Author: ken

Absentee Investors

Capitalism’s insatiable drive for returns remains a wild card at the center of our economic system, a source of economic instability. A case in point: the current recovery in the housing market may have less to do with the optimism of prospective home-owners about the slowly improving economy as with Wall Street’s demand for new investments.

The last housing bubble was fueled by banks making cheap and unsecured money available to people who couldn’t really afford the houses they were buying. The disconnect in the system, then, was that the mortgages were bundled and sold so that those who bought them had no knowledge of the properties that they were based on. When home-owners defaulted on a massive scale, the banks kept dicing and slicing the “derivatives,” oblivious to the risk.

Now according to The New York Times: “Large investment firms have spent billions of dollars over the last year buying homes in some of the nation’s most depressed markets. The influx has been so great, and the resulting price gains so big, that ordinary buyers are feeling squeezed out. Some are already wondering if prices will slump anew if the big money stops flowing.” Once again, those who buy have little or no knowledge of what they are actually buying.

This can look like a recovery, but as an analyst at Fitch put it: “The question is how much the change in prices really reflects market demand, rather than one-off market shifts that may not be around in a couple years.” The Times commented: “investment companies, like Blackstone, have swooped in, buying thousands of houses in the same areas where the financial crisis hit hardest.”

“Joe Cusumano, a real estate agent in Riverside County, Calif., said that in recent months 90 percent of his business had been for companies like Invitation Homes, a Blackstone subsidiary. Home values in Riverside County have risen by 15 percent in the last year”. . . . But “he wondered if faraway investors would properly maintain the homes they buy. . . . He also worries what will happen when these investors start selling, as they inevitably will.

“The thing that scares me is the values going up so quickly,” said Mr. Cusumano. “That’s what happened before and that’s what’s scaring me. Is this going to happen again?” (See, “Behind the Rise in House Prices, Wall Street Buyers.”)

The danger is not just to the families who find the value of the homes they live in disintegrate as the new bubble bursts. It is to the underlying health of our economy. Are we seeing real growth, genuine robustness reflecting well-founded consumer confidence? Or are we seeing what we want to see?

It looks like playing has resumed at the casinos. Is the music going to pause in time for investors to reconsider the risk? Or, as last time, are they going to continually recalculate the risk so as to keep on playing? Will competition among the banks and hedge funds make it virtually impossible for them to pull out before it is too late?

Or will they once again fall prey to the group mentality that whispers: “Everyone is doing it, so it must be OK”?

What it Says About Us

Many of us are inclined to view the whistle blower as a kind of hero, the person who sacrifices his own career to warn others of the danger he alone knows, a danger that could eventually ensnare others in suffering or moral corruption. But it hardly ever works out that he is rewarded for his daring.

More often, the whistle blower is shunned by his colleagues and punished – and that is likely to be the fate of Edward Snowden. It is not surprising, of course, that the government will prosecute him. It wants to discourage such behavior as quickly and forcefully as it can. What calls out for explanation is why colleagues and fellow citizens turn against the whistle blower, why do the potential beneficiaries of the whistle blower’s painful and difficult revelations end up punishing him?

C. Fred Alford researched this over ten years ago for his book, The Whistleblowers: Broken Lives and Organizational Power, concluding: “the reality of whistleblowing is grim. Few whistleblowers succeed in effecting change; even fewer are regarded as heroes or martyrs.”

The essential reason he found is that co-workers do not want to know what the whistle blower reveals. If they acknowledge the exposed truth, their careers will be jeopardized. At the very least, their comfort and sense of security is undermined.

If it is not about their own organization, engaging their own colleagues, it still poses an extremely uncomfortable dilemma most would prefer to avoid: They know and everyone else is forced to know that standard policies and procedures are illegal or corrupt. Do they address that and throw their own careers off course? Do they not address that and run the risk of being complicit?

A frequent “solution” to this dilemma for by-standers is to turn against the whistle blower, either castigating him for putting others at risk, or delving into his motivations. Dick Chaney, not surprisingly, took the former course, calling Snowden a “traitor.” David Brooks in The New York Times, going the other way, took him apart. “Though obviously terrifically bright, he could not successfully work his way through the institution of high school. Then he failed to navigate his way through community college.”

Not content with defining him as a personal failure, he went on to see him as representing all that is wrong with out society, calling him the “ultimate unmediated man,” without redeeming social commitments: “He betrayed honesty and integrity…. He betrayed his oaths.,,, He betrayed his friends…. He betrayed his employers…. He betrayed the cause of open government.” Not content with that, Brooks went on to claim: “He betrayed the privacy of us all.” Finally, “He betrayed the Constitution.” (See, “The Solitary Leaker.”)

This extraordinary diatribe leaves one wondering why Brooks’ journalistic colleagues at The Guardian and The Washington Post cooperated in publishing Snowden’s revelations in the first place, and why corporations like Google are reexamining their policies of cooperating with government surveillance. What vituperation do they deserve?

It may well be that the governments extensive data mining is justified in the cause of national security. But whatever Snowden’s crime, he is forcing us all to think about this complex and difficult issue.

Perhaps that is what can’t be forgiven.

And It’s No Surprise

The public was not alarmed after Edward Snowden blew the cover on the government’s vast data mining operation. Without thinking too much about it, it looked like most of us had assumed it was going on all the time.

After all, in an age where anyone can find most of our relevant data through Google, “private” information requires just a bit more effort to get. Years of having our email accounts hacked, discovering that employers often have access to our medical records, reading about leaks and corporate espionage and identity theft, most people have come to take it for granted that any information about them can easily end up in the public realm. We are exposed daily to the sharing of information about our retail purchases, our surfing habits, our “likes” and “friends.” CCTV cameras track our every move. And, even if we don’t have the skills to do it ourselves, we know about the millions of geeks around the world who take every secret as a challenge to decode and unearth.

We know it — and yet we have not fully taken it in. Most people I know take routine precautions. They don’t respond to requests for passwords, and don’t send money to friends who have been allegedly stranded in a foreign country. But we are not as obsessed with security as we would need to be to keep our secrets safe or as cavalier as we should be in accepting our exposure. As The New York Times put it in an editorial, we have “traded privacy for convenience.”

And we try not to think about how vulnerable we are. As The Times went on to say: “the privacy war is asymmetric. Governments have spent billions to develop tools to conduct surveillance and hack into computer systems. Far fewer resources have been devoted to protecting users from such intrusions.”

As a result, people like Snowden and Pvt. Manning and Julian Assange are seen as modern day Robin Hoods. They steal the cloak of secrecy from the powerful to expose their hypocrisy. (See, “Can’t Hide in the Cloud.”)

Mainstream journalists now are rallying around the government, lining up against The Guardian, where Snowden’s revelations were first published, as well as the public’s inclination to celebrate their new Robin Hoods. The journalists do have a point, of course, as data mining on a grand scale is probably here to stay as a necessary tool to fight terrorism.

Tom Friedman wrote in The Times, “If there were another 9/11, I fear that 99 percent of Americans would tell their members of Congress: ‘Do whatever you need to do to, privacy be damned, just make sure this does not happen again.’ That is what I fear most.” (See, “Blowing a Whistle.)

In making that defense, however, Friedman and others are exposing the reality that the public has conceded the struggle already, and it has settled into a semi-paranoid complacency and a convenient surrender to round-the-clock surveillance.

Public attitudes here are not the point. Just as Wall Street needs careful regulation, intelligence needs monitoring by those who know what they are doing – as the rest of us go on pretending we still have secrets while looking the other way. The problem clearly requires the kind of specialized commitment, energy and know-how that journalists seem reluctant to call for.

Can We Look It In the Eye?

When capitalism took over the world roughly 200 years ago, it vastly increased society’s productivity but at the cost of immense human suffering. Millions of people were displaced and dramatic cycles of boom and bust rendered workers vulnerable to starvation and disease. Over time, the imbalances have been modified and corrected.

Henry Ford had the idea about a hundred years ago that if his workers were paid adequately they would be able to buy the cars they assembled in his factories. More sales, more demand, more work – and the link between work and consumption quickly became one of the celebrated aspects of a more balanced capitalism.

The logic still holds, but globalization has put a big dent in this bargain. Not only do big multi-national corporations search for the best tax breaks they can find throughout the world, starving governments of revenue in the process, – the topic I addressed in last week’s blog post – they search for the cheapest labor they can find around the world.

Daniel Gross noted in Newsweek: “Corporate profits have soared from $1.1 trillion in 2008 to $1.95 trillion in 2012—up 77 percent. The amount of cash on companies’ books has risen from $1.39 trillion in 2008 to $1.79 trillion in the fourth quarter of 2012—also a record.” Nonetheless, corporations are reluctant to hire more workers or increase wages. Gross went on to note that “Since the recession, companies have realized that if they freeze, or even cut, wages, workers will still show up and toil just as productively.”

The problem, though, is that then they don’t have money to spend. “Where are all the customers?” read a plaintive email from a Walmart executive that leaked in early February. “And where is all their money?”

“’Workers are consumers, and when they aren’t paid enough to buy goods, the economy can’t grow,’ said Amy Traub, senior policy analyst at the Manhattan-based think tank Demos.” She adds: “We end up trapped in a vicious cycle of low growth, and companies that persist in trying to cut labor costs further only make matters worse for themselves.” (See, “Apple Too Clever By Half.”)

The unbridled pursuit of profit in this phase of Investor Capitalism is pushing corporations into a destructive process. Not only are they not hiring, preventing the distribution of wealth, those who cannot get jobs are increasingly squeezed as governments cut back their safety nets.

A member of a recent panel at N.Y.U’s business school, argued that “current publicly traded U.S. companies were ‘actually obliged to maximize their externalities’ — economist-speak for behavior that harms the wider community — if that would increase their bottom line.” The panelist noted that “paying the lowest possible taxes is not the exceptional policy of one particularly greedy chief executive — it is what every executive seeks to do to keep his job. According to The New York Times, reporting on the panel: “the grim title of the session was “Can American Capitalism be Saved?”

In a new book, a University of Michigan sociologist, Mark S. Mizruchi, contends that the forsaking of responsibility for the wider community is a big shift in the behavior of U.S. business and a central reason for the country’s political and economic malaise. (See, “Aligning With the Greater Good.”)

“The current American corporate elite seems to be leading us toward the fate of the earlier Roman, Dutch and Habsburg Spanish empires, starving the treasury and accumulating vast resources for itself.”

“Unbelievable Chutzpah” or Brilliant Innovation?

Clearly the guys at Apple, talented at developing amazing products based on brilliant technological innovations, are also busy innovating in other ways, and that tells us a lot about how dysfunctional our financial system has become.

First came the news that the company was sitting on billions of dollars of profit, unsure what to do with it. More recently came the astounding news of its success in escaping taxes.

In the old days of traditional capitalism, new businesses sold shares to investors who thus became owners. In return, the shareholder-owners would get dividends, and with luck and good management the shares might also increase in value. That concept became obsolete when investors got interested in the far greater returns that could be gotten from flipping the shares. Companies then got interested in driving up the value of their shares, less interested in providing a reasonable and secure rate of return. The profitability of a company became less important than its ability to “increase shareholder value,” as that strategy became known — and in fact many companies stopped bothering to pay dividends at all. They wanted to raise “value.”

That’s how Apple’s ballooning nest egg of $145 billion came about. But then their shares did not continue to go up. What were they going to do with all that money? And how could they stimulate an increase in share prices? The ingenious solution was to borrow money to pay dividends. The problem with just paying out the money they already had was that then they’d have to pay taxes on it first. And the borrowed moneycould be used to buy back shares, and that too would bolster their price.

As noted in The New York Times: “About two-thirds of Apple’s cash about $102 billion — sits overseas in lower-tax jurisdictions. If it returned some of that cash to the United States to reward its investors, it could have significant tax consequences for the company.” In other words, they would have to pay taxes.

That takes us to the tax problem: Thanks to what lawmakers called “gimmicks” and “schemes,” Apple was able to largely sidestep taxes on tens of billions of dollars. “Over all, Apple’s tax avoidance efforts shifted at least $74 billion from the reach of the Internal Revenue Service between 2009 and 2012, the investigators said.” But they “have not accused Apple of breaking any laws and the company is hardly the only American multinational to face scrutiny for using complex corporate structures and tax havens to sidestep taxes.”

As one economist put it: “They have been so successful with their tax planning that they’ve created a new problem,” (See, “To Satisfy Its Investors, Cash-Rich Apple Borrows Money.”)

Edward Kleinbard, a former staff director at the Congressional Joint Committee on Taxation, said: “There is a technical term economists like to use for behavior like this. ‘Unbelievable chutzpah.’”

On Capitol Hill Monday, legislators made plain their fury over what they called Apple’s “egregious” and “outrageous” conduct. But after they vented their frustration and were assured that Apple had not broken any law, they calmed down and praised the company for doing such a great job. (See, “Apple’s Web of Tax Shelters Saved It Billions, Panel Finds.”)

It turned out that the Senators had no one to blame but themselves for having created those rules. As Tim Cook, Apple’s CEO, put it: “Apple pays all the taxes we owe – every single dollar.”