Wall Street for Trump

Wall Street is so publicly overjoyed, on the record and in the numbers, with the Trump reign of terror so far — and still Democrats are going out of their way to make excuses and defenses of Wall Street and to object to any criticism or push for very deep regulation (let alone dismantling). If they’re not paying you to do it, ask yourself why you want to shield them.

It’s a sector that has long since outgrown its investment money-raising purposes relative to the real economy and has disappeared down a rabbit hole of hypercapitalism divorced from any real function or good practice. That’s not even a socialist perspective or anything. That’s just backed up by decades of data and research. It has become a massive useless casino that distorts our economic and political governance.

It should be shoved back into a little box until it is so small that it can only do what it’s supposed to do: raise private money for real investments in the material economy. Not whatever this monopoly money bullshit is wherein the politicians are purchased, the pensions are purloined, the small-dollar investors are taken advantage of, and the massively wealthy shareholder supermajority in the country diverts loans into profits, instead of into projects.

Free college AND a better Wall St? Sanders sees a way.

Sanders-021507-18335- 0004Senator Bernie Sanders has unveiled his latest policy proposal as part of his Democratic presidential campaign: Free public college, funded via a new financial transactions tax to discourage damaging Wall Street speculation. It’s a step up from his earlier pre-campaign proposal of cutting tuition only in half. Here’s a summary of his new plan:

Annual tuition costs at those institutions add up to roughly $70 billion, according to a fact sheet from Sanders’ office. The proposed legislation would require the federal government to compensate for two-thirds of that sum, with the states making up the additional third.
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The federal funding for Sanders’s proposal would come from a tax on financial transactions. Stock trades, bonds, and derivative trading would be taxed at rates of 0.5 percent, 0.1 percent, and 0.005 percent, respectively. Supporters of the financial transaction tax […] say it is not only a progressive way to raise revenue but would also discourage dangerous levels of Wall Street speculation.

A recent report from economist Joseph Stiglitz and the Roosevelt Institute, intended to provide a comprehensive framework for reworking American economic policy, endorsed a financial transaction tax as a way to “penalize short-term traders and incentivize longer holding periods, thus reducing instability and encouraging longer-term productive investment.”

 
Unfortunately perhaps the biggest pitfall of this plan — though it is (abstractly) an excellent starting point for a negotiation in Congress — is its dependence on state governments for a third of the funding. Low-cost public colleges and university educations are already being demolished in the name of dogmatic tax cuts. This plan depends on somehow convincing dozens of states not to slash funding / hike tuition and fees for their public colleges. But it’s a lot better than nothing.

Related reading on…

How much would it cost to make public colleges free?
Corporate borrowing diverted to shareholders, not investment
Putting Finance Back in the Box
Stock market speculation
Billionaire stock speculation

Clinton takes aim at executive pay, hedge fund managers

On day two of Hillary Clinton’s campaign through Iowa, she made an effort to distance herself from some of the Wall Street crowd she used to represent (and drew a lot of financial support from) as a US Senator from New York. Reuters:

“There is something wrong when hedge fund managers pay lower tax rates than nurses or the truckers that I saw on I-80 as I was driving here over the last two days,” Clinton said, perched on a stiff metal chair in the automotive shop of a community college.

Some hedge fund managers and private equity firm partners, among the wealthiest financiers on Wall Street, benefit from a tax code loophole that lets them pay the capital gains tax rate, which is lower than the ordinary tax rate, on large portions of their incomes.

Clinton also repeated her concerns, first voiced on Sunday, that chief executives make 300 times more than the average worker, and sympathized with students discussing the high cost of a college education.

 
The United States has the highest executive pay packages in the world, and the already large disparity between CEO compensation and salaries of the average American worker has exploded since 1980 (although the gap peaked in 2000).

The Globalist itemizes the facts in “CEOs and the Rest of Us”:

1. On average, the CEOs of large U.S. companies received $12.3 million in compensation in 2012, based on an analysis of S&P 500 companies.

2. Given that the average American worker earned $34,645 in 2012, the typical U.S. CEO earns 354 times what the average worker does.
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5. A worker at the U.S. minimum wage would have to work 813 hours — or 20 weeks — to earn an hour’s worth of CEO pay.
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9. The CEOs of the 100 largest companies in the United Kingdom earned an average of just under $3.8 million in 2012. That is 84 times the average British worker’s compensation of $44,743.

10. Britain’s CEO-to-worker wage ratio today is almost exactly the same as the one in the United States in 1990 — more than two decades ago.

11. At that time, U.S. CEOs earned “only” 85 times the average U.S. worker’s wage.

 
Vermont Senator Bernie Sanders, a democratic socialist, has been speaking in Iowa on these issues as well for many months, as he decides whether or not to run against Clinton for the Democratic presidential nomination. Another likely contender, Maryland Gov. Martin O’Malley, also called recently for stronger regulations on Wall Street.

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March 18, 2015 – Arsenal For Democracy 120

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Topic: How the Shareholder Revolution is hurting America’s businesses and workers. People: Bill, Nate. Produced: March 16th, 2015.

Discussion Points:

– What happens to companies that borrow money to make shareholder payouts?
– Why aren’t American companies investing in the future as much as they used to?
– Why should American companies tie wages to increases in profits and productivity instead of focusing on dividends and stock buybacks?

Note for listeners: We’re testing a half-hour version of the show over the next few weeks. Let us know whether you prefer this format or the longer format.

Episode 120 (27 min):
AFD 120

Related Links:

AFD: Corporate borrowing diverted to shareholders, not investment
The Roosevelt Institute: Blog post on “Disgorge the Cash: The Disconnect Between Corporate Borrowing and Investment”
The Globalist: U.S. Stock Ownership: Who Owns? Who Benefits?
The Globalist: Can the United States Close the International Wage Gap?
The Globalist: Want to Fix Income Inequality? Relink Wages to Productivity

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Corporate borrowing diverted to shareholders, not investment

A new paper from The Roosevelt Institute examines the “collapse” in the relationship between U.S. corporate borrowing and corporate investment into new projects or operations. Where every dollar a company borrowed prior to the 1980s would lead to 40 cents worth of investment, today more of the money is diverted into payouts for shareholders than is actually invested and there is almost no relationship between dollars borrowed and dollars invested.

In the summary blog post, they write that “very large swings in credit flows to the corporate sector [since the last recession] do not correspond to any similar shifts in aggregate investment,” while payouts to shareholders “appear more strongly associated with variation in cash flow and borrowing.” These relationships to borrowing were reversed in the pre-1980s period and crossed over each other in the 1985-2001 period most associated with significant changes to U.S. corporate governance norms and rules that tended to favor quarterly shareholder interests above all other priorities, including long-term investment.

This practice of borrowing to pay shareholders instead of borrowing to invest, as you might guess, basically means shareholders are profiting against the company’s future financial health, rather than from current (or future) returns on its previous (or current) investments. That means literally raiding the companies’ future earnings to generate payout cash now. The company will eventually have to pay back the borrowed money with interest, but it will not have gained anything from that borrowing because it was used to rain money down on shareholders instead of actually growing the company’s operations. This means companies are putting themselves deeper into a long-term hole, even as wealthy shareholders (the vast majority of American stock is held by a very small number of people with a lot of money to throw around) rake in money in the short-term.

Meanwhile, I would surmise, investment banks stand to make a lot of profits in interest — as long as the borrowing companies don’t collapse from all their unproductive loans. Down the line, a lot of American companies could have very high debt burdens while also being very underdeveloped compared to foreign competitors who invested in keeping up with the times and growing their long-term potential earnings. That will make them vulnerable to bankruptcy and other problems.

Here’s the paper’s abstract:

This paper provides evidence that the strong empirical relationship of corporate cash flow and borrowing to productive corporate investment has disappeared in the last 30 years and has been replaced with corporate funds and shareholder payouts. Whereas firms once borrowed to invest and improve their long-term performance, they now borrow to enrich their investors in the short-run. This is the result of legal, managerial, and structural changes that resulted from the shareholder revolution of the 1980s. Under the older, managerial, model, more money coming into a firm – from sales or from borrowing – typically meant more money spent on fixed investment. In the new rentier-dominated model, more money coming in means more money flowing out to shareholders in the form of dividends and stock buybacks.

These results have important implications for macroeconomic policy. The shareholder revolution – and its implications for corporate financing decisions – may help explain why higher corporate profits in recent business cycles have generally failed to lead to high levels of investment. And under this new system, cheaper money from lower interest rates will fail to stimulate investment, growth, and wages because, as we show here, additional funds are funneled to shareholders through buybacks and dividends.

 
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Labour propose tax avoidance crackdown, Tories balk

Despite recent backlash from big business and finance firms and lobbies, Labour are pushing ahead with a leftward shift to crack down on corporate abuses, according to The Financial Times. In addition to charging that Conservatives have “totally failed” to take sufficient action on tax avoidance loopholes generally, Labour wants to target British tax havens:

On Friday [February 6, 2015], Ed Miliband, Labour’s leader, announced plans to put the UK’s offshore financial centres on a tax haven blacklist if they did not comply with a new transparency measures. But the plan was attacked as unworkable by [Chancellor] Osborne, who seized on it as further evidence that the Labour leader was “unfit to be prime minister”.

 
Grand_Cayman_IslandWell, I don’t know about that, Mr. Osborne, but it seems like trying to do something about the problem of offshore UK/crown tax havens (full story➚) is better than doing nothing. This is, after all, creating a lot of problems for other countries (see previous link), and British governments have repeatedly pledged to the international community to rein them in — and has singularly failed to do so.

It will be interesting to see if Labour are willing to hold fast to their new position on corporate abuses — fully reasonable and sufficiently moderated positions, in my view — until the May elections or if they bend to pressure to be blindly (and fearfully) “pro-business,” as they arguably were in much of the “New Labour” years.

I say “interesting,” because I have a strong suspicion that the outcome of the internal Labour debate — between its working-class/progressive base and its City of London finance types — could prefigure the coming 2016 debates (if we have any) in the U.S. Democratic Party about whether to run on “middle class economics” or in Wall Street’s pocket.

There are certainly a lot of very clear parallels here, given the similarly outsized roles “The City” and Wall Street have taken on in both countries’ economies and politics, along with the controversial transformations of the New Democrats and New Labour led by Bill Clinton and Tony Blair respectively in the 1990s. While it may have worked in the short run, it has caused a great deal of problems for both parties in the longer run.

Moreover, in both countries, the center-left parties find themselves quickly abandoned by their respective financial districts for the conservatives — the natural home of Big Finance — when the winds change. Meanwhile, the under-served natural economic base of Labour and the Democrats drifts angrily, staying home on election day or seeking solace in fringe parties.

There is, of course, one other linkage of interest here. The tax evasion/avoidance problem — combined with various recent banking scandals — have given a new meaning to the phrase “special relationship” between the United States and the United Kingdom, given how often City and Wall Street firms seem to be tangled up in it together.

New York speculators are forcing an Argentina default, 1780s-style

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Uwe Bott, Chief Economist at The Globalist Research Center, raised some interesting points in a new article on the latest Argentinian debt crisis, explaining how Wall Street hedge funders are abusing the Rule of Law to profiteer from Argentina’s chronic fiscal problems:

On Wednesday, Argentina is likely to default again on its sovereign debt. After its mega-default on some $100 billion in December 2001, it is now likely to default on those bonds that were restructured in 2005 and 2010.

Why is it that Argentina, once again, cannot pay? Well, that’s actually not the issue. Argentina can pay and has paid its semi-annual payment to the trustee of the restructured bonds, the Bank of New York Mellon.

Without getting fully into all the legal tangles – and they are mind-numbingly complex – there is a broader point to be considered in the battle of New York vs. Argentina. It concerns the role that New York-based hedge funds play in the global financial game.

Wolves in sheep’s clothing

In essence, they try to present themselves as sheep, while they really are wolves. Let me explain: Unlike most of Argentina’s bondholders, NML Capital and Aurelius Capital Management bought Argentine bonds in 2002 and 2003, after Argentina had already defaulted. For that reason, they were able to buy these bonds for pennies of their face value.

Why on earth would they do that, you ask? Because from the get go, they intended to use – or rather abuse — the legal rights of holders of bonds issued under New York law for one purpose only, to make Argentina pay the full amount at a later point in time.

Argentina managed to obtain restructuring agreements from its bondholders in 2005 and 2010 that paid them 30 cents for each dollar owed and over a much longer maturity.

The hedge funds rejected these restructurings. They knew that New York law was on their side.
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But the issue left unaddressed is this: Is this really a question of the letter of the law — or is it a question of the intent of the law? Specifically, is this not a stellar example for “two wrongs don’t make a right”?

True, Argentina should have complied with its debt obligations and surely could have afforded to pay more than the 30% of face value to all investors. But the hedge funds’ exploiting the letter of U.S. law after buying defaulted bonds for pennies and then asking for full repayment flies in the face of what justice is all about.

 
This behavior is a longstanding and apparently proud American — or perhaps more accurately, New York City — tradition, dating to the earliest days of the republic.
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