The Rule of Accumulated Advantage

The Wall Street Journal, usually the megaphone of Wall Street's more devout worshippers, has a very readable cranky counter-argument today. It seems most of what you read about stocks and investments is tailored to please the large company offering them. This happened with the private rating agencies who tailored their assessments to their customers' demands, which is like an oncologist asking you whether you'd like him to see cancer on your x-ray or something nice. Financial analysts and journalists have been far too nice to Wall Street for years. This is how bubbles are made.

Love, money, admiration, credit ratings, applause, sexual favors, media coverage, protection, immunity, security, and (apparently) the blessings of God, Jesus and the Holy Ghost all increase as you move up the scale. The bigger and richer you are the more you get, the more help you get, the more sympathy you get, the more everything. (The Queen always gets the most presents, not only because everybody wants to please her but because, unlike other mortals, she has two birthdays every year.)

The rich today are handled with the gentle concern the vulnerable once could beg for. The poor and vulnerable are increasingly scorned. Is this because of the Prosperity Gospel? It's strange to think that Darwin and Herbert Spencer's bleakest thoughts are now the guiding principles of the followers of Jesus. (As Herman Cain says "If you aren't rich, blame yourself!") The most popular churches say that riches are a sure signal that God loves you more than other people. No wonder they're popular; they tell their biggest donors exactly what they want to hear. Churches kiss up, not down like they used to. We always knew the rich really inherit the earth, but now it's part of the gospel, preached from the pulpit and included in the holy decrees from the Wall Street Journal op-ed pages.

The Vatican's careful protection of its shepherds is nothing compared to the protection financial journalists and analysts give to the enormous banks. They praise bad investments and cover up dubious ones. They praise those who reward them for their praise. Is this their job? Is the priesthood meant to interpret and warn or is it there to uphold the almighty? It's a sad and dangerous fact that all favors and advantages accrue upward unless something corrects the system. Peer review applies the corrective rigor to the scientific community, where even consensus has its contrarians who insist on the alternate possibility.

Competition used to apply this rigor to free enterprise. Competition gave the entire system greater stability. Failures, a natural event, still happened but they were smaller. Now we have Too Big To Fail. Now failure and consequences are only dished out to regular people––whose only mistake was believing a corporation's annual report or the admiring words of a financial analyst who privately wanted the love of the CEO and the board. Increasingly, rewards are privatized upward while risks are socialized to everybody else, to ordinary people, less exalted people, to laid off employees and to us as taxpayers.

In a quarter when Goldman Sachs announced a half billion dollar loss it also announced ten billion dollars in bonuses to the executives who delivered that loss. How many billions did the US Treasury throw at Goldman during the recent crisis? Did Goldman absorb any losses from the havoc it helped create? What is wrong with this picture? We once had restrictions on this kind of thing; we demanded them and they served us well. Until we forgot why they were there, and began believing the Reaganite fairy tale about the self-regulating genius of Wall Street. About how our economy was magically protected by fairies and elves. The bigger they are the more regulation they need. It would give the rest of us more freedom and less to worry about.

"Goldman Sachs rules the world"

Stock trader Alessio Rastani had a moment of remarkable candor on the BBC last week.

"For most traders we don't really care about having a fixed economy, having a fixed situation, our job is to make money from it. Personally, I've been dreaming of this moment for three years. I go to bed every night and I dream of another recession. When the market crashes... if you know what to do, if you have the right plan set up, you can make a lot of money from this."

"This is not a time right now for wishful thinking that governments are going to sort things out. The governments don't rule the world, Goldman Sachs rules the world," said Rastani.

He expressed an eager hope that the economy would crash in the next year because it was going to make him very rich. These are the people who will control events. Unless we restore some of the regulations removed by the last four presidents prior to Obama. One good idea would be to place a tiny transaction tax on share trading.

"...a tax of just 0.05 percent (one twentieth of one percent) levied on each stock, bond, derivative or currency transaction would be aimed at financial institutions’ casino-style trading, which helped precipitate the economic crisis. Because these markets are so vast, the tax could raise hundreds of billions of dollars a year globally for cash-strapped governments and could increase development aid."

It might also help limit the large financial speculators who buy thousands of shares for split seconds and then sell them, forcing the markets quickly up or down in massive computer driven gyrations. Those gyrations are making traders rich because they earn fees for every transaction. These traders profit from a panicked market. They profit from inadequate public information, from their own prior information or inside information, from asymmetries of information and from broad insecurities and public worries.

Barbara Ehrenreich has a very good piece in the Washington Post. How strange it is to live in a country where most people are hurting, worried and living at their limits but the rich are treated like a special protected class. It's worth reading and sharing.

"...consider Daphne Guinness, profiled at length in this past week’s New Yorker, who is apparently best known for wearing clothes, which she draws from a wardrobe of 2,500 garments, 450 pairs of shoes and 200 handbags. On the day she was interviewed, she wore a high-collared, presumably bespoke shirt by uber-designer Alexander McQueen, “a pave diamond brooch,” silver sheaths on two of her fingers and “custom-made sparkly silver Mary Janes, with a three inch platform under the toe” — not the heel, the toe. Well, to each her own, but she might as well walk around Manhattan wearing a sign saying “My husband stole your pension.”" The super rich are flaunting again because they've been rebranded by the Republicans as "Job Creators"––without creating any jobs. Their money isn't invested in factories or employees but luxury goods.

But anyone or any party that takes the side of the poor against the rich or the powerless many against the powerful few will find he has powerful enemies. Money puts people in office and guess where the money is. Meanwhile we have a large powerful political and media apparatus devoted to the aid and protection of the very rich: the Republican Party, Fox News, the Wall Street Journal and the entire Murdoch operation, and most of talk radio.

How American Corporations Plundered Employee Pensions

Wall Street Journal reporter Ellen E. Schultz discusses her new book RETIREMENT HEIST in this interview with Salon.com. How did many major American corporations plunder their employees' retirement funds? It wasn't complicated. It was surprisingly easy for them to do. First they hired expert help. Legal and accounting experts. Then they went to work. Read and share this interview. RETIREMENT HEIST is an important book.

"Think of pensions as a debt. If a company can reverse a debt, it can record it as income. And that income is the same as if they got it from selling trucks or whatever it is the company sells. There were billions in promises to retirees for pensions and healthcare and death benefits and life insurance, and the companies figured out that if they cut or eliminated them altogether then they could get those billions in profit -- and even use them for executive compensation."

But what are promises? What are obligations? Why do large profitable companies steal pension funds? Because they can, and their executives instruct them to do so. They are rewarded for doing so.

Remember, a corporation is properly called a "limited liability corporation". In a legal sense, in a purely capitalistic sense, they are formed and operated to avoid obligations, to evade responsibilities, to figure out ways of delivering as little as possible for as much money as possible. "Innovation" often involves devising ways to give poorer, cheaper, delayed and/or non- service for as much as they can charge. Companies that do this are admired for "outcompeting" their competitors, and their shareholders are the envy of the shareholders whose companies have more scruples.

Not all corporations behave this way, but without regulations to keep the game fair the ones that do cheat have a competitive advantage.

This is happening more and more because consulting companies and corporate leadership pow-wows and business schools have taught business leaders to ignore two of the three loyalties corporations have, the loyalty to the customer and to the employee, and to put all effort and dedication to pleasing the third group––the owners and shareholders. Corporate executives usually belong to this group. When possible the loyalty is confined to the executives themselves, leaving shareholders holding the bag.

Blaming the Surgeon for the Cancer He's Removing

Today's Must-Read is from the Daily Beast, Tina Brown's hard-hitting digital newspaper. And nobody deserves to be hit harder than Standard & Poors.

As Noni Prins's article explains, S&P was "factory-stamping" AAA bond ratings on all the garbage Wall Street could manufacture in the run up to the financial meltdown of 2007-2008, and pocketing enormous fees.

The U.S. debt problem right now, which S & P is deploring, is largely made up of S & P's toxic garbage that we taxpayers (and our government) had to clean up.

A bit like blaming the surgeon for the cancer he's been asked to remove. The U.S. government removed the cancerous investments S&P and Moody's fed into the U.S. economy.

Instead of S & P downgrading U.S. Treasury Bonds, the U.S. Justice Department ought to be putting S & P on trial for its massive fraud. But major financial players appear to have total immunity.

This would be outrageous satire if it were satire, but it's not. It's all true, and we're paying for it.

Billions With the Push of a Button

I read an interesting article about the machinery the wizards of Wall Street use to make their money. There is no heavy lifting involved, but a lot of advantages in liquidity and access are leveraged to the limit. These tricks aren't something you and I can benefit from. The other question is, are these systems being used to secure markets or game them? To safeguard stability or exploit instability? I don't need to tell you which impulse I think is dominant.

It augments the argument I've already put to you that there is a Rule of Accumulated Advantage* by which each advantage leverages other advantages, and by which all advantages accrue upward unless balanced by a different power (government) operating for the broader good, the public good.

Playing fields in America have never been so tilted.

*I'd love to collect more informed and expert opinion about this Rule of Accumulated Advantage. I'd be interested in your thoughts. It's something I've been writing and thinking about for some time, but it's difficult to gain expert insight on it. Partly because insight and expertise in these matters are proprietary, even to the extent of academics belonging to sponsoring corporations. Most economists who understand this arcane field belong to the corporations who pay them. But I also have the distinct disadvantage of not being an economist myself. I'm a writer and illustrator of complex ideas.