Friday, February 20, 2009

Wall Street: Grand Masters of Ponzi

For those attempting to understand who was behind this globalized pyramid scheme, one need look no further than the corner of Broad and Wall.

Wall Street is the hand that conceived and built the global financial and economic Ponzi pyramid. Its banks, brokers, and investment funds stand alone at the top of that pyramid. No one cohort has played as large a role or benefited as much during the past decades from the carving up and selling of America than Wall Street. The billions in wealth extracted from the U.S. economy in past decades by Wall Street firms stands in sharp contrast to the trillions in wealth that has evaporated in the past year due to Wall Street's failed alchemy.

Wall Street is the ultimate wealth concentration machine. It packages and securitizes companies and sells them off to the highest bidder, taking a large slice of the profits along the way. Apologists will say that companies need Wall Street to gain access to capital, but the reality is what we really need are more accessible and open capital markets, not markets controlled by a self-nominated ultra-wealthy country club.

It's Wall Street's all-consuming drive for profits that has driven the relentless outsourcing trend over the past 30 years. It started in the '70s and '80s with blue collar jobs and in the past decade millions of white collar "knowledge worker" jobs have gone overseas as well. We were all told that knowledge-based jobs were the careers of the future, only we were not told the future would only last about 8 years. One must ask what would the country look like today if Goldman, Morgan, Merrill, Lehman and Bear had never existed? The answer is clear: American incomes would be stable and evenly distributed, unemployment would be negligible, the U.S. would still be a leader in science and engineering and this financial collapse would never have happened.

Profits Before People
Last month I said that the December jobs report was bad at 500k+ jobs lost, well as expected, January's was worst at 600k+ lost. I understand there are firms that are on the edge of insolvency that need to lay off just to survive, but how about all of these highly profitable companies laying off workers on top of that? Take Microsoft as an example; recently they laid off 5000 of their workers, because profit margins, although higher than any other company in the history of the world, apparently are not high enough to satisfy Wall Street. Not to mention that they have over $20 billion in cash and their most recent quarter's operating cash flow was a staggering $9 billion i.e. just 3 months of cash flow is enough to pay those 5,000 workers for roughly the next 12 years (assuming they make on average $150k).

And where will those 5,000 ex-Microsoft employees go to get new jobs as they are dumped into what is clearly the worst economy in the past 80 years? Obviously most of these people won't get new jobs any time soon and if they do eventually find a new job it will likely be outside their primary field of expertise and at a fraction of the pay. Not to pick on only Microsoft, because there are dozens if not hundreds of other corporations out there that are still profitable at this juncture that are taking full advantage of this downturn to "streamline" operations. In doing so collectively, they will short-sightedly turn what would have been a bad recession into a prolonged and enduring depression, simply because they are too profit-obsessed to take a temporary drawdown on their profit margins and/or are unwilling to retrain and move people around the company.

The incestuous relationship between Wall Street and Washington is lock solid. While banks and brokers received trillions of dollars in bailout funds, Detroit auto CEOs were hauled up in front of Congress like third class criminals for requesting a mere $25 billion. I will leave aside the debate as to whether either of these groups should have been bailed out at all, but the difference in treatment between these two industries was stark to say the least. The key difference is that Detroit's bailout represents hundreds of thousands of decent paying middle class jobs, while Wall Street's bailout represents billions of dollars in bonuses and payouts for ultra wealthy campaign contributors.

There are those who blame Greenspan and other government bureaucrats for this financial debacle. I am not going to say that the man wasn't absurdly ideological and short-sighted in his policies, but to believe that he was the primary sponsor of those policies is naive in the extreme. No. Behind Greenspan was the strong hand of the Wall Street firms who were far and away the greatest beneficiary of the multi-decade monetary profligacy. In short, Greenspan's role was simply as front man and stooge for moneyed interests.

And finally, under my favourite theme of "who didn't see this coming?": Suffice to say that when your "best" and "brightest" are flocking to Wall Street to trade pieces of paper back and forth in a zero sum game while extracting billions of dollars of fees in the process, then you should be honest enough to realize that as a nation your best days are behind you...