas. They are selling the same story overseas in reference to bankers in America. In the end, it will be the continued proliferation of the derivative nuclear weapons that dropped one bomb in 2008, but with an unlimited arsenal remaining, will ultimately be the destroyer of global capitalism.
Hope is quickly fading on the prospects of the Volcker Rule. I see only two prospects remaining: (1) Buffett and Munger come out and make another press blitz much as they did at the height of the crisis in October 2008, and argue strongly for the Volcker Rule, or (2) European lawmakers beat American lawmakers to the punch, and pass the Volcker Rule in the EU before Washington dummies are able to pass Dodd's poop on paper. As to the first, Munger has already made his pitch in "Basically, It's Over," and Buffett did the same in his annual letter to Berkshire investors -- no one in Washington appears to be listening. As to the second, Tim Geithner issued a warning over the weekend to U.S. lawmakers that Washington needs to act quickly on financial reform, lest the U.S. loses the advantage of setting the initiative before the Europeans do. In a nutshell, what little Timmy is saying is, "Hurry, pass Dodd's bill that maintains the status quo" so that European banks will win the argument against European lawmakers who are calling for the Volcker Rule; if European banks can show that a Volcker Rule in the EU will put EU's financial industry at a strategic disadvantage to its U.S. counterpart, European lawmakers will have no choice but to bow to the bankers.
The bulls are on parade on Wall Street, and Main Street keeps getting trampled.
Bullshit.
Peace
Jeremy
Democrat Senator Chris Dodd recently released his 1300 page proposal coupled with an 11-page summary, the content of which claims to "restore responsibility" on Wall Street. Folks, I'm sorry, but I'm going to have to use a word that I keep finding myself coming back to over and over again in the middle of this economic crisis -- it's bullshit. Dodd's bill is a big pile of bullshit.
It is curious that in the midst of Dodd's unveiling of the financial reform bill, and even as Tim Geithner made a *veiled* forceful call for Congress to act quickly on financial reform, that Wall Street has responded so positively in market action during the month of March. There is a reason for Wall Street's glee. The bulls are on parade because Wall Street owns Washington.
The longer Dodd and Company keep working on the financial reform bill, the more watered down the damn bill becomes. There is much I do not like about his latest proposal. The biggest gaffe is its handling of the hedge funds operating inside America's banking institutions.
For some time now, I've been talking about the necessity of the Volcker Rule to put an end to banks from operating hedge funds and engaging in over-leveraged bets on risky securities. This activity was the primary reason for the TARP emergency bill of 2008 that was used to bailout failed bets made by Wall Street bankers. The Volcker Rule is endorsed by Warren Buffett, Charlie Munger, many European leaders, and five former heads of the Federal Reserve. [Read Charlie Munger's "Basically, It's Over" for what will happen from failure to pass the Volcker Rule]. The bankers opposed the Volcker Rule from the outset because it would signal an end of the profit boom they have experienced over the past 10 years since the repeal of the Glass-Steagall Act.
What the latest Dodd proposal does with the Volcker Rule is put the idea on a shelf of more ideas to be researched further by the Federal Reserve. Because Congress doesn't have the balls to stand up to greasy big dollar donors on Wall Street, it now looks like it will not enact plain language statutory prohibitions of dangerous derivatives trading. Instead, under Dodd, Congress is looking to make a pass and dish it over to the Federal Reserve to deal with the issue. Yeah, the Feds will "deal" with the issue like pro sports deals with steroids. What is the Federal Reserve going to do with the Volcker Rule? It will spend a year or so on so-called research, shaped largely from skewed data offered by bank lobbyists, and in the end it will propose what it calls the "Volcker Rule," but in actuality is nothing at all like it. It will be a wolf in sheep's clothing and a thief in the night. [The Volcker Rule calls for a total ban on hedge fund operations within banks, and further calls for a regulated derivatives market to oversee independent hedge fund operations].
Under the Volcker Rule subheading of Dodd's report, it reads, "Regulations will be developed after a study by the Financial Stability Oversight Council and based on their recommendations."
Basically, it's game over.
Dodd is basically giving bankers all over the country and in every Congressional district in the U.S., a free-license over the next year to ramp up hiring in their respective hedge funds, err I mean, investment divisions. [Bloomberg.com recently reported Citigroup, for instance, is on a hiring spree in its hedge fund operation]. And in each District, bankers will make the case to the politicians running for elected office in November that these highly-leveraged securities investments are necessary to keep pace with financial innovation overseas. They are selling the same story overseas in reference to bankers in America. In the end, it will be the continued proliferation of the derivative nuclear weapons that dropped one bomb in 2008, but with an unlimited arsenal remaining, will ultimately be the destroyer of global capitalism.
Hope is quickly fading on the prospects of the Volcker Rule. I see only two prospects remaining: (1) Buffett and Munger come out and make another press blitz much as they did at the height of the crisis in October 2008, and argue strongly for the Volcker Rule, or (2) European lawmakers beat American lawmakers to the punch, and pass the Volcker Rule in the EU before Washington dummies are able to pass Dodd's poop on paper. As to the first, Munger has already made his pitch in "Basically, It's Over," and Buffett did the same in his annual letter to Berkshire investors -- no one in Washington appears to be listening. As to the second, Tim Geithner issued a warning over the weekend to U.S. lawmakers that Washington needs to act quickly on financial reform, lest the U.S. loses the advantage of setting the initiative before the Europeans do. In a nutshell, what little Timmy is saying is, "Hurry, pass Dodd's bill that maintains the status quo" so that European banks will win the argument against European lawmakers who are calling for the Volcker Rule; if European banks can show that a Volcker Rule in the EU will put EU's financial industry at a strategic disadvantage to its U.S. counterpart, European lawmakers will have no choice but to bow to the bankers.
The bulls are on parade on Wall Street, and Main Street keeps getting trampled.
Bullshit.
Peace
Jeremy
Tuesday, March 23, 2010
Plugged In, Powered Off - A Poem by Jeremy MacNealy
Plugged in population
Intravenous lines of
Morphine surfing
Drip sip knowledge of everything
Fantasy lobotomy from reality
Lights, Camera, anesthetizing action
Dancing with hallucinogenic stars
OP EDified with opinion oblivion
Entertained with Tranquilizer Vision
Digitized mapping to everywhere
Directionless to nowhere
'A button,' 'left arrow,' 'right trigger,' fire
Pull the amnesia trigger on who we are
Peace
Jeremy
Intravenous lines of
Morphine surfing
Drip sip knowledge of everything
Fantasy lobotomy from reality
Lights, Camera, anesthetizing action
Dancing with hallucinogenic stars
OP EDified with opinion oblivion
Entertained with Tranquilizer Vision
Digitized mapping to everywhere
Directionless to nowhere
'A button,' 'left arrow,' 'right trigger,' fire
Pull the amnesia trigger on who we are
Peace
Jeremy
Monday, March 22, 2010
A Short Account of the History of the Corporation: PART 6 (The Rise of the American Business Corporation)
Previously, we saw how the railroad giants, relying on new corporate laws (limited liability, general incorporation, parent/subsidiary forms, acquisition/expansion across state lines), new sources of capital (the stock market), and new levels of organizational efficiency and operational scale (driven in large part by technology advancements in transportation and communication), rapidly emerged as the first true "super" corporations as we have come to know them over the past 120 years. The rise of corporate giants brought many new changes to society, and, it presented many new challenges. As was the case with chartered mercantile empires that preceded them, like the British East India Company, the accumulation of power and corporate misbehavior by these early “super” corporations would not go unchallenged by the public.
In an interview with the New York Times in 1882, railroad tycoon William Vanderbilt was quoted as follows:
"The public be damned. What does the public care for the railroads except to get as much out of them for as small a consideration as possible! I don’t take any stock in this silly nonsense about working for anybody’s good but our own because we are not. When we make a move we do it because it is in our interest to do so, not because we expect to do someone else some good. Of course we like to do everything possible for the benefit of humanity in general, but when we do we first see that we are benefiting ourselves. Railroads are not run on sentiment, but on business principles and pay."
The public disagreed. One form of public protest came through the organizing of labor unions. As one author points out, “The consolidation of capital prompted a consolidation of labor.” Initially, laborers organized in piecemeal: the printers organized in 1852, the hat finishers in 1854, iron molders in 1859, cigarmakers and shipmakers in 1864, as illustration. The first nationwide organization of labor came with the formation of The National Labor Union in 1866. Workers from various industries continued to organize nationally, campaigning for 8-hour workdays, protesting against the importation of Chinese contract laborers as well as poor factory conditions.
And in some cases violence ensued. The tension between corporate managers and corporate laborers was severe as evidence by the Preamble adopted the American Federation of Labor that organized in Columbus, OH in 1886. It read: “A struggle is going on in all of the civilized world between oppressors and oppressed of all countries, between capitalist and laborer.” By the 1890s, along with the maturation of big business also came the “maturing of the unions.”
In response to strong public discontent, politicians began applying pressure on corporations, passing among several other pieces of legislation targeted at the corporation, the Sherman Antitrust Act in 1890, which for the first time defined unlawful combinations as illegal monopolies under federal law. Not longer after in 1906, the Roosevelt administration would successfully break up the monopoly enjoyed by Standard Oil. The result of the breakup was the eventual formation of Exxon, Amoco, Mobil, and Chevron.
Despite these counter moves by public officials, the financial crisis “Panic of 1873” and the ensuing failure of the Reconstruction of the South by 1875, highlighted the inadequate regulatory structure in place at the time. Even with the implementation of the Foran Act of 1885, the Interstate Commerce Act of 1887, the Sherman Antitrust Act in 1890, among others, federal regulation proved largely ineffective, leaving the responsibility of regulating corporations to state governments.
Since states had already assumed the role of being the primary grantor of corporate charters, the regulation of corporate activity too was largely in the hands of state legislatures. Though there were federal regulatory provisions in place at the time, these early statutory laws were largely designed to provide significant freedom to state and corporate activity. As a matter of policy given the context, this makes some sense as the nation was attempting to rapidly expand geographically as well as industrially. Ultimately, this policy proved a failure since the economy was not only rapidly expanding geographically, it was doing so while growing in great complexity. The states were no match for the new giant corporation, which at the time was not only operating across state borders, but in some cases internationally.
The “Panic of 1906” amplifies the inadequacy of the regulatory structure at that time. In 1863, the National Bank Act of 1863 was enacted which among other things provided for federal incorporation of national banks to create a uniform national currency. These national banks were scrutinized by a newly created regulatory agency set up in the U.S. Treasury, the Office of the Comptroller of the Currency. What the Act didn’t provide for was a uniform regulatory structure for state banks. This flaw surfaced in 1906 when state banks adhering to state law mandated reserves caused a liquidity freeze among Wall Street brokers. In response, the Federal Reserve Act of 1913 was enacted, creating a central bank to regulate the movement of funds between national and state banks. While the Act provided for greater monetary control, it was far from a cure-all, as the stock crash of 1929 would demonstrate.
It was previously noted that legal developments by this time had opened the door for corporations to move from an “entity” structure to an “enterprise” structure, thereby adopting a parent-subsidiary-corporation model. Regulatory structures, on the other hand, were behind the times, still centering on corporate “entity law.” This inadequacy proved fatal during the “roaring” ‘20s when national and state banking institutions operating through subsidiaries engaged in non-traditional banking activities: participating in the securities business, including establishing stock brokerages, investment services, and securities underwriters. Congress was convinced that the Depression was largely due to the intermingling of commercial and securities activity in the banking system.
During the 1920s, New York bank Goldman Sachs (yep, the same one a key contributor to the latest financial crisis) sought to juice its corporate earnings by engaging in a new venture -- Goldman Sachs Trading Corp. The newly formed investment wing of the bank began investing through a new form of trading mechanism and using extensive amounts of leverage (debt). Goldman's trades failed in spectacular fashion, as did the investment practices of most other banks at the time. Sound familiar?
In response, the Banking Act of 1933 (commonly referred to as the Glass-Steagall Act) was passed which was designed to separate completely the commercial banking business and the securities business. The promulgation of this Act marked a shift underway in Franklin Roosevelt’s Administration, which “abandoned ‘entity’ as the legal standard” and now viewed the corporation as operating a complex, multi-tiered enterprise, requiring the application of “enterprise law.”
The FDR Administration rallied the people behind New Deal statutes, strengthening corporate law and in the same stroke transformed the federal government into the central force in the regulation of American business. The greatest failure of business in America was succeeded by the most sweeping changes to corporate, finance, and investment law in U.S. history; The Emergency Transportation Act of 1933, the Banking Act of 1933, the Securities Act of 1933, the Securities Exchange Act of 1934, the Public Utility Holding Company Act of 1935, the National Labor Relations Act of 1935, the Investment Advisors Act of 1940, and the Investment Company Act of 1940, all reflect this transformation.
Selling these landmark statutory changes to the public was not difficult as the drafters of the legislation mirrored the shift in sentiment the public had toward big business at this time: “That consumers, not business, made markets.” As such, “Consumers could, therefore, rightfully demand the regulation of business for the common good.”
Big business would survive the depression of the 1930s, and even with much heavier federal oversight, emerged stronger than ever before. By 1950, the United States accounted for an astounding 39.3% of the world’s GNP, manufactured 17 out of 20 of the world’s automobiles, and 72.7% of sales generated by the top 200 largest corporations in the world were based in the United States. Dominating every industrial and economic metric it was evident that a new super power had arisen: America’s big business corporation. Through improvement in corporate law, corporate regulation, rapid advancements and deployment of technology, and international expansion, the American business corporation led the U.S. to unprecedented growth from 1945 until 1970 when the GNP of the U.S. increased from $21.3 billion to one trillion dollars.
The unprecedented levels of business growth created new challenges for the American business corporation. Among these that we will address in our next part of the discussion, is the public response that was needed to counter the emerging environmental crisis in the 1960s, 70s, and 80s, through the formation of several important regulatory mechanisms. Labor outsourcing and labor offshoring would also create a public stir...
Peace
Jeremy
In an interview with the New York Times in 1882, railroad tycoon William Vanderbilt was quoted as follows:
"The public be damned. What does the public care for the railroads except to get as much out of them for as small a consideration as possible! I don’t take any stock in this silly nonsense about working for anybody’s good but our own because we are not. When we make a move we do it because it is in our interest to do so, not because we expect to do someone else some good. Of course we like to do everything possible for the benefit of humanity in general, but when we do we first see that we are benefiting ourselves. Railroads are not run on sentiment, but on business principles and pay."
The public disagreed. One form of public protest came through the organizing of labor unions. As one author points out, “The consolidation of capital prompted a consolidation of labor.” Initially, laborers organized in piecemeal: the printers organized in 1852, the hat finishers in 1854, iron molders in 1859, cigarmakers and shipmakers in 1864, as illustration. The first nationwide organization of labor came with the formation of The National Labor Union in 1866. Workers from various industries continued to organize nationally, campaigning for 8-hour workdays, protesting against the importation of Chinese contract laborers as well as poor factory conditions.
And in some cases violence ensued. The tension between corporate managers and corporate laborers was severe as evidence by the Preamble adopted the American Federation of Labor that organized in Columbus, OH in 1886. It read: “A struggle is going on in all of the civilized world between oppressors and oppressed of all countries, between capitalist and laborer.” By the 1890s, along with the maturation of big business also came the “maturing of the unions.”
In response to strong public discontent, politicians began applying pressure on corporations, passing among several other pieces of legislation targeted at the corporation, the Sherman Antitrust Act in 1890, which for the first time defined unlawful combinations as illegal monopolies under federal law. Not longer after in 1906, the Roosevelt administration would successfully break up the monopoly enjoyed by Standard Oil. The result of the breakup was the eventual formation of Exxon, Amoco, Mobil, and Chevron.
Despite these counter moves by public officials, the financial crisis “Panic of 1873” and the ensuing failure of the Reconstruction of the South by 1875, highlighted the inadequate regulatory structure in place at the time. Even with the implementation of the Foran Act of 1885, the Interstate Commerce Act of 1887, the Sherman Antitrust Act in 1890, among others, federal regulation proved largely ineffective, leaving the responsibility of regulating corporations to state governments.
Since states had already assumed the role of being the primary grantor of corporate charters, the regulation of corporate activity too was largely in the hands of state legislatures. Though there were federal regulatory provisions in place at the time, these early statutory laws were largely designed to provide significant freedom to state and corporate activity. As a matter of policy given the context, this makes some sense as the nation was attempting to rapidly expand geographically as well as industrially. Ultimately, this policy proved a failure since the economy was not only rapidly expanding geographically, it was doing so while growing in great complexity. The states were no match for the new giant corporation, which at the time was not only operating across state borders, but in some cases internationally.
The “Panic of 1906” amplifies the inadequacy of the regulatory structure at that time. In 1863, the National Bank Act of 1863 was enacted which among other things provided for federal incorporation of national banks to create a uniform national currency. These national banks were scrutinized by a newly created regulatory agency set up in the U.S. Treasury, the Office of the Comptroller of the Currency. What the Act didn’t provide for was a uniform regulatory structure for state banks. This flaw surfaced in 1906 when state banks adhering to state law mandated reserves caused a liquidity freeze among Wall Street brokers. In response, the Federal Reserve Act of 1913 was enacted, creating a central bank to regulate the movement of funds between national and state banks. While the Act provided for greater monetary control, it was far from a cure-all, as the stock crash of 1929 would demonstrate.
It was previously noted that legal developments by this time had opened the door for corporations to move from an “entity” structure to an “enterprise” structure, thereby adopting a parent-subsidiary-corporation model. Regulatory structures, on the other hand, were behind the times, still centering on corporate “entity law.” This inadequacy proved fatal during the “roaring” ‘20s when national and state banking institutions operating through subsidiaries engaged in non-traditional banking activities: participating in the securities business, including establishing stock brokerages, investment services, and securities underwriters. Congress was convinced that the Depression was largely due to the intermingling of commercial and securities activity in the banking system.
During the 1920s, New York bank Goldman Sachs (yep, the same one a key contributor to the latest financial crisis) sought to juice its corporate earnings by engaging in a new venture -- Goldman Sachs Trading Corp. The newly formed investment wing of the bank began investing through a new form of trading mechanism and using extensive amounts of leverage (debt). Goldman's trades failed in spectacular fashion, as did the investment practices of most other banks at the time. Sound familiar?
In response, the Banking Act of 1933 (commonly referred to as the Glass-Steagall Act) was passed which was designed to separate completely the commercial banking business and the securities business. The promulgation of this Act marked a shift underway in Franklin Roosevelt’s Administration, which “abandoned ‘entity’ as the legal standard” and now viewed the corporation as operating a complex, multi-tiered enterprise, requiring the application of “enterprise law.”
The FDR Administration rallied the people behind New Deal statutes, strengthening corporate law and in the same stroke transformed the federal government into the central force in the regulation of American business. The greatest failure of business in America was succeeded by the most sweeping changes to corporate, finance, and investment law in U.S. history; The Emergency Transportation Act of 1933, the Banking Act of 1933, the Securities Act of 1933, the Securities Exchange Act of 1934, the Public Utility Holding Company Act of 1935, the National Labor Relations Act of 1935, the Investment Advisors Act of 1940, and the Investment Company Act of 1940, all reflect this transformation.
Selling these landmark statutory changes to the public was not difficult as the drafters of the legislation mirrored the shift in sentiment the public had toward big business at this time: “That consumers, not business, made markets.” As such, “Consumers could, therefore, rightfully demand the regulation of business for the common good.”
Big business would survive the depression of the 1930s, and even with much heavier federal oversight, emerged stronger than ever before. By 1950, the United States accounted for an astounding 39.3% of the world’s GNP, manufactured 17 out of 20 of the world’s automobiles, and 72.7% of sales generated by the top 200 largest corporations in the world were based in the United States. Dominating every industrial and economic metric it was evident that a new super power had arisen: America’s big business corporation. Through improvement in corporate law, corporate regulation, rapid advancements and deployment of technology, and international expansion, the American business corporation led the U.S. to unprecedented growth from 1945 until 1970 when the GNP of the U.S. increased from $21.3 billion to one trillion dollars.
The unprecedented levels of business growth created new challenges for the American business corporation. Among these that we will address in our next part of the discussion, is the public response that was needed to counter the emerging environmental crisis in the 1960s, 70s, and 80s, through the formation of several important regulatory mechanisms. Labor outsourcing and labor offshoring would also create a public stir...
Peace
Jeremy
Saturday, March 20, 2010
Healthcare Reform Passes - So What? Taxes, Budget Cuts, Social Unrest, and Financial Reforms
The House is on the verge of rounding up the necessary 216 votes to put the healthcare reform package on the fast track to President Obama's desk. Ok, so what?
Critics point to both procedural and substantive issues for how the bill is being passed and what the bill actually does. I do not find the procedural arguments compelling given the fact that over the decades, each Congress has used a hefty dose of trickeration to push through whatever policy the majority in power deems necessary. However, I still have concerns over some of the substantive portions of the bill. Specifically, the bill doesn't do nearly enough to address price controls and price dynamics.
Tort reform has to happen if there is to be a legitimate effort at reigning in costs. So far, tort reform has received virtually no attention. Further, a public health insurance plan option is a necessary component of lowering health care costs. Critics of the public option make all kinds of absurd "anti-socialist-like" arguments that really make no sense whatsoever. The U.S. Government has been both a primary insurer and a central component of creating competitive pricing environments for decades. Flood insurance, Medicaid, FEHBP (the health insurance plan that our elected Washington politicians receive), Veterans insurance, financial deposit insurance, mortgages, student loans, and farm subsidies are several of the many ways that as a public policy we have used the scale and scope of the federal government to assist with vital services and with creating competitive marketplaces. Failure to include tort reform and a public option in the current healthcare plan is a significant failure. That may not necessarily mean that the plan itself is doomed to failure. It does mean that the plan is doomed to failure if necessary, substantive amendments are not made to the healthcare plan in the immediate future.
My other criticism of the handling of this bill, and pretty much every other bill that has passed since the mid-1980s, is the accompanying plan to pay for it, or lack thereof. Ever since the Reagan Administration, supply-side economic policies have dominated. What supply-side economics seeks to do is lower taxes across the board, to allow people and corporations to spend and invest more money. By lowering taxes up front, naturally the amount of tax revenues that the government is able to collect also declines. If federal budgets are not reduced accordingly, we have deficits. Supply-side economists are not too concerned with up front budget deficits because the belief is that by lowering taxes, economic growth can expand, and that will result in increased tax revenues down the road to compensate for the tax revenues lost up front. In theory, this sounds nice. In practice it has been a catastrophe. Since supply-side economics was implemented back in the mid-1980s, the federal debt went from less than $1 trillion to almost $14 trillion.
Now we are stuck between a rock and a hard place.
To make up the difference between the costs of what we spend as a nation, and the revenues that we use to pay for those costs -- we have to (1) normalize taxes across the board back to their historical rates applied for over 100 years, and (2) reduce expenses across the board to a normalized level. Over the next 10 years will see both, or face a total collapse of the U.S. dollar. We will see the progressive rate scale of the individual taxpayer increase to historical levels where the nation's wealthiest will once again see a 60-90% marginal rate; dividend and capital gains taxes will also increase to historical levels. Further, we will see significant cuts to federal programs, including entitlement programs and war/defense expenses. This is the only answer we have.
But there should be no delusion as to the consequences of even these necessary steps -- it will be a very, very painful process for our nation. What will happen when we make across the board tax increases in conjunction with across the board cuts in spending is (1) slower economic growth, and (2) a loss of vital public services for millions of Americans, that together will lead to increased poverty and increased social unrest. It is quite possible that the remedy to put our nation back onto a path of fiscal responsibility, may itself lead to an ever downward spiral of the economy.
When I say we are stuck between a rock and a hard place, I really mean there are no easy answers to our nation's problems -- either path (staying the same course we've been on the last 30 years, or reverting back to historical tax and reduced expense levels) has the real potential to lead to the same result -- a complete traumatic failure of the U.S. economy.
Before turning to my final criticism of the Obama Administration's handling of the healthcare bill, a couple words on why I believe the U.S. has been making preparations in anticipation of massive social unrest. There are folks within the Pentagon and within the highest level of our military who are tasked with the sole responsibility of thinking up every scenario that puts our national security at stake, and how to successfully implement measures to counter each threat. It had occurred to me that when former Treasury Secretary Poulsen threatened legislators in October 2008 that if the emergency TARP bill isn't passed that something worse than the Great Depression would result and that "marshall law" would have to be used, that when Poulsen stated these things he wasn't talking out of his ass. Our government makes contingency plans for virtually every potential threat to our nation's security interests, it is only reasonable to assume that it has a similar plan in place in the case of total economic failure resulting in massive social unrest. Poulsen's remarks are credible given what we know from other publicly available information: (1) the formation of U.S. Northern Command (USNorthCom) after 9/11 that is charged with protecting the American homeland, (2) as first reported by the Washington Post that the Northern Command will receive 20,000 troops (and later reported, up to 80,000 troops) by 2011 that are being redeployed from the Army's 3rd Infantry Division that had been serving in Iraq, (3) a report from the Army Times stating that Northern Command troops will be retrained to assist with "civil unrest" and "crowd control" and "to subdue unruly or dangerous individuals without killing them," (4) the Defense Authorization Act of 2006 and the 2008 National Defense Authorization Act overriding portions of the Insurrection Act of 1807 and the Posse Comitatus Act of 1878, which essentially grants the sitting president increased power to use military troops on American soil for purposes of martial law, (5) in July 2009, NorthCom's Commander-General Victor Renault spoke before the House Armed Services Committee to begin pushing for centralized authority of the 400,000 National Reserve units that have been traditionally deployed by order of state governors, (6) Clergy Response Teams are being established nationwide to deal with crisis and social unrest (Romans 13 is their go-to chapter of the scriptures), and (7) bill H.R. 645 currently sitting in the House, is designed to "direct the Secretary of Homeland Security to establish national emergency centers on military installations." Earlier this week, ratings agency Moody's issued a new report warning public officials to change their current fiscal planning trajectory otherwise the U.S.'s AAA-rating will be in jeopardy. In the same report, Moody's indicated that severe government spending cuts will be needed, and as a result substantial "social unrest" is likely to ensue (similar to what we are seeing in Greece right now). As evidenced from the above, our military thinkers are ahead of the curve on this one and have measurements in place to deal with this very real possibility. Personally, I welcome these measures. After seeing Columbus residents at a healthcare protest demonstration earlier this week, turn nasty against an old impoverished man suffering with Parkinson's disease, I am convinced that we will need substantial numbers of military personnel to subdue the crazies in times of social unrest.
My final criticism of the handling of the healthcare reform bill, is that by so much attention being shifted toward this subject, that much less attention has focused on the financial nuclear weapons that created the crisis of 2008-2009. I have said many times before, healthcare reform is both worthy and necessary. But, it is possible to spend so much time on it, that sight is lost on other critical measures. This is what has happened over the past year. Every day that major news outlets focus on how Democrats are planning to round up the necessary 216 votes in the House, is another day of little or no discussion on the lobbying war being unleashed by the major banking institutions. Most Americans don't know that what transpired in our financial institutions over the past few years was the byproduct of two events that happened no more than 10 years removed -- (1) the repeal of the Glass-Steagall Act in 1999, and (2) the passage of the Commodity Futures Modernization Act (CFMA) of 2000. How many Americans know that former Republican Senator Phil Gramm of Texas, was primarily responsible for both granting banks an opportunity to set up a hedge fund inside their respective financial institutions, and allow these bank-run hedge funds to invest in highly risky derivatives securities free from any form of government regulation? How many people know that both Gramm's wife and Gramm himself directly benefited from his legislative efforts to assist banking institutions? [Gramm's wife was on the board of directors at Enron, one of the major lobbyists for CFMA; Phil Gramm currently receives a hefty income as one of the heads of the investment division at financial giant UBS]. The financial crisis of 2008 was not a product of inevitability. It was a product of greed and ignorance and self-interests.
To fix the destruction that Gramm and his cohorts created, the Volcker rule (which essentially reinstates the spirit of the Glass-Steagall Act) must be passed, and the CFMA must be repealed. I cannot overstate the fight of historic proportions that this effort entails. We must win this fight, otherwise it is a guarantee that the derivatives market will be the ultimate destroyer of global capitalism. Gramm is conveniently gone from the fight, but in his place is Mr. "Orange Tan Man" Bonehead John Boehner of Ohio (R) and a host of new bank puppets that are trying their damndest to maintain the status quo on Wall Street. If Boehner wins this fight, this nation loses.
Peace
Jeremy
Critics point to both procedural and substantive issues for how the bill is being passed and what the bill actually does. I do not find the procedural arguments compelling given the fact that over the decades, each Congress has used a hefty dose of trickeration to push through whatever policy the majority in power deems necessary. However, I still have concerns over some of the substantive portions of the bill. Specifically, the bill doesn't do nearly enough to address price controls and price dynamics.
Tort reform has to happen if there is to be a legitimate effort at reigning in costs. So far, tort reform has received virtually no attention. Further, a public health insurance plan option is a necessary component of lowering health care costs. Critics of the public option make all kinds of absurd "anti-socialist-like" arguments that really make no sense whatsoever. The U.S. Government has been both a primary insurer and a central component of creating competitive pricing environments for decades. Flood insurance, Medicaid, FEHBP (the health insurance plan that our elected Washington politicians receive), Veterans insurance, financial deposit insurance, mortgages, student loans, and farm subsidies are several of the many ways that as a public policy we have used the scale and scope of the federal government to assist with vital services and with creating competitive marketplaces. Failure to include tort reform and a public option in the current healthcare plan is a significant failure. That may not necessarily mean that the plan itself is doomed to failure. It does mean that the plan is doomed to failure if necessary, substantive amendments are not made to the healthcare plan in the immediate future.
My other criticism of the handling of this bill, and pretty much every other bill that has passed since the mid-1980s, is the accompanying plan to pay for it, or lack thereof. Ever since the Reagan Administration, supply-side economic policies have dominated. What supply-side economics seeks to do is lower taxes across the board, to allow people and corporations to spend and invest more money. By lowering taxes up front, naturally the amount of tax revenues that the government is able to collect also declines. If federal budgets are not reduced accordingly, we have deficits. Supply-side economists are not too concerned with up front budget deficits because the belief is that by lowering taxes, economic growth can expand, and that will result in increased tax revenues down the road to compensate for the tax revenues lost up front. In theory, this sounds nice. In practice it has been a catastrophe. Since supply-side economics was implemented back in the mid-1980s, the federal debt went from less than $1 trillion to almost $14 trillion.
Now we are stuck between a rock and a hard place.
To make up the difference between the costs of what we spend as a nation, and the revenues that we use to pay for those costs -- we have to (1) normalize taxes across the board back to their historical rates applied for over 100 years, and (2) reduce expenses across the board to a normalized level. Over the next 10 years will see both, or face a total collapse of the U.S. dollar. We will see the progressive rate scale of the individual taxpayer increase to historical levels where the nation's wealthiest will once again see a 60-90% marginal rate; dividend and capital gains taxes will also increase to historical levels. Further, we will see significant cuts to federal programs, including entitlement programs and war/defense expenses. This is the only answer we have.
But there should be no delusion as to the consequences of even these necessary steps -- it will be a very, very painful process for our nation. What will happen when we make across the board tax increases in conjunction with across the board cuts in spending is (1) slower economic growth, and (2) a loss of vital public services for millions of Americans, that together will lead to increased poverty and increased social unrest. It is quite possible that the remedy to put our nation back onto a path of fiscal responsibility, may itself lead to an ever downward spiral of the economy.
When I say we are stuck between a rock and a hard place, I really mean there are no easy answers to our nation's problems -- either path (staying the same course we've been on the last 30 years, or reverting back to historical tax and reduced expense levels) has the real potential to lead to the same result -- a complete traumatic failure of the U.S. economy.
Before turning to my final criticism of the Obama Administration's handling of the healthcare bill, a couple words on why I believe the U.S. has been making preparations in anticipation of massive social unrest. There are folks within the Pentagon and within the highest level of our military who are tasked with the sole responsibility of thinking up every scenario that puts our national security at stake, and how to successfully implement measures to counter each threat. It had occurred to me that when former Treasury Secretary Poulsen threatened legislators in October 2008 that if the emergency TARP bill isn't passed that something worse than the Great Depression would result and that "marshall law" would have to be used, that when Poulsen stated these things he wasn't talking out of his ass. Our government makes contingency plans for virtually every potential threat to our nation's security interests, it is only reasonable to assume that it has a similar plan in place in the case of total economic failure resulting in massive social unrest. Poulsen's remarks are credible given what we know from other publicly available information: (1) the formation of U.S. Northern Command (USNorthCom) after 9/11 that is charged with protecting the American homeland, (2) as first reported by the Washington Post that the Northern Command will receive 20,000 troops (and later reported, up to 80,000 troops) by 2011 that are being redeployed from the Army's 3rd Infantry Division that had been serving in Iraq, (3) a report from the Army Times stating that Northern Command troops will be retrained to assist with "civil unrest" and "crowd control" and "to subdue unruly or dangerous individuals without killing them," (4) the Defense Authorization Act of 2006 and the 2008 National Defense Authorization Act overriding portions of the Insurrection Act of 1807 and the Posse Comitatus Act of 1878, which essentially grants the sitting president increased power to use military troops on American soil for purposes of martial law, (5) in July 2009, NorthCom's Commander-General Victor Renault spoke before the House Armed Services Committee to begin pushing for centralized authority of the 400,000 National Reserve units that have been traditionally deployed by order of state governors, (6) Clergy Response Teams are being established nationwide to deal with crisis and social unrest (Romans 13 is their go-to chapter of the scriptures), and (7) bill H.R. 645 currently sitting in the House, is designed to "direct the Secretary of Homeland Security to establish national emergency centers on military installations." Earlier this week, ratings agency Moody's issued a new report warning public officials to change their current fiscal planning trajectory otherwise the U.S.'s AAA-rating will be in jeopardy. In the same report, Moody's indicated that severe government spending cuts will be needed, and as a result substantial "social unrest" is likely to ensue (similar to what we are seeing in Greece right now). As evidenced from the above, our military thinkers are ahead of the curve on this one and have measurements in place to deal with this very real possibility. Personally, I welcome these measures. After seeing Columbus residents at a healthcare protest demonstration earlier this week, turn nasty against an old impoverished man suffering with Parkinson's disease, I am convinced that we will need substantial numbers of military personnel to subdue the crazies in times of social unrest.
My final criticism of the handling of the healthcare reform bill, is that by so much attention being shifted toward this subject, that much less attention has focused on the financial nuclear weapons that created the crisis of 2008-2009. I have said many times before, healthcare reform is both worthy and necessary. But, it is possible to spend so much time on it, that sight is lost on other critical measures. This is what has happened over the past year. Every day that major news outlets focus on how Democrats are planning to round up the necessary 216 votes in the House, is another day of little or no discussion on the lobbying war being unleashed by the major banking institutions. Most Americans don't know that what transpired in our financial institutions over the past few years was the byproduct of two events that happened no more than 10 years removed -- (1) the repeal of the Glass-Steagall Act in 1999, and (2) the passage of the Commodity Futures Modernization Act (CFMA) of 2000. How many Americans know that former Republican Senator Phil Gramm of Texas, was primarily responsible for both granting banks an opportunity to set up a hedge fund inside their respective financial institutions, and allow these bank-run hedge funds to invest in highly risky derivatives securities free from any form of government regulation? How many people know that both Gramm's wife and Gramm himself directly benefited from his legislative efforts to assist banking institutions? [Gramm's wife was on the board of directors at Enron, one of the major lobbyists for CFMA; Phil Gramm currently receives a hefty income as one of the heads of the investment division at financial giant UBS]. The financial crisis of 2008 was not a product of inevitability. It was a product of greed and ignorance and self-interests.
To fix the destruction that Gramm and his cohorts created, the Volcker rule (which essentially reinstates the spirit of the Glass-Steagall Act) must be passed, and the CFMA must be repealed. I cannot overstate the fight of historic proportions that this effort entails. We must win this fight, otherwise it is a guarantee that the derivatives market will be the ultimate destroyer of global capitalism. Gramm is conveniently gone from the fight, but in his place is Mr. "Orange Tan Man" Bonehead John Boehner of Ohio (R) and a host of new bank puppets that are trying their damndest to maintain the status quo on Wall Street. If Boehner wins this fight, this nation loses.
Peace
Jeremy
Tuesday, March 16, 2010
Here Come the Wall Street Spin Doctors...
I made time this morning to work through the 200+ articles I set aside that inform us about the state of the U.S. economy. No surprise, the news isn't good. What is a surprise is the fact that the market has yet to really price in the state of the economy. What this means is that when Democrats in Congress finally move to pass healthcare reform, the markets will begin tanking sharply. The news headlines will read that the market is responding negatively to the new healthcare reforms. That will be the bullshit spin coming from Wall Street insiders. The truth is the market has been riding up a wave of b.s. for months now and is long overdo for a major selloff.
With consumer spending making up roughly 70% of the economy, it is clear that where the American household goes so goes the American economy. The average American household is not doing too well right now. Because of an underperforming stock market, 401(k)s have lost over a quarter of their value in the past decade. Existing homes sales fell 7% in January, following a 16% decline in December (the largest drop in history). Important to note that of the homes that were actually sold, 38% were foreclosure sales. New homes sales are fairing even worse, declining over 11% in January, the sharpest drop since 1963. We will not see an improvement on home sales any time soon -- new mortgage applications are at a 13-year low. Some with mortgages are wishing they didn't have one -- more than one-fourth of all Americans with a mortgage owe more than their home is now worth; also, 10% of mortgage owners owe more than 25% than their home is worth. Real unemployment is estimated at around 17% right now, with more than 40% of the unemployed being out of work for over 6 months. Unemployment and high medical expenses are contributing to increased bankruptcies -- personal bankruptcy filings are up 14% from a year ago; more than 60% of the filings are tied to medical expenses. [Healthcare reform matters.] Those fortunate enough to have jobs are also being affected by the poor marketplace -- in 2009, personal incomes fell 1.7%, the sharpest drop since the Great Depression; average income is less than it was 10 years ago.
While Wall Street banks are experiencing record profits (thanks to back-door AIG bailouts from the taxpayer), the average U.S. bank is not doing well. After 140 bank failures in 2009, well over 700 banks (or about 10% of all U.S. banks) are on the FDIC's watch list for potential failure this year. After all that has been spent on bank bailouts, it is estimated that an additional $1.5 trillion is needed to recapitalize U.S. banks (this statistic is baffling to me considering that the estimated capitalization of all U.S. banks is only $1 trillion -- nationalization of the banking system does not seem so farfetched). More than $1 in every $10 that U.S. banks have lent out is in the hands of troubled borrowers on the verge of default. Wall Street bankers are doing very well - Wall Street bonuses increased 17% in 2009 to $20 billion; compensation and benefits from the 20 largest banks were at $300 billion in 2009. The average pay of a Goldman Sachs banker in 2009 is $600,000; partners at the top 25 law firms (dealing primarily on Wall Street) earned anywhere from $1.3 to $4 million in 2008. Meanwhile taxes on high earners are at historical lows -- about half the rate they have been over the past 100 years.
The U.S. Government and state governments are also in a world of hurt. Expect massive cuts in state budgets over the next 2 years. In the state of Illinois, for example, it is projected to have a deficit of $11 to $13 billion through 2011. Public sector pensions are one part of the burden -- the 50 states are facing a $1 trillion shortfall in public sector retirement plans. Federal debt is in an even worse situation -- U.S. debt is expected to top $22 trillion over the next decade. Because of the high debt, rating agency Moody's published a warning this week that the U.S. Government's AAA-rating is in jeopardy; the U.S. has never had less than a AAA-rating. Moody's concerns center on federal debt that is expected to sit at 64% of GDP this year, additionally the U.S. deficit is expected to rise to 10.6% of GDP this year making it one of the most severe ratios in the industrialized world.
Because of do-nothing Republicans on Capitol HIll, systemic risks in the financial system remain. The combined assets of the 6 largest U.S. banks make up 63% of total U.S. GDP; 15 years ago, the combined assets from the 6 largest bank only made up 17% of U.S. GDP. "Too big to fail" financial institutions was the reason that we were told a bailout of Wall Street was needed -- yet, the numbers show that the same banks are bigger than ever before. Another major contributor to the financial crisis was derivatives. Today, an estimated $670 trillion remains wrapped up in derivatives in a shadowy and unregulated market; recent estimates put the derivatives market at 20 to 40 times the entire U.S. economy. Surely Republicans can see these problems, right? The fact that there are now 8 lobbyists for every member of Congress might have something to do with do-nothing Washington Republicans. Just a guess -- call me crazy.
So, with all of the unfavorable news widely disseminated in mainstream media, surely the stock market has priced in the negativity? Ummm, no, it hasn't. The market is basically sitting about where it was 10 years ago, yet unemployment was less than 4% then, and average income was higher then than it is today; further, our national debt has more than doubled from where it was 10 years ago. But markets are forward looking, right? So maybe the market is pricing in solid growth in the years to come? Over the past decade, growth was driven by tax cuts, tax credits, 0% interest rates and federal handouts. Today, because of unfunded spending over the past 10 years, new tax cuts and new tax credits are not possible, and federal handouts are expected to come to an end this year as the home buyer program fazes out in April. And, we are still stuck with 0% interest rates. Where will the growth come from? Who knows. But the market is definitely looking through a rosy lens right now. The S&P 500 has a PE of about 80 if we use trailing numbers over the past year. If we look to where earnings are being projected to be by 2011, as estimated by Wall Street analysts, the S&P is carrying a forward PE of anywhere from 20 to 25. Historically, the S&P has carried on average a PE of 15.7. The market must be a good deal because mutual funds currently have the lowest cash levels since September 2007, 1 month before the S&P 500 started on its 57% decline to an ultimate low of 666 in early 2009. [Hedge fund managers look at cash levels of mutual funds because hedge fund managers consider mutual funds to be "dumb" money]. Another bearish indicator -- insider selling is at a high for the year, while insider buying is at a low. And curiously, the SEC recently moved to curb short sales through a 3-2 vote; the timing is interesting -- some see it as a move in preparation of upcoming market declines.
I purposely haven't mentioned the sovereign debt crisis facing other countries; Greece, for example, has $72 billion in debt due this year and has to make severe cuts to social programs to pay the bill. The reason I haven't mentioned the crisis facing Portugal, Ireland, Greece, Spain, Italy, the U.K., and other nations, is that our country is at the heart of the global problem. Where we go as a nation, so goes the rest of the world. We must focus on fixing our problems first, and then we can worry about what other countries are dealing with. In summary, where are we at? A new financial health indicator developed by Goldman Sachs, which consists of 44 economic indicators, is projecting economic weakness in the near future. Genius. Just read the news. Where will the market go from here in light of the economic data that is out there? It will not fair any better than it has the past 10 years; adjusted for inflation, Wall Street returned a 20% loss to the average investor over the past decade. Do not expect any better than that this decade.
Peace
Jeremy
With consumer spending making up roughly 70% of the economy, it is clear that where the American household goes so goes the American economy. The average American household is not doing too well right now. Because of an underperforming stock market, 401(k)s have lost over a quarter of their value in the past decade. Existing homes sales fell 7% in January, following a 16% decline in December (the largest drop in history). Important to note that of the homes that were actually sold, 38% were foreclosure sales. New homes sales are fairing even worse, declining over 11% in January, the sharpest drop since 1963. We will not see an improvement on home sales any time soon -- new mortgage applications are at a 13-year low. Some with mortgages are wishing they didn't have one -- more than one-fourth of all Americans with a mortgage owe more than their home is now worth; also, 10% of mortgage owners owe more than 25% than their home is worth. Real unemployment is estimated at around 17% right now, with more than 40% of the unemployed being out of work for over 6 months. Unemployment and high medical expenses are contributing to increased bankruptcies -- personal bankruptcy filings are up 14% from a year ago; more than 60% of the filings are tied to medical expenses. [Healthcare reform matters.] Those fortunate enough to have jobs are also being affected by the poor marketplace -- in 2009, personal incomes fell 1.7%, the sharpest drop since the Great Depression; average income is less than it was 10 years ago.
While Wall Street banks are experiencing record profits (thanks to back-door AIG bailouts from the taxpayer), the average U.S. bank is not doing well. After 140 bank failures in 2009, well over 700 banks (or about 10% of all U.S. banks) are on the FDIC's watch list for potential failure this year. After all that has been spent on bank bailouts, it is estimated that an additional $1.5 trillion is needed to recapitalize U.S. banks (this statistic is baffling to me considering that the estimated capitalization of all U.S. banks is only $1 trillion -- nationalization of the banking system does not seem so farfetched). More than $1 in every $10 that U.S. banks have lent out is in the hands of troubled borrowers on the verge of default. Wall Street bankers are doing very well - Wall Street bonuses increased 17% in 2009 to $20 billion; compensation and benefits from the 20 largest banks were at $300 billion in 2009. The average pay of a Goldman Sachs banker in 2009 is $600,000; partners at the top 25 law firms (dealing primarily on Wall Street) earned anywhere from $1.3 to $4 million in 2008. Meanwhile taxes on high earners are at historical lows -- about half the rate they have been over the past 100 years.
The U.S. Government and state governments are also in a world of hurt. Expect massive cuts in state budgets over the next 2 years. In the state of Illinois, for example, it is projected to have a deficit of $11 to $13 billion through 2011. Public sector pensions are one part of the burden -- the 50 states are facing a $1 trillion shortfall in public sector retirement plans. Federal debt is in an even worse situation -- U.S. debt is expected to top $22 trillion over the next decade. Because of the high debt, rating agency Moody's published a warning this week that the U.S. Government's AAA-rating is in jeopardy; the U.S. has never had less than a AAA-rating. Moody's concerns center on federal debt that is expected to sit at 64% of GDP this year, additionally the U.S. deficit is expected to rise to 10.6% of GDP this year making it one of the most severe ratios in the industrialized world.
Because of do-nothing Republicans on Capitol HIll, systemic risks in the financial system remain. The combined assets of the 6 largest U.S. banks make up 63% of total U.S. GDP; 15 years ago, the combined assets from the 6 largest bank only made up 17% of U.S. GDP. "Too big to fail" financial institutions was the reason that we were told a bailout of Wall Street was needed -- yet, the numbers show that the same banks are bigger than ever before. Another major contributor to the financial crisis was derivatives. Today, an estimated $670 trillion remains wrapped up in derivatives in a shadowy and unregulated market; recent estimates put the derivatives market at 20 to 40 times the entire U.S. economy. Surely Republicans can see these problems, right? The fact that there are now 8 lobbyists for every member of Congress might have something to do with do-nothing Washington Republicans. Just a guess -- call me crazy.
So, with all of the unfavorable news widely disseminated in mainstream media, surely the stock market has priced in the negativity? Ummm, no, it hasn't. The market is basically sitting about where it was 10 years ago, yet unemployment was less than 4% then, and average income was higher then than it is today; further, our national debt has more than doubled from where it was 10 years ago. But markets are forward looking, right? So maybe the market is pricing in solid growth in the years to come? Over the past decade, growth was driven by tax cuts, tax credits, 0% interest rates and federal handouts. Today, because of unfunded spending over the past 10 years, new tax cuts and new tax credits are not possible, and federal handouts are expected to come to an end this year as the home buyer program fazes out in April. And, we are still stuck with 0% interest rates. Where will the growth come from? Who knows. But the market is definitely looking through a rosy lens right now. The S&P 500 has a PE of about 80 if we use trailing numbers over the past year. If we look to where earnings are being projected to be by 2011, as estimated by Wall Street analysts, the S&P is carrying a forward PE of anywhere from 20 to 25. Historically, the S&P has carried on average a PE of 15.7. The market must be a good deal because mutual funds currently have the lowest cash levels since September 2007, 1 month before the S&P 500 started on its 57% decline to an ultimate low of 666 in early 2009. [Hedge fund managers look at cash levels of mutual funds because hedge fund managers consider mutual funds to be "dumb" money]. Another bearish indicator -- insider selling is at a high for the year, while insider buying is at a low. And curiously, the SEC recently moved to curb short sales through a 3-2 vote; the timing is interesting -- some see it as a move in preparation of upcoming market declines.
I purposely haven't mentioned the sovereign debt crisis facing other countries; Greece, for example, has $72 billion in debt due this year and has to make severe cuts to social programs to pay the bill. The reason I haven't mentioned the crisis facing Portugal, Ireland, Greece, Spain, Italy, the U.K., and other nations, is that our country is at the heart of the global problem. Where we go as a nation, so goes the rest of the world. We must focus on fixing our problems first, and then we can worry about what other countries are dealing with. In summary, where are we at? A new financial health indicator developed by Goldman Sachs, which consists of 44 economic indicators, is projecting economic weakness in the near future. Genius. Just read the news. Where will the market go from here in light of the economic data that is out there? It will not fair any better than it has the past 10 years; adjusted for inflation, Wall Street returned a 20% loss to the average investor over the past decade. Do not expect any better than that this decade.
Peace
Jeremy
Wednesday, March 10, 2010
Is it B.S. or a Real Bull?
The U.S. stock indexes are on a nice run of late, building on top of enormous gains from the past year. It begs the question: is it sustainable? There are at least two ways to interpret recent market behavior: (1) it's bullshit, or (2) it's a real bull. For the most part, it seems financial writers and economists are fairly evenly split on the question. Among the published literature on the topic, there is no question that the overall sentiment tilted heavily to the bearish side in the month of February. This month, however, the tide has clearly shifted in favor of the bulls. So who is right? Hopefully the optimists are. Though, there is evidence to suggest that this may be nothing more than wishful thinking.
Much of the recent optimism reminds me of a period not too long ago. After a severe decline of the S&P 500 in 2001, the index saw a strong rebound to a peak in January 2002. The S&P then retraced a bit for the next several weeks. By late February and into March, the markets regained their strength, rising to roughly the same highs set in early January. Optimism was in the air. The hope was that the terrible downturn in the market was finally over, and only blue skies remained.
Here is some of the rosy commentary from late February/early March 2002, provided by the Federal Reserve Board...
"More recently, there have been encouraging signs that economic activity is beginning to firm. Job losses diminished considerably in December and January, and initial claims for unemployment insurance and the level of insured unemployment have reversed their earlier sharp increases. Although motor vehicle purchases have declined appreciably from their blistering fourth-quarter pace, early readings suggest that consumer spending overall has remained very strong early this year. In the business sector, new orders for capital equipment have provided some tentative indications that the deep retrenchment in investment spending could be abating. Meanwhile, purchasing managers in the manufacturing sector report that orders have strengthened and that they view the level of their customers' inventories as being in better balance. Indeed, the increasingly rapid pace of inventory runoff over the course of the last year has left the level of production well below that of sales, suggesting scope for a recovery in output given the current sales pace...
...Subsequent news on economic activity bolstered the view that the economy was beginning to stabilize. The information reviewed at the January 29-30, 2002, FOMC meeting indicated that consumer spending had held up remarkably well, investment orders had firmed further, and the rate of decline in manufacturing production had lessened toward the end of 2001...
...Federal Reserve policymakers are expecting the economy to begin to recover this year from the mild downturn experienced in 2001..."
Euphoric CNBC schmanalysts also chimed in, gloating over previous calls that the economy would recover as early as March 2002.
Following these remarks from the Fed and from the highs in mid March 2002, the S&P 500 rapidly deteriorated, losing about a third of its value in only four months.
Nice one, fellas.
Another comparison comes to mind. In 1929, the Dow Jones Industrial Average lost roughly 50% of its value in a matter of weeks. This period is commonly referred to as "the Crash." Historians will quickly correct this misconception -- the real Crash and the Great Depression came after 1929.
Within a year of the 50% decline of 1929, by mid-1930, the market had recovered about 50% of its value. The sentiment then, as it is now, was that the worst was behind the American economy. Legislators wrangled and wasted away precious time, accomplishing very little in this period because the predominant view was that the economy was on track for a slow but steady rebound.
From the highs set in 1930, the U.S. market would go on to lose almost 90% of its value in a brief 2-year period, bottoming out in 1932. "Do little" President Herbert Hoover was given the boot in 1932, as America called on FDR for New Deal-sized change.
So, is the market as we see it in March 2010, a real bull, or like preceding bear market rallies, nothing more than b.s.?
Over the past 2 weeks, I have compiled data from about 200 articles from a wide range of sources, including economists, hedge fund managers, financial writers, and other investor savvy people, the content of which states unequivocally that the good times are over. I'll be putting a quite a bit of time at the federal courthouse the next two days, and this weekend I will be cranking out a paper that aims to put bullet holes into weak-minded libertarian positions. Despite my frantic schedule, my intention is to find some time over the next few days to filter through the 200 or so articles and provide some of the data I am seeing, and examine whether the numbers suggest we are indeed experiencing déjà vu or something more destructive.
"We live in a world where amnesia is the most wished-for state. When did history become a bad word?" - John Guare
Peace
Jeremy
Much of the recent optimism reminds me of a period not too long ago. After a severe decline of the S&P 500 in 2001, the index saw a strong rebound to a peak in January 2002. The S&P then retraced a bit for the next several weeks. By late February and into March, the markets regained their strength, rising to roughly the same highs set in early January. Optimism was in the air. The hope was that the terrible downturn in the market was finally over, and only blue skies remained.
Here is some of the rosy commentary from late February/early March 2002, provided by the Federal Reserve Board...
"More recently, there have been encouraging signs that economic activity is beginning to firm. Job losses diminished considerably in December and January, and initial claims for unemployment insurance and the level of insured unemployment have reversed their earlier sharp increases. Although motor vehicle purchases have declined appreciably from their blistering fourth-quarter pace, early readings suggest that consumer spending overall has remained very strong early this year. In the business sector, new orders for capital equipment have provided some tentative indications that the deep retrenchment in investment spending could be abating. Meanwhile, purchasing managers in the manufacturing sector report that orders have strengthened and that they view the level of their customers' inventories as being in better balance. Indeed, the increasingly rapid pace of inventory runoff over the course of the last year has left the level of production well below that of sales, suggesting scope for a recovery in output given the current sales pace...
...Subsequent news on economic activity bolstered the view that the economy was beginning to stabilize. The information reviewed at the January 29-30, 2002, FOMC meeting indicated that consumer spending had held up remarkably well, investment orders had firmed further, and the rate of decline in manufacturing production had lessened toward the end of 2001...
...Federal Reserve policymakers are expecting the economy to begin to recover this year from the mild downturn experienced in 2001..."
Euphoric CNBC schmanalysts also chimed in, gloating over previous calls that the economy would recover as early as March 2002.
Following these remarks from the Fed and from the highs in mid March 2002, the S&P 500 rapidly deteriorated, losing about a third of its value in only four months.
Nice one, fellas.
Another comparison comes to mind. In 1929, the Dow Jones Industrial Average lost roughly 50% of its value in a matter of weeks. This period is commonly referred to as "the Crash." Historians will quickly correct this misconception -- the real Crash and the Great Depression came after 1929.
Within a year of the 50% decline of 1929, by mid-1930, the market had recovered about 50% of its value. The sentiment then, as it is now, was that the worst was behind the American economy. Legislators wrangled and wasted away precious time, accomplishing very little in this period because the predominant view was that the economy was on track for a slow but steady rebound.
From the highs set in 1930, the U.S. market would go on to lose almost 90% of its value in a brief 2-year period, bottoming out in 1932. "Do little" President Herbert Hoover was given the boot in 1932, as America called on FDR for New Deal-sized change.
So, is the market as we see it in March 2010, a real bull, or like preceding bear market rallies, nothing more than b.s.?
Over the past 2 weeks, I have compiled data from about 200 articles from a wide range of sources, including economists, hedge fund managers, financial writers, and other investor savvy people, the content of which states unequivocally that the good times are over. I'll be putting a quite a bit of time at the federal courthouse the next two days, and this weekend I will be cranking out a paper that aims to put bullet holes into weak-minded libertarian positions. Despite my frantic schedule, my intention is to find some time over the next few days to filter through the 200 or so articles and provide some of the data I am seeing, and examine whether the numbers suggest we are indeed experiencing déjà vu or something more destructive.
"We live in a world where amnesia is the most wished-for state. When did history become a bad word?" - John Guare
Peace
Jeremy
Monday, March 8, 2010
A Short Account of the History of the Corporation: PART 5 (The Rise of the American Business Corporation)
It has been awhile, but in the last examination of the early developments of the corporate structure in America, we saw how a Marshall Court decision allowed businesses to pursue its own ends removed from the threat of federal intrusion. I also noted, however, that states largely ignored much of the court ruling because at the time the only way to curb corporate behavior was through manipulation of the corporate charter; no federal-based corporate regulatory framework existed at the time. We will see later on how this libertarian model of corporate regulation was massively flawed. As corporations expanded across not only state borders, but also across national borders, it would require the eventual development of a federal-based regulatory framework to better check the corporation and its newfound freedom against misguided business practices. These requirements would not surface until the 20th century immediately following the Great Depression.
Beyond a federal-based legal framework to properly guide the behavior of early chartered enterprises, another significant weakness was that the corporation was framed around partnership, which limited the “firm’s ability to raise capital” due to unlimited liability. Some early 19th century incorporation practices did use “limited liability” but it was only granted as a “favor” to those who had the “leverage to obtain it from state legislatures.” In 1824, a federal circuit court decision in Wood v. Drummer aided in moving common law toward accepting limited liability as “the default rule governing businesses.” By 1832, common law had fully adopted the principle of limited liability of corporate shareholders. This change of the corporate form was being mirrored in England with the passage of the Companies Act of 1862. The Act made it legal to form limited-liability joint-stock corporations (akin to publicly traded corporations today), which meant that the max that shareholders could lose was only the amount invested, and nothing more.
While the capital constraints that previously hampered corporations were now removed with the general acceptance of limited liability principles, the mid-19th century American corporation still faced geographic restrictions. To ward off competition from surrounding jurisdictions, states often legislated that corporate operations “be geographically limited to its chartering state.” A Supreme Court decision in 1868, Paul v. Virginia, changed that. The Court held that states could not prohibit a foreign corporate entity from pursuing commerce and commodity transactions in the state’s own jurisdiction. The Court’s opinion aptly captures the importance of corporate enterprise in the development of the Western world, taking the reader back to the annals of merchant empires, even noting that Massachusetts and Plymouth found their “origin, and settlement, and growth under the charters of trading corporations.”
These legal developments provided the catalyst for the emergence of big business in America. The first of these “super” corporations came from the railroad industry and its unprecedented demand for massive sums of capital. By 1910, 240,000 miles of railroad track had been laid. This was only made possible with vast sums of capital. And the most efficient means to bring that capital to the market was the corporation and the stock exchange. Such were the capital requirements of the railroad industry that in 1898, railroads “accounted for 60% of publicly issued stock” on the New York Stock Exchange. In 1891, The Pennsylvania Railroad employed over 110,000, almost triple the total size of the United States’ armed forces at the time. The company’s market capitalization of $842 million was nearly equivalent to the total national debt. And along with big business came extremely wealthy individuals: By 1900 the railroad industry was largely controlled by just seven investor groups: the Vanderbilts, E.H. Harriman, George J. Gould, James J. Hill, J.P. Morgan, Andrew Carnegie, and W.H. Moore.
The significance of the railroad corporation extends beyond its reliance on the stock market to meet heavy capital requirements. Perhaps an even greater development that further distinguished the railroad corporation from the mercantile partnerships that preceded it was on an infrastructure level and the operational efficiencies gained. The scale of railroad projects required a new way of doing business that could measure performance and make rapid and responsive changes, both of which required a steady flow of reliable information. The combined effect of the enormous sums of capital obtained through equity exchanges and the efficiencies of its business operations make railroads the first true corporations in the modern sense.
Other industries would model the success of the railroads. Henry Ford’s operation is particularly noteworthy as his company built upon the organizational efficiency of the railroad industry by applying similar concepts to his manufacturing facilities. Through these developments he was able to cut the production time of a Model T from 12 hours down to 1.5 hours by 1914. Such was the success of his mass production and mass distribution system that the process soon was copied by nearly every other successful corporation – the process became known as Fordism.
Now freed up legally, financially and geographically to pursue organic growth (natural growth within a business entity), another change would pave the way to corporate growth through acquisitions. Up until this time corporations for the most part were not given the ability to acquire shares of other corporations. This changed in 1890 when New Jersey policymakers enacted liberal legislation giving corporations for the first time the authorization to purchase shares of other companies. A new structure of parent- and subsidiary-corporations was realized, and soon powerful corporations like Standard Oil and United States Steel began organizing into super-massive corporate groups.
The cumulative effects of these legal developments on the corporate form were radical, transforming it from a simple partnership into a super structure with tremendous organizational complexity to match its vast operational scale. Modeling themselves after the railroads and utilizing the newly constructed railroad lines for the distribution of manufactured goods, soon other “super” corporations emerged. Identifying niches in the market and developing new products, corporations like Procter & Gamble, DuPont, General Electric, Ford and many others rose to power.
A glimpse at Proctor & Gamble’s corporate history portrays just how much of an impact these legal developments had on the corporation in America. Proctor & Gamble started in 1837 as partnership between William Proctor and James Gamble to sell candles. After operating as a simple partnership for 53 years, P&G incorporated in 1890 in order to raise additional capital for expansion purposes. With the ability to raise levels of capital that was previously impossible, and with the ability to acquire other businesses as well as expand across state borders, P&G experienced enormous growth over a 100 year period. Today the company has operations in over 80 countries and owns numerous brands like Pampers, Gillette, Braun, Iams, Folgers, Wella, Duracell, most of which acquired through the purchase of other companies.
In our next look at the history of the American business corporation, we will see that the concentration of capital, which led to abuses by tycoons, was met with collectives of labor. Much like English consumers were required to organize in the 1700s to counter business practices that relied on slave trade, workers similarly organized to combat unjust labor practices. The history of capitalism has this theme played out over and over again: the concentration of capital leads to injustices - the concentration of consumers, laborers, shareholders, and stakeholders to counter these injustices.
Peace
Jeremy
Beyond a federal-based legal framework to properly guide the behavior of early chartered enterprises, another significant weakness was that the corporation was framed around partnership, which limited the “firm’s ability to raise capital” due to unlimited liability. Some early 19th century incorporation practices did use “limited liability” but it was only granted as a “favor” to those who had the “leverage to obtain it from state legislatures.” In 1824, a federal circuit court decision in Wood v. Drummer aided in moving common law toward accepting limited liability as “the default rule governing businesses.” By 1832, common law had fully adopted the principle of limited liability of corporate shareholders. This change of the corporate form was being mirrored in England with the passage of the Companies Act of 1862. The Act made it legal to form limited-liability joint-stock corporations (akin to publicly traded corporations today), which meant that the max that shareholders could lose was only the amount invested, and nothing more.
While the capital constraints that previously hampered corporations were now removed with the general acceptance of limited liability principles, the mid-19th century American corporation still faced geographic restrictions. To ward off competition from surrounding jurisdictions, states often legislated that corporate operations “be geographically limited to its chartering state.” A Supreme Court decision in 1868, Paul v. Virginia, changed that. The Court held that states could not prohibit a foreign corporate entity from pursuing commerce and commodity transactions in the state’s own jurisdiction. The Court’s opinion aptly captures the importance of corporate enterprise in the development of the Western world, taking the reader back to the annals of merchant empires, even noting that Massachusetts and Plymouth found their “origin, and settlement, and growth under the charters of trading corporations.”
These legal developments provided the catalyst for the emergence of big business in America. The first of these “super” corporations came from the railroad industry and its unprecedented demand for massive sums of capital. By 1910, 240,000 miles of railroad track had been laid. This was only made possible with vast sums of capital. And the most efficient means to bring that capital to the market was the corporation and the stock exchange. Such were the capital requirements of the railroad industry that in 1898, railroads “accounted for 60% of publicly issued stock” on the New York Stock Exchange. In 1891, The Pennsylvania Railroad employed over 110,000, almost triple the total size of the United States’ armed forces at the time. The company’s market capitalization of $842 million was nearly equivalent to the total national debt. And along with big business came extremely wealthy individuals: By 1900 the railroad industry was largely controlled by just seven investor groups: the Vanderbilts, E.H. Harriman, George J. Gould, James J. Hill, J.P. Morgan, Andrew Carnegie, and W.H. Moore.
The significance of the railroad corporation extends beyond its reliance on the stock market to meet heavy capital requirements. Perhaps an even greater development that further distinguished the railroad corporation from the mercantile partnerships that preceded it was on an infrastructure level and the operational efficiencies gained. The scale of railroad projects required a new way of doing business that could measure performance and make rapid and responsive changes, both of which required a steady flow of reliable information. The combined effect of the enormous sums of capital obtained through equity exchanges and the efficiencies of its business operations make railroads the first true corporations in the modern sense.
Other industries would model the success of the railroads. Henry Ford’s operation is particularly noteworthy as his company built upon the organizational efficiency of the railroad industry by applying similar concepts to his manufacturing facilities. Through these developments he was able to cut the production time of a Model T from 12 hours down to 1.5 hours by 1914. Such was the success of his mass production and mass distribution system that the process soon was copied by nearly every other successful corporation – the process became known as Fordism.
Now freed up legally, financially and geographically to pursue organic growth (natural growth within a business entity), another change would pave the way to corporate growth through acquisitions. Up until this time corporations for the most part were not given the ability to acquire shares of other corporations. This changed in 1890 when New Jersey policymakers enacted liberal legislation giving corporations for the first time the authorization to purchase shares of other companies. A new structure of parent- and subsidiary-corporations was realized, and soon powerful corporations like Standard Oil and United States Steel began organizing into super-massive corporate groups.
The cumulative effects of these legal developments on the corporate form were radical, transforming it from a simple partnership into a super structure with tremendous organizational complexity to match its vast operational scale. Modeling themselves after the railroads and utilizing the newly constructed railroad lines for the distribution of manufactured goods, soon other “super” corporations emerged. Identifying niches in the market and developing new products, corporations like Procter & Gamble, DuPont, General Electric, Ford and many others rose to power.
A glimpse at Proctor & Gamble’s corporate history portrays just how much of an impact these legal developments had on the corporation in America. Proctor & Gamble started in 1837 as partnership between William Proctor and James Gamble to sell candles. After operating as a simple partnership for 53 years, P&G incorporated in 1890 in order to raise additional capital for expansion purposes. With the ability to raise levels of capital that was previously impossible, and with the ability to acquire other businesses as well as expand across state borders, P&G experienced enormous growth over a 100 year period. Today the company has operations in over 80 countries and owns numerous brands like Pampers, Gillette, Braun, Iams, Folgers, Wella, Duracell, most of which acquired through the purchase of other companies.
In our next look at the history of the American business corporation, we will see that the concentration of capital, which led to abuses by tycoons, was met with collectives of labor. Much like English consumers were required to organize in the 1700s to counter business practices that relied on slave trade, workers similarly organized to combat unjust labor practices. The history of capitalism has this theme played out over and over again: the concentration of capital leads to injustices - the concentration of consumers, laborers, shareholders, and stakeholders to counter these injustices.
Peace
Jeremy
Friday, March 5, 2010
Cracks on the Wall and the Faulty Foundation
There is a story I have shared in prior speaking engagements and have used in some writing pieces. It is a derivation of an actual event that happened to a house owned by an aunt and uncle of mine...
Upon returning home from work one day, my uncle noticed a small crack on one of the walls. He had never seen the crack prior to that day, and rightfully assumed it recently formed. To attempt to fix the crack, he used some fresh mortar, and subsequently repainted the wall.
The wall appeared to be back to normal.
Several weeks later, my uncle noticed a new crack on the wall, only this time it was substantially larger than the original. Concerned that something else more problematic was causing the cracking, he called up a contractor to check it out. The contractor arrives on the scene, and says, “Yep, you do have a crack but it may have simply formed from the foundation settling, and nothing more.” He adds, “If you are genuinely concerned, to get a full diagnosis of the situation, you are going to need a specialist to investigate it - a structural engineer. But as this can be costly, I don't recommend using an engineer unless the problem becomes more severe.”
My uncle didn't have several thousand dollars laying around to pay for a structural engineer, especially if the problem proved to be nothing more than settling. He took the contractor's advice, repainted the wall once more, and hoped that would be the end of the cracking.
No such luck.
Within weeks the crack not only reappeared but now it was joined by several more cracks that extended across the length of the entire wall. He had no choice. He finally called in the structural engineer to conduct a full examination over the problem. The engineer arrived on the scene, inspected the wall, inspected the foundation and reports back to my uncle: “Yes, you do have significant cracking on your wall, but your problem isn’t the cracks.”
“Well, what do you mean?” my uncle questions, “I have cracks that now extend across the entire face of the wall.” “If my problem isn’t the cracking, then what is the problem?”
The engineer replied, “You can patch the cracks up and repaint that wall over and over again, but no amount of covering up the cracks is going to fix the problem. The problem isn’t the cracks - it is your faulty foundation. Until you fix your foundation, you will forever have cracks on your walls.”
From the local and personal events of private life, to global and social challenges of the public square, the truth of this parable is inescapable: we will forever be reacting to cracks on the walls, until we finally act on the faulty foundations. I am reminded of this story once more as the great debate continues over what the American healthcare system should be like in the 21st Century, or how should banking institutions and hedge funds operate from this day forth, or what is the necessary level of taxation and the budget to address the deficit and national debt, or how should corporations and governments partner to address a host of emerging issues ranging from entitlement shortfalls, education, affordable housing, free speech in non-democratic societies, global conflict, the environment, poverty, resource consumption, drug use, obesity, healthcare, and nuclear weapons.
In each of these areas, we are at the crossroads of crisis because for too long we have applied the expedient patchwork approach to the social cracks, when the solution calls for deliberate and difficult fixing of faulty foundations. In this century of crisis, our generation is granted the unique challenge to address the most pressing problems that will determine if our house will provide a sustainable habitat for generations to come, or if it is to become a shack of shambles.
Peace
Jeremy
Upon returning home from work one day, my uncle noticed a small crack on one of the walls. He had never seen the crack prior to that day, and rightfully assumed it recently formed. To attempt to fix the crack, he used some fresh mortar, and subsequently repainted the wall.
The wall appeared to be back to normal.
Several weeks later, my uncle noticed a new crack on the wall, only this time it was substantially larger than the original. Concerned that something else more problematic was causing the cracking, he called up a contractor to check it out. The contractor arrives on the scene, and says, “Yep, you do have a crack but it may have simply formed from the foundation settling, and nothing more.” He adds, “If you are genuinely concerned, to get a full diagnosis of the situation, you are going to need a specialist to investigate it - a structural engineer. But as this can be costly, I don't recommend using an engineer unless the problem becomes more severe.”
My uncle didn't have several thousand dollars laying around to pay for a structural engineer, especially if the problem proved to be nothing more than settling. He took the contractor's advice, repainted the wall once more, and hoped that would be the end of the cracking.
No such luck.
Within weeks the crack not only reappeared but now it was joined by several more cracks that extended across the length of the entire wall. He had no choice. He finally called in the structural engineer to conduct a full examination over the problem. The engineer arrived on the scene, inspected the wall, inspected the foundation and reports back to my uncle: “Yes, you do have significant cracking on your wall, but your problem isn’t the cracks.”
“Well, what do you mean?” my uncle questions, “I have cracks that now extend across the entire face of the wall.” “If my problem isn’t the cracking, then what is the problem?”
The engineer replied, “You can patch the cracks up and repaint that wall over and over again, but no amount of covering up the cracks is going to fix the problem. The problem isn’t the cracks - it is your faulty foundation. Until you fix your foundation, you will forever have cracks on your walls.”
From the local and personal events of private life, to global and social challenges of the public square, the truth of this parable is inescapable: we will forever be reacting to cracks on the walls, until we finally act on the faulty foundations. I am reminded of this story once more as the great debate continues over what the American healthcare system should be like in the 21st Century, or how should banking institutions and hedge funds operate from this day forth, or what is the necessary level of taxation and the budget to address the deficit and national debt, or how should corporations and governments partner to address a host of emerging issues ranging from entitlement shortfalls, education, affordable housing, free speech in non-democratic societies, global conflict, the environment, poverty, resource consumption, drug use, obesity, healthcare, and nuclear weapons.
In each of these areas, we are at the crossroads of crisis because for too long we have applied the expedient patchwork approach to the social cracks, when the solution calls for deliberate and difficult fixing of faulty foundations. In this century of crisis, our generation is granted the unique challenge to address the most pressing problems that will determine if our house will provide a sustainable habitat for generations to come, or if it is to become a shack of shambles.
Peace
Jeremy
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