The Sting of American Capitalism 21 comments
-
Font Size:
-
Print
- TweetThis
As we sift through the rubble of another popped bubble, I’m reminded of the classic movie, “The Sting”. The story revolves around con men making up a Tale that convinces a Mark to freely give them money. After the Mark gives them the money, they split up their shares and head into the sunset. It isn’t legal, but it isn’t theft; kind of like what we’ve seen with the internet and real estate bubbles.
The Tales
A few short years ago, technology and the internet mesmerized the masses. The Marks were invited to the world of privilege, IPOs. The freshly minted stocks were rolling off the printing presses far too slowly to satisfy the Marks who had been whipped into a buying frenzy. The ink on most internet IPOs, like the ink on the subsequent subprime sequel, was worthless before it dried. Only when there were no new Marks to buy the worthless paper did they realize they’d been stung.
More recently, the floodgates of mortgage finance were opened to millions of Marks, formerly relegated to wasting their money on rent. Houses couldn’t be made fast enough for the millions of pre-approved, American-dream-seekers. Trillions in debt were created and much of it transferred, in a game that only simulated economic growth for the Marks. All those tasty new mortgages were bundled and sold as AAA paper, and only when the Marks couldn’t pay their mortgages did everyone realize they’d been stung.
The Sting
Financial CEOs dabbing sweat off their brows reminds me of Paul Newman brushing his nose to give his friends the high sign. The Tales worked and the money is gone. Step back and see these bubbles for what they were - clever cons that seduced a willing public out of lots of money. Embarrassingly, the Feds have been naive accomplices. Desperate to promote the notion that we’ve evolved above recessions, they’ve supplied unlimited credit which provided front money for the cons.
Now that the smoke and mirrors are getting packed up, the Federal Reserve can better see that the colossal credit bubbles are economic simulation - not stimulation; accomplishing little more than further elevating the top 1% from what is becoming the proletariat. Could someone please remind them, as we threaten a deflationary spiral, that they are commissioned to regulate leverage, both in the banks and in the markets? If it looks too good to be true, raise the margin requirements!
Has Gondorff Escaped?
This time the disenfranchised Mark is fighting mad and not interested in taking it on the chin. As the CEOs pass the high sign, the Mark finally questions why the 25:1 CEO vs. worker compensation of his youth has exploded to the 500:1 ratio of today. He finds it difficult to comprehend that a single human can “earn” a significant percentage of his nation’s aggregated product by running what seems to be a government funded confidence game. And, why those fortunes are retained despite the demise of the very institution that generated them.
The latest “everybody-can-be-rich-con” is now dismantled and the CEOs are scrambling to fly their jet helicopters into the sunset. This time, however, the con was so big that it almost felled the republic and hopefully the Marks will at least be avenged by a parade of orange jumpsuits. The Wall Street machine that produced these cons is no longer and that may be a happier ending than the original.
Disclosure: I remain a seller of most things US dollars buy.
Related Articles
|
-
The Seeking Alpha 100
See allThe top 100 stock
market authors
selected for publication
Seeking Alpha 100 » -
Fastest Climbers
Authors with the largestSee all
increase in followers
in the last 7 days
Fastest Climbers » -
Top Commenters
Top commenters,See all
as ranked by their peers
Top Commenters » -
Top Instabloggers
The 100 most active
Instabloggers.-
1
David Fry
-
2
TraderMark
-
3
Don Dion
-
4
Cliff Wachtel
-
5
Mike Havrilla
Top Instabloggers » -
1
-
Top StockTalkers
TopSee all
StockTalkers.
Top StockTalkers »
This article has 21 comments:
Maybe I am naive, perhaps the job of the modern day executive is to see who can decieve the investor the most into thinking that there investments are safe.
Sure there are failures but the upsides on the good ones can be far greater than in some Alpha stock thats reached its growth potential.
New companies and investors with risk capital in new ideas are essential to the continued growth of the US and any other country of new technologies such as biochemicals and energy saving etc. They are needed because bankers have little vision except to cover their backsides and take their interest and comissions and so act in unison like sheep -or should I say lemmings -in jumping over the cliff hand in hand. Bankers are wankers. Risk investors are the good guys.
Take all your money out of Gondorff's banks. Do no business with them, remove all their reserves, and the edifice collapses.
Ya follow?
Oppressing the poor is a big no-no in the Bible. Hiding it via fractional reserve banking does not fool the Creator.
1. A low level of inflation is necessary for economic growth. There is limited credit unless some form of fractional banking is used. Credit is a necessary component of growth. However, credit out of control can well be called "economic simulation." Brilliant analogy, David.
2. Executive compensation is a disgrace. I strongly believe that executives who build strong businesses deserve very large amounts of compensation. However, the huge compensation packages we have seen in the past few decades have not been for results as much as for taking risk. Risk takers should be compensated only when the risks succeed; otherwise the risk takers should suffer the consequences and, in the worst cases, receive no compensation at all.
My ideal compensation plan for executives would be one that has a comfortable salary, say $200,000 to $500,000 annually real time (depending on job scope and complexity) and large deferred compensation packages based on long-term performance factors such as revenue and profit growth, employee compensation growth, and balance sheet improvement. The deferal time frame should be something like ten years. Every year the compensation committee of a corporation can determine what deferred compensation is appropriate for current company performance and also what the company must accomplish over the next ten years in order for the compensation to be delivered. In addition, a year by year scale-up of the deferred amount should be defined based on ongoing progress of the company in the event the executive resigns, retires or is replaced. Such a compensation plan would help prevent the enrichment of what are essentially thieves, such as we have seen time and time again over the past ten or more years.
3. I have read that the concentration of wealth in the top 1% in 2007 was the highest it had been since 1927. Does anyone have a reference for that? I am reminded of an allegory I read recently (sorry, I can't remember who to credit). The story refers to a poker game where one player wins most of the chips. The other players can only continue in the game by using credit. Finally they have lost so much that they can't get any more credit. At that point, game over.
Translation: "There is limited credit unless some form of stealing via inflation is used. "
When "free enterprise" is based on theft, I submit it is not free enterprise.
1) Inflation is not necessary for economic growth. The US was limited in its ability to print money between 1800 and 1910 because it was on the gold standard. One ounce of gold was worth $20.67 that entire time, ie. no inflation whatsoever. Yet, the CPI went from the high 40s to the high 20s over that interval (I forget the year for CPI = 100) indicating that 'growth' was making stuff less expensive to buy. Our country went from a backwater farming nation to world economic powerhouse without inflation.
2) Yes. Credit is limited to what people can save for investment. This limits growth to those areas where demand is highest as those areas will produce the greatest profits for the investment. Limited credit (ie. higher natural interest rates) will serve to reduce the waste of savings on non-productive ventures.
Printing money for 'investment' leads to growth in non-productive areas without proper concern over whether there is sufficient demand for the investment. Resources are wasted as a result. Factories are built to produce items that people don't need or want (think SUVs) and then go out of business and sit empty (think strip malls).
Bottom line: Credit unbacked by savings leads to waste in the economy while savings backed credit reduces waste because of the limited capital available.
If the investments are good, why wouldn't they voluntarily loan the money?
Some people are fascist and don't know it.
Either way there will always be an elite few who profit at the expense of the many. So be it!
We are only monkeys
with digital watches
and chemically enhanced crotches
what did you expect?
The trouble is that the "wealth" has already been created. All those houses have been built and the builders have all been paid. Even better, most of the resources that go into construction are domestic, not imported, so most of the money stayed in the US economy.
If there is now no "market" for all this wealth, the production of which has already been paid for, then there must have been a misallocation of incomes away from the people who want to own and live in those houses and into the pockets of somebody else. Could it be in the pockets of financiers who collected tens and hundreds of millions of dollars for doing "their share" of the productive process?