HOW FI­NANCE RU­INED BUSI­NESS

Mak­ers and Tak­ers adds up the ill ef­fects of Wall Street’s zero-sum game. By David Sax

Bloomberg Businessweek (North America) - - The Critic -

Three years ago, your can of Coke sud­denly cost a few pen­nies more. The cul­prits? The clever bankers at Goldman Sachs. Ac­cord­ing to a Se­nate panel, they gamed the global alu­minum mar­ket, ware­hous­ing tens of thou­sands of tons of the metal in Detroit and de­lay­ing delivery to cus­tomers like Coca-Cola. The bank was able to ratchet up the price on its sup­ply, net­ting sev­eral bil­lion dol­lars in the process. The best part: Goldman didn’t do it as a hedge against other in­vest­ments. The bank did it to make money for it­self, at the ex­pense of every­one else.

Ma­neu­vers like this are le­gal, but they’ve be­come more dis­taste­ful in the wake of the 2008 col­lapse, giv­ing birth to the coinage of a term. “Our eco­nomic ill­ness has a name: fi­nan­cial­iza­tion,” writes Time busi­ness and eco­nom­ics colum­nist Rana Foroohar in Mak­ers and Tak­ers: The Rise of Fi­nance and the Fall of Amer­i­can Busi­ness. The book of­fers a blis­ter­ing cri­tique of how Wall Street’s zero-sum think­ing came to dom­i­nate and then hob­ble the U.S. econ­omy. She isn’t ped­dling a vi­sion of neo-so­cial­ism, à la Thomas Piketty or Bernie San­ders. Her ar­gu­ment is that fi­nance for the sake of fi­nance is bad for busi­ness—and cap­i­tal­ism as a whole.

Tra­di­tion­ally, fi­nance served the needs of busi­ness (Foroohar’s “mak­ers”) by pro­vid­ing cap­i­tal and in­vest­ing in longterm growth. But start­ing in the post­war decades and ramp­ing up from the Rea­gan era on­ward, fi­nance ( the “tak­ers”) be­gan to take care of No. 1 first. Fig­ures like for­mer De­fense Sec­re­tary Robert Mcna­mara pop­u­lar­ized man­age­ment by sta­tis­tics, while in­vestors such as Carl Ic­ahn made short-term prof­its the ul­ti­mate goal. Busi­nesses slashed re­search and devel­op­ment bud­gets in fa­vor of bal­ance sheet tricks and tax dodges.

In Foroohar’s view, the banks’ pri­mary ac­tiv­ity is mov­ing debt around, a risky strat­egy that hurts the abil­ity of busi­ness to grow. As proof, she cites the fate of com­pa­nies such as Gen­eral Mo­tors, Gen­eral Elec­tric, and Xerox, whose my­opic think­ing led to a de­cline in in­no­va­tion and their place at the pin­na­cle of global busi­ness. In­stead of serv­ing busi­ness, fi­nan­cial­iza­tion be­came an end in it­self, a closed sys­tem un­moored from tan­gi­ble eco­nomic ac­tiv­ity.

The mes­sage of Mak­ers and Tak­ers isn’t rad­i­cal or en­tirely new. (Still, Foroohar’s ar­gu­ment is time­less given the ex­tent to which ope­nended anger is fu­el­ing pop­ulist fer­vor on the Right and Left.) While she writes with pas­sion, you don’t get a sense of how she in­tends to fix things be­yond the case she makes for a sleepier, sim­pler cap­i­tal­ism rooted in bread-and-but­ter busi­nesses such as man­u­fac­tur­ing.

If that seems like a sim­plis­tic or naive hope, Foroohar notes that our cur­rent sys­tem wasn’t handed down to us in per­fect form from the heav­ens. Mod­ern cap­i­tal­ism is the prod­uct of a messy evo­lu­tion, driven by nat­u­ral greed and con­strained by the laws we’ve en­acted to pro­tect our­selves from it. “We can re­make them as we see fit,” she writes, “to bet­ter serve our shared pros­per­ity and eco­nomic growth.” Those are sunny ideals, no doubt, but there might be enough light just now to pre­vent Wall Street from ever bilk­ing us out of our Cokes again. <BW>

BAL­ANCE SHEET TRICKS AND TAX DODGES RE­PLACED R&D

Newspapers in English

Newspapers from Canada

© PressReader. All rights reserved.