Wall Street's Free Market Trumps Real Freedom


Free markets and their attentive politicians are always serving up something new. May’s service — an 872 point Dow Jones blowout — clearly dampens recovery hopes. Is it right that financial markets impact the underlying economy so remarkably? Could a different financial architecture help mitigate this problem — an architecture that does not shortchange honorable merit when it comes to financial rewards?

Increasingly, sleeplessness is not just for speculators holding risky bets. It is a problem for many middle class American breadwinners, too. Why? Wage growth for most workers is highly constrained. Good jobs continue to go overseas for lower pay. Employers are reducing retirement plan benefits for new hires. The Federal Reserve’s commitment to a policy of inflation penalizes those who do not regularly invest in assets leveraged by inflation. A significant portion of U.S. fiscal spending comes from overseas borrowing. Meanwhile, government liabilities rise as government takes tax receipts from the responsible and bails out or subsidizes the irresponsible. What’s not to worry about?

Interestingly, well-to-do boomers are worrying, too, according to financial commentator, Robert Powell (Marketwatch, May 19). Indeed, Powell says that boomers in their fifties are concerned about the costs of helping aging parents, adult children and kids nearing college age. He estimates the Ivy League tab for his four children may reach one million dollars. Plus, he worries about setting aside sufficient retirement funds for himself and his wife. How much does he feel impelled to save for retirement? A cool 2 to 4 million dollars. No doubt many Americans would like the opportunity to worry about that problem!

People like Powell are constantly reminded by firms like Merrill Lynch, Charles Schwab, and the big life insurance companies that they need to invest more dollars with expert guidance if they want to retire in style and have their money outlast them. While this advice has been socially normed and seared into our collective conscience, it is neither culturally rational or morally defensible, all things considered. After all, just because something is widely accepted does not make it right. The commonness of beliefs does not equate to the correctness of beliefs.

Financial Advisors Don't See Full Picture

Some financial advisors are shamefully ignorant of fiduciary morality; others are good people caught up in an errant financial architecture. Most financial advisors choose to go with the flow, quite like most people working in higher education, medicine, law, religion and other fields that need productive reform. Indeed, it is hard not to go with the flow when public and private pension funds have fiduciary guidelines that direct them to Wall Street. Nevertheless, a timid acceptance of today’s norms may be little more than capitulation to Wall Street’s false prophets. Granted, it is hard to get completely free of Wall Street, especially when one’s employer provides limited pension plan options. Still, even the act of moving 50% of one’s capital back to state and local investment markets is a meaningful act of resistance against Wall Street’s hegemony.

The financial industry sells its retail clientele certain conceptual “products”: return on investment, retirement planning, income security, tax minimization tactics, investment risk management, wealth maintenance strategies, leisure life dreams, and self image. (I should know: In earlier times I worked for two Wall Street firms.) The financial industry, a few small pockets aside, does not sell the idea of investment in the common good; granted, the niche market of socially responsible investing is a step in the right direction. Nevertheless, relatively few retail marketed investments are evaluated with the sustainable national good in mind. Products and services are marketed for individual gain, not the public interest.

Listening To The Wrong Message

We’re told: “Get the money you need by investing in Wall Street’s securities.” A better admonition would be: “Make sure you honorably deserve the money you earn.” Irrationally we think our nation can escape judgment when the aggregate behavior is to seek more money than justified by the real value of our contributions. No wonder we have inflation that has wrecked the value of the 1970 dollar! Little wonder that the gap between the wealth class and the working class widens as financially empowered people exploit advantaged access to money growth mechanisms.

Sinfully, investors dream of the free market as a private money manufacturing system — a legalized counterfeiting operation. We want our money to grow because we arrive early in a little Ponzi trend — long or short — that provides unearned gains as latecomers pile in behind us. Even when it comes to (3) investment grade bonds we don’t think clearly. We’ve accepted the notion that public debt is good, for it provides opportunities for steady, secure returns for security buyers. However, over 90% of Americans pay far more in taxes, inflation and debt service rolled forward to foreigners than we get back in interest earned on government debt held in our pension plans. In short, we hazard national security — think economic sovereignty crisis — for returns that aren’t even real. How dumb is that! Indeed, there is a whole false religion of free markets to which we mistakenly burn incense. It is as though we’ve elevated the idea of free market capitalism above the idea of godliness. How did that happen?

What Free Markets Really Need

Markets need structural rules and guardrails. Markets do not need suffocating regulations. Regulatory overkill testifies that the underlying architecture is wrong. Markets that are appropriately designed are not easily turned against the public interest. The fact that the democratic administration thinks it necessary to add thousands of pages of new financial regulations and consumer protections is a bright red flag about the underlying architecture of our democratic capitalism. The coming regulations will not perform adequately!

Another witness to the errant design of modern finance capitalism is the unrelenting tendency of the system to allocate capital unwisely as it regards investments and unjustly as it concerns rewards. Democratic capitalism in America is widening the gap between the bottom 75% and the top 5%. When new wealth is being generated, should the bottom three-quarters of the population sink on both an inflation adjusted basis and on a comparative basis? Hardly. Defenders of today’s architecture need to objectively recognize that our skewed free market system is promoting the growth of big government as the federal government works to redistribute financial resources. Unfortunately, big government programs redistribute in morally and socially hazardous ways that work against the common good. A properly designed market system — moral guardrails and all — would facilitate a move to smaller federal and state government. Its higher standards would require much less regulatory burden, too.

Do Growing Dollars Have Real Worth?

Financial advisors tell us how much money we will need to retire at a level we aim to achieve, then we set about with their fee-for-service help to “grow” our money. We’re in good company, we hope. The Fed seeks to grow dollars, the Treasury seeks to borrow dollars, and the Russians seek to counterfeit dollars. Everyone covets dollars. But this covetousness is inflationary and counter to our lasting good when it exceeds the real value of our productive contributions. By contrast, when one grows a cattle herd from 20 head to 200 head, there’s more real wealth to go around. Then again, it takes real work to get this kind of financial growth.

There is a great deal of monetary capital in the world and a good deal of able money management; consequently, there is little chance that aggregate investment capital deserves to appreciate 7-12% per annum after inflation. Capital is not that precious relative to other productive resources. Passive investment capital supplied to large corporations operating in low risk environments probably does not deserve more than 2-5% return after inflation. Granted, active investment capital applied in necessarily high risk business environments deserves a higher return, as does private ownership.

One problem with the architecture of finance capitalism is that market risks (volatility and disequilibria hazards) tend to determine (or price) the costs of capital far more than "business execution risks.” As a result, speculative investors are able to increase their share of corporate profit relative to rewards received by labor and mid-management. Undistorted conservative ideology says this is wrong as does the biblical theology upon which a good deal of conservative ideology was once based. Inescapably, there is something wrong with market architecture when markets skew the allocation of rewards in favor of exploiters rather than honorable producers. Capital markets that misappropriate capital costs and wrongly allocate rewards need reform!

Most speculators, investors, pension funds and other capital holding entities are trying to get a much richer return on money than is warranted by the value of capital to labor. Elevated returns on investment capital unjustly wash out the capital accumulation power of those least able to secure sizable non-earned premium returns on investments. As a result, developed nations turn to socialism and redistribution schemes to help the disadvantaged. Perversely, these ‘solutions’ lead to big government and a host of threats to the common good.

Summary: Wall Street System Is Unjust

In sum, Wall Street profits are increasingly becoming claims upon the ownership title of others and usurpations against the purchasing power of working people around the world. It is only possible to apply a limited amount of money against a given amount of goods and services before the value of money is inflated away. Thus, when people “make” through passive investment huge amounts of money for retirement — the money primarily growing in betting pools that do not directly capitalize new productive enterprise — that money washes out the competitive buying power of “barely-able-to-invest” wage earners. (This is social injustice!) While increasing numbers of wage earners save for retirement through Wall Street vehicles, the Wall Street Ponzi approach to retirement savings tends to give financial predators opportunities to capitalize upon the nation’s retirement security needs. Its like unionizing the wealthy while working class people are sent to ‘right to work’ states; granted, many government workers are overpaid. A much better approach is to create a financial architecture that allows retirement savers to participate directly in the private sector aggregate income stream.

May’s wild month on Wall Street is a good reminder that no one’s future is safe while Wall Street predators buy government treasuries as means of collateralizing speculative trading endeavors. When Wall Street climbs, people feel like the economy is recovering. When financial markets sink, people’s hopes for the economy crater. Financial markets should not trump the underlying economy or be the linchpin of national security. The federal government and Wall Street are too big relative to the general economy and the other institutional aspects of society. Furthermore, they’re in an unhealthy relationship. It is time for nonpartisan reforms to cut both hazards back to size.