Instead of production


Instead of production
Investing in production did not give the profit that the bankers wanted. So they found alternatives. Like lobbying, buying back own stock, commodities, "innovations".

In the 1980s, Wall Street discovered that investments in lobbying, politicians, boards of directors and academic experts pay better than investments in production. Now Wall Street's real core competence is lobbying. They spend maybe one percent of corporate profits on lobbying, political contributions and the like. More than on research and development.

Profit without productivity
Not only high finance changed from production to lobbying. Telecommunications, energy, media, health care, industrial food as well as thousands of ultra-wealthy families all have vested interest in protecting their assets. The result is a policy that blocks development and protects incompetence; American industry is put at disadvantage. Like steel industry and consumer electronics before them, GM and Chrysler have for decades been run by incompetent managers, without any interference from complacent boards or antitrust authorities. Many of those at the top do not want to become obsolete so they resist change.
The result is that technically, many foreign nations have overtaken America. In 1982, GM closed an assembly plant in Fremont, California. Because it was unprofitable and because the workers union was unmanageable. In 1984, it was reopened by Toyota. With the same unionized workforce, they raised the quality and doubled the productivity.

Buying back own stock
Buying back own stock is another method to make money without really trying. On a stock buyback, the total stock value remains be the same but the number of shares decreases while value per share increases correspondingly; that is, unless the market sees it as a good or bad sign and reacts accordingly. It's just shareholder money going to shareholders. With 91 percent of S&P 500 earnings spent on stock buybacks and dividends, there is not much left for product development.
Buyback is an alternative to dividends; stock is removed from the market and stock price increases correspondingly. A win for those who keep their shares and for those who sell. Also, management remuneration is often depending on share price development; thus without having to accomplish anything, top executives can make a lot of money through buybacks.

There are more methods to increase your profit. Deliberately making service worse is one. When banks were permitted to trade in commodities, Goldman found a way to choke the aluminum market. They bought a major trader and managed to increase delivery time from 6 weeks to 16 months. Instead of moving the metal to customers, Goldman was using its trucks to run ore around among the warehouses. From 2008 to 2010, the inventory increased from 50,000 tons to 850,000 tons, most of it owned by speculators. The price increased and Goldman could act like they had cornered the market.

What would we be without innovations? Cave men. No wonder people often equate innovations and progress. Within finance many are touting innovations, with those questioning the benefits dismissed as envious or antiquated. Still, pro-innovation chairman of the Federal Reserve Ben Bernanke's only recent example of good inventions is subprime loans; other innovations are older, like securitization (from the 1970s) and credit cards (even older). His predecessor Paul Volcker is more critical. He thinks that for the last twenty years, the only useful financial innovation is the automatic teller machine.
There is one thing common for recent financial innovations (except for the ATM). They only contribute to the wellbeing of those within finance and their allies. With bankers and economists applauding the wondrous innovations, institutions are bled dry. Most of the innovations are innovative ways to hide bad assets or to hide risks. Most often, Collateralized Debt Obligations are mentioned but there is more. Credit Default Swaps, synthetic or not. Other types of swaps and repos. We got new types of companies that are not subject to the same supervision as for example banks. If you want to keep something secret and don't know how, you can always claim it's a trade secret; not a new invention but still efficient. Using High Frequency Trading is not about hiding but about getting ahead of competition to make a deal; it is innovative but not productive.

© Anders Floderus