Sunday, October 2, 2016

MAKERS AND TAKERS

For many the title implies that some people do the work and others just live off the profits generated by workers.  Job creators and mooches is part of the thinking (or rationalizations) that enable a few to exploit the many.  The financial trade employs 4% of jobs, but extracts 25% of corporate profits.

There have always been some people who strive to take advantage of their naive comrades, but Rana Foroohar brings up to date with some modern twists.   One starting point was with the American Civil War.  Abraham Lincoln needed to finance the Union cause, but learned he needed support from banks and they wanted concessions.

Not too long after the Civil War in both Britain and America the legal concept of limited liability started gaining momentum.  This meant an investor could not be held liable for financial disasters.  Basically it removed a hesitation to be a partner in a business when you could be liable for more than your investment.  It freed up a lot of capital for the benefit of most, but also increased the willingness to take risks.

By the 1920's 3/4 of major household items were bought on credit.  This was just the start of making it easier to spend money one did not have.  As advertising helped create demand for more products, the cost of living or "keeping up with the Jones" got more expensive, more women became workers and then found even that became more difficult kept it going with credit.

American business schools have come to emphasize efficiency.  A short term view to boost shareholder profit.  This can be seen in countless companies that emphasized cutting costs at the expense of research.  Many companies could make a large part of their profits from financing.  Short term profits at expense of real long term growth (which might require research, training) has become normal..

Avoiding taxes is a priority  I am reminded of Mariana Mazzucato who felt governments were not given enough credit for their efforts for research  Many governments are responsible for significant improvements.  Read more at:  http://www.johnfdavidson.com/2015/07/the-entreprenurial-state.html

Companies are finding more ways to avoid taxes.  A new strategy is called inversion where a large American company merges with a company is a lesser taxed nation and arranges their affairs to reduce taxes.

Commodities are the stuff of life, but not previously considered a very sexy investment.  Still huge investment firms always looking for new opportunities found a few.  One of the net results was the rising of prices including food.  Another interesting example was Goldman Sachs hoarded aluminum to raise the price.  Amongst other companies affected by that were Coke and Coors that used aluminum for canned beverages.

The author commented that the government chose to bail out banks rather than give more support for those with risky mortgages that often were arranged with a fraudulent element.  Basically the government did fine companies when they were able to prove fraud, but virtually none of the heads of the fined companies were sent to jail.  Jail time has proved to be more effective than fines.

Rana quotes Luigi Zingales, "Even in the United States public resentment against finance can undermine the expectation that the rule of law will be respected in the future.  Without this expectation the competitive, democratic and inclusive finance will quickly become unsustainable."

Because financing is so critical to a society they should adopt an equivalent of the Hippocratic oath.

Many other examples and explanations are in the book.  The average voter is unaware how finance has dominated their lives.  It is amazing that with 4% of the jobs finance controls 25% of corporate profits.  Who are the makers and who are the takers?

1 comment:

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