Tuesday, January 29, 2013

How Wall Street is Killing Our Economy

This post will be in two parts. The first about what's wrong with our economy, the second about what's wrong with our political system. For some background on where I'm coming from, please see my previous post, "The Economy, Stupid."
[Quick link disclaimers: 1) In "The Economy, Stupid" my hopes for a prospective Obama administration were pre-Tea Party induced government paralysis and 2) I don't know what happened to the pictures.]


First, let me simplistically summarize how investing is supposed to work:

1) You have worked hard, saved money, and now you have a little extra cash that you'd like to invest.

2) You, or your broker, find some companies you really like; companies that make a great product, have a profitable business model, and maybe some characteristics you personally value, such as commitment to their workforce, or side projects that benefit the community.

3) You invest your money in the companies you have chosen.

4) The company takes the money people like you have invested and uses it to expand their production lines or open new store fronts or buy a new line of delivery trucks.

5) Over many years, if you have invested wisely, the companies in which you have invested pay you dividends because the growth of their companies was made possible by your investments. ("Over many years" is the key here! A company may not always be paying dividends because they may actually become less profitable during times they are building and expanding, but that's OK; what's important is that they are able to take those risks because in the long run, they will be better, more valuable companies.)

6) When you are ready to retire, the money you saved over the years and the money you made through your wise investments have resulted in a nice little nest egg that will make your golden years more comfortable.

This practical model of how investing money should work has been made obsolete by the systematic deregulation of our financial institutions. I talk about the error of financial deregulation in "The Economy, Stupid."

What I want to talk about now is how the current Wall Street model of investing is completely destroying the fabric of our economy.

You see, traditional investing builds companies, builds industries, and connects companies to the people they serve, both consumers and investors. It's all about building and growing and moving forward.

The current Wall Street model works more like this:

1) You take money you should be saving (because saving money is for fools; everyone knows you have to spend money to make money), and you give your money to a large corporate firm who invests the money for you.

2) These large corporate investment firms (most of whom are now intertwined with banks, further blurring the line between saving and investing) are financial powerhouses whose very investments make and break companies and entire industries.

3) Corporate investment firms are interested in two things: more money, and more money NOW.

4) Companies who sell their stock in the public market have their stock bought by these huge corporate investment firms, not based on the value of the company, but the value of the company's stock, and whether that stock will be worth more, not ten or twenty years down the road, but NOW.

Are you worth more NOW? How about NOW? Oh, you need more workers? You need to expand your factory? Well, you better figure out how you can expand and still be worth more money NOW. Why don't you just open a factory in China? OK, well while you were holding a town meeting with your factory workers, your stock prices went down the crapper and you are about to become personally bankrupt, so you are going to sell your company to Bain Capital, which will come in and turn this company around and make it profitable NOW (even if that means chopping it up like a stolen car and selling it off piece by piece).

5) You look at your stock portfolio at least every month, pleased that your wise investments are growing exponentially and scoffing at your dinosaur of an Uncle who advised you to buy bonds (seriously, what is this WWII??).

6) Rather than use any of the money from your stock portfolio, because it's making so much money where it is, you take out loans to buy your home, your cars, and even your washer and dryer because at Sears you got 12 months same as cash!

7) You wake up one morning and all the talking heads on the 24-hour-news networks are having full-on panic attacks. The middle-aged balding guy on CNN who just yesterday was wearing a fireman's hat and dancing around a prop siren proclaiming that QXS's stock had no where to go but UP, is hiding under his desk crying.

8) You run to your computer and learn that your stock portfolio has lost 70% of it's value and you now have less money than you put in to it to begin with. Tomorrow you'll learn that the retirement account through your employer was also heavily invested in the stock market. Next month you'll do the math and realize that you owe more on your house than it's worth. 18 months from now your 25-year-old daughter will move back home because the best job she can get with the business degree you'll paying off for the next 20 years is as a part-time desk clerk at a furniture store.

Now, amid all this financial chaos is the little noted fact that the rich are still getting richer. Companies are still posting record profits.

Why?

Because they are trapped in a financial system where posting record profits is literally the only way to stay afloat.

How?

I'll use a furniture store my husband used to work at as an example:

A national, iconic chain of high-end furniture.

First, and this was a long time ago, they moved the production of their goods overseas. So you have been paying more money for less quality (more profit for the investment firms).

Next, they outsourced things like delivery, repairs, and customer service to outside third-party companies. So you are paying more money for less service (more profit for the investment firms).

Next, they started buying out all of their franchises and streamlining their business model, which meant closing less profitable stores, laying off workers, and warehousing fewer items. So you are paying more money to drive further to find a store to wait longer for an inferior product to be delivered by some guy who doesn't work for the furniture company and can't answer any questions you have about the recliner he just plopped in your living room (more profit for the investment firms).

Finally, they decided to get rid of almost all of their experienced commissioned salespeople and replace them with part-time minimum-wage employees, AND pay their store managers LESS for the added responsibility of babysitting the endless turnover of young, recent college graduates who can't understand why this is the best job they can get while coming to the realization that instead of getting married and buying their first car, they will in fact be moving back in with their parents who told them not to go to design school in the first place.

So next time you're in a store upset that you can't get any service even though you are making a large purchase (which used to matter to the people selling you this crap), you can take heart in knowing that the corporation who owns the store you're buying from is making record profits by giving you, and the distracted teenager ringing up your order, the shaft.

And don't forget that the company's profit model also incorporates giving the government the shaft, because they are paying record-low taxes on their record-high profits.

And other than the occasional grandstanding over taxes, when was the last time anyone in the government addressed ANY of these issues that are tanking our economy?

President Obama has made no indication that he is even aware of the insatiable corporate greed that is forcing our industries to self-cannibalize our whole economy in the name of making more money than last year, than last quarter, than last month!

It's like watching time lapse footage of a rodent corpse bloating up with the ever-multiplying bacteria that is feasting on its entrails until those very bacteria devour the corpse entirely and die off themselves, leaving behind a barren skeleton.

When will someone in government stand up to the corporate powers-that-be, rally the population, and declare that the only way to save ourselves is to fundamentally change the way we run our economy?