Kiss Wall Street Goodbye
Does the public stock market actually serve a purpose? To some free-market zealots, the answer is obvious: The public markets increase liquidity, and this enables fledgling businesses to get off the ground by allowing them access to capital. Moreover, we can all reap the benefits of capitalism’s “creative destruction” and become a nation of investors (as opposed to one of actual producers). For well over a decade, the public bought this line with increasing gullibility. New research, however, suggests that the only institutions public financing helps are those which arrange the financing. That is to say, public equity finance is a business whose greatest beneficiaries are its salesmen.
Lawrence E. Mitchell, a professor of business law at George Washington University, argues in a recent paper that the “empirical evidence is clear that the American public stock market rarely has been a significant factor in financing industrial enterprises in the United States. The only American business sector to rely upon public stock issuances as an important source of financing public activity is the financial industry itself.” Based on data going back to 1955 and in some cases even earlier, Mitchell finds that “America’s economy is increasingly based on finance, and our public financial markets principally are financing finance.” In fact, he concludes, “the data raises the question of why we incur the very substantial economic and social costs of a public stock market in the first place.”
It is a question worth asking in light of the large-scale collapse of the stock market—precipitated in significant part by the even larger collapse of the mortgage and credit markets. The “market”—by which nearly everyone means the stock market—was supposed to make us all rich, but we seem to have forgotten that there should be some real value behind all that common stock. The crisis indicates that when you build a market on value that everyone merely believes to be worth something—until they don’t—that market may not provide long-term stability.
It seems that when people have wanted to build a business that produces something—food, materials, other goods—they have had little need historically for the public markets. When you want to sell financial snake oil, however, you “go public” and get investments from average Americans and their pension-fund managers seeking a quick profit. Worse, obsessions with quarterly results and no-strings profits have made the market more volatile than ever before; most “investors” should be called “traders,” as the reason for holding stock is no longer to increase wealth over time at a rate greater than inflation but to turn it over quickly by selling as soon as the price rises.
Mitchell’s research comes out at a fortuitous time, as the federal government is pumping money into financial institutions to keep the markets going, in order to “avoid chaos.” The major investment banks have either folded or turned themselves into normal, staid commercial banks. As Mitchell’s paper implies, the government might have been better off lending our tax dollars to companies that actually build something—or, better yet, reducing our tax burden.
—Anonymous
This article first appeared in the January 2009 issue of Chronicles: A Magazine of American Culture (Cultural Revolutions).
Entries(RSS)
Anonymous: "When you want to sell financial snake oil, however, you “go public” and get investments from average Americans and their pension-fund managers seeking a quick profit."
Yes, only recall Anthony Trollope's Augustus Melmotte in The Way We Live Now.
What is meant by "for well over a decade." This has been going on for centuries. In America, in particular, since Alexander Hamilton floated government bonds and accepted bank paper as if it were real money.
I would add that Wall Street has almost always been reliant on big government interventions. Wall Street has almost always supported the political party that was more willing to support government intervention in the economy for the benefit mostly of big business. It supported Hamilton against Jefferson. Clay, Webster and the Whigs against Jackson and the decentralizing Democrats. Lincoln, Seward, Stevens, Sumner and the Republicans against the Democrats and the Confederacy. It was the Wall Street marvel J.P. Morgan who pushed the Federal Reserve and the income tax on Wilson and the Democrats to put order to the economy which the Street dominated. Today, Wall Street looks to the Democrats for succor. One only has to look at the political contributions of the stockjobbers in the big banking establishments to realize that their money is on the Democrats, from the "socialistic" Charles Schumer and Hillary Rodham Clinton to the Big O himself, Barack Obama.
Lawrence Kudlow, alleged Catholic convert, fancifully pronounces the big investment banks of Wall Street the "crown jewels" of the US economy. He supported the government bail out of the Wall Street "crown jewels" while he favored the government turning it's back on the American motor companies, manufacturers who actually made things for people to use. One can only guess that Mr. Kudlow has not read Ropke, Chesterton or Belloc for true Catholic views of the the economy.
Yes, CHRONICLES is right. Kiss Wall Street goodbye.
The whole basis of modern finance capitalism is the limited liability corporation where the state charters a form of organization where the investors can lose only up to the amount of money they put it, but can gain unlimited profits. Is this form of organization even moral or is it just an invitation to corruption and predation? I'm not trying to imply an answer one way or the other. I'm an investor myself and just about anyone living in the contemporary world takes this form of organization for granted. But I would like to hear what others think.
Corporations and LLCs become in law NEW legal entities. Therefore, these entities are responsible for their acts, not the individual investors in the entity. This sham should be ended, and investors should be liable for the acts of the entity they own up to their individual culpability.
To #4: Without limited liability, I imagine the finance of business in this country would decline by over 99%. New business are far too risky to put your life savings on the line for and if any were willing to do so, that investors would expect to take a very active role in the management of the company. The idea of a public corporation would vanish.
The law, however, does permit creditors to reach the shareholders of corporations in limited circumstances (known as "piercing the corporate veil") in certain egregious cases of fraud. That, I suppose, is the protection against corruption and predation. The doctrine is probably too limited, however.
The development of corporate law has been far less concerned with protecting the victims of corporations than with protecting passive investors against abuses by management of corporations.
"new businesses are far too risky to put your life savings on the line for..."
Really? Well, if that's the case, then DON'T put your life savings into it. Do something else.
But don't go to banks whining about your need for "credit," and expecting the government to save your skin whenever your new business or your bank goes bust.
This whole credit mentality has got to stop, NOW. And if you're an idiot with a new idea, then pay for it yourself.
To #7: Are we talking about two different things? i'm talking about small businesses that can only grow with capital infusions. The way to get these capital infusions is to sell stock to passive investors. Passive investors will not invest in companies if there isn't limited liablity. Would you buy stock in Microsoft if you knew that a Microsoft bankruptcy meant your personal assets were on the line? It's generally understood that a person who first starts a business dumps nearly all of his assets into the business. We are talking about third party financing of these businesses.
But all this raises an interesting question: what is the purist libertarian position on limited liability? Do they agree that corporations (and by extension limited liability) are the creations of the state? (How could they disagree?) And that, since limited liability is a creation of the state, states are free to regulate corporations as they see fit? Would a purist libertarian argue that there shouldn't be any limited liability? I haven't seen that argument made, only consistent arguments for less regulation of corporations based on free market principles.
You can't talk about small businesses and then use Microsoft as an example.
If a small businessman needs money, he could always convince "third parties" like his parents or his friends or his brother-in-law to lend it to him. He doesn't have to go public and issue stock. And in those cases the persons making those private loans to him could only lose the amounts that they actually lent. Whatever losses were incurred by the business itself would be the responsibility of the businessman. In fact, no one else need ever know a thing about those private loans.
The use of Microsoft was to illustrate the broader point: without limited liability, no one is going to invest in a company unless they have some sort of control over management.
When I say small business, I guess I should be more precise. I don't mean really small, family-run type businesses. I'm talking about businesses that need more capital than that which can be provided by friends and family. Also, there is only so much financing a bank will give. At this point, a business has nowhere to turn but to passive equity investors.
I think the current stock market reflects accurately the value of empty American factory buildings. These mills were sold down the river by the stockholders on the grounds that whatever products they made could be produced cheaper in nations unaffected by environmental and labor laws, thus maximizing return on investment.
I guess it was a short term vision that paid off for a while but the slick operators have moved on to bigger and faster swindles. It's only a matter of time before they pay with their blood.
I once read a book about the stock market called 'The Burning Match' It started by explaining how business financing worked in the beginning, and briefly explained how it got out of hand and became the Wall Street monster it is now. The line was drawn when stock issued by a company was no longer tied directly to company assets,
or in some cases, directly to company profits, but rather on demand for the stock itself, which is manipulated by the stock promoters (who are the ones who make the market for that stock through advertising).
The author described stock trading with the idea of a burning match. Once it's lit, it gets passed from hand to hand, until finally someone gets burnt.
Another book, written in the late 70's by a man who made a fortune in the stock market and then blew the whistle on it as the huge fraud it is, said that stock prices are created by manipulation of demand, which is done by issuing press releases to the media, etc. Through such means, people are encouraged to buy when stock prices are high (that's when they wish to sell the stock off). Then, through the same means, the price of the stock can be made to fall or even collapse, and the buyers have lost everything. Now the price sits low for several years, and the insiders spend that time buying it back as low prices until the buy up all they can, then start the process over again.
I think he was on to something.
Another book I read described the international fiat currency market as a big swindle, which I dont doubt.
To 12: I would blame management for that much more than stockholders. Management is obsessed with keeping a stock price high a) in order to enrich themselves (they are usually some of the largest individual shareholders) and b) because the stock price is often the measure of success. I think most stockholders (who are investors and not speculators) would be happy with a fairly stable stock price on stock they hold that pays out a nice 8% dividend.
To 13: It sounds like "The Burning Match" concludes that virtually all investment in the stock market is speculation. You will find many solid investors who pride themselves on investing based on the performance of the business and not simply by guessing which stocks will go up.
@14 Mr. Oliver
You make a good point. Much of the mis-management came from weak men trying to please their corporate wives who detested small town life. They wanted to become Manhattan swells. When the corporations moved their headquarters to New York, you could be certain that another mill town would be de-stabilized.
Furthermore, the business schools are teaching, via computer simulation, how to maximize stock prices. In the 1980s it usually involved stock buybacks to impose scarcity. Nowadays it involves book-juggling, fraudulent reporting and issuance of worthless paper.
The question is, who gets the gold? Something of value is traded for the shares.
This continues to confirm the assertion made by others that capitalism is a system by which people with large fortunes monopolize the collection of profits and increasingly shift all the risks to the citizenry. The "free market" is only one of their tools. Congress, the Federal Reserve, and regulators are others.
Another egregious disposition that needs to be corrected is that due to a court case in the mid 1800's and a lawyers brief in a railroad case corporations are treated in the law as persons and thus the beneficiary of certain "rights". One of those many things established by a court that the Congress never voted on!
@14: Actually, the 'Burning Match' did mention what you have pointed out, but I think it implied that such investors were becoming less common.
R. Oliver @ 11
"Also, there is only so much financing a bank will give. At this point, a business has nowhere to turn but to passive equity investors."
The translation of that would seem to be as follows: "When financially astute persons who run a bank won't invest in your idea, then you have to turn to foolish individuals who aren't as sharp as bankers."
The whole strikes me as bordering on fraud.
Part of the problem is an unspoken assumption -- namely, that every business, even when it is making a satisfactory profit, must necessarily expand. Why?
@13 Allen
In the 1920s it was common to use the phrase "gambling on the stock market." Speculation was a euphemism brought in later.
'You will find many solid investors who pride themselves on investing based on the performance of the business and not simply by guessing which stocks will go up.'
That is true, but I wonder how many of those investors think they are investing based on the performance of the businesses, without realising that the stock they are investing in isn't actually tied to the value of company assets or profits generated by that company, or if they are, only in an indirect manner?
Mr Gervaise, I wasn't aware of that fact. Thank you. Gambling is what it really is.
Mr Salemi, I second your question in #18 above. I have wondered about it for years.
Doing a google search for the entire phrase "gambling on the stock market" brings up some intersting sites. I first heard the expression on Upstairs Downstairs back in the 1970s.
In my do-gooder prude days I counselled people regarding money matters and debt. One caller asked if playing pegboards is wrong in God's sight, then he asked about several other games of chance. I had a difficult time convincing him that the scriptures' actually talked about working for money. He truly thought the only honest way to get money was to win it. Such is the spirit of poverty.
@18 Jospeh
If a business stagnates, then the competition will gobble it up. It's the nature of pure competition. Furthermore, running a business is not a static proposition, but very fluid. Employees come and go, machines break down, fashions change, production methods become more streamlined, and the annual expansion of the money supply continually drives down the value of the dollar. And using the phrase "every business ... must expand." is a very sweeping generalization and usually false. A dentist can only take care of so many patients, a barber can only cut so much hair in a workday, I could go on.
@Etienne Gervaise
Have you seen the Money Masters documentary on Google video?
It is very good although long at 3 1/2 hours and explains how the international financial system works including the comparison of what happened during the depression and what is happening today.
As far as I can tell the stock market is like a betting shop where you bet on stocks of companies you think will make a profit.
The only problem is that it is inevitably due to corruption when a cohesive group of people with similar business interests using insider trading especially if they have contacts and influence in the government and in the Pentagon and especially if they are affiliated with military development companies like Dov Zakeim and draft foreign and domestic policy.
Shortly before 9/11 there was a spike in short selling of stocks on the stock market any connection?
There also the fact that it can be used as an economic warfare strategy.
As written before in Chronicles and other places international financer George Soros is suspected of being heavily involved in engineering the Asian stock market crash of 98.
@Etienne Gervaise brings up a very good point. There are limitations of human scale in most businesses. Supporters of big business inevitably say that bigness increases efficiency due to economies of scale. Yet, what we keep seeing is that they eventually tend to grow to be too big to fail, and as the current economy is showing, they are also too big to bail out. Efficiency is necessary but it is not sufficient. It is a means to an end, but not appropriate as an end in itself. Even business experts like Peter Drucker think that effectiveness is more important than mere efficiency. But effectiveness brings an ethical and even philosophical dimension to the discussion. Efficiency for Drucker is doing the thing right, and effectiveness is doing the right thing. So, what is the right thing? From an Aristotelian point of view, it is to lead the good life. Is bigness necessarily the best path to the good life? I rather think not. Fortunately, Chronicles, its editors, contributors, and readers have long discussed this very issue, and do a far better job than those of a shallow economic viewpoint who worship efficiency while the culture and its hopes for a life well lived fall into the abyss.
@24 george
I have not seen it but I'm aware of its content.
In every stock transaction there is a winner and a loser, one party thinks the stock has reached it maximum value, and the other party thinks it will go up more. There was a time when research told you the value of a company's assets and subtracted its liabilities, but those days have sadly gone, so the name of the gme is speculation -- or gambling.
@20 Mr. Wilson: I think the prudent investor would respond that speculation does distort the relationship between the price of a stock and the performance of a company, but that the fundamentals (i.e., the company's performance) are a solid indicator over time.
@18 Mr. Salemi: No, I think you are missing important differences between debt and equity investments. Banks generally can't make equity investments. Therefore, they are limited to providing loans to companies and cannot share in the upside of a company. Suppose they make a loan at 8%. If the company goes under, they'll probably get a little of the principal back. If the company takes off, they'll get their principal plus 8%. For an equity investor, if the company goes under, he'll almost certainly get nothing. If the company takes off, he could make an enormous profit (maybe 100 or even 200%). The risk of losing the investment is worth the potential big return. Without that incentive, you would lose considerable innovation because, although most ideas fail, most would not get the chance to succeed.
With the advent of computer trading, and the corresponding movements of stock prices that it engenders, it is virtually impossible for anyone outside of a corporation's senior management to make any sort of informed investment decisions. Computers search stock prices for gains to be made of even a few cents per share, and this may not be related to the fundamentals of the corporation, but rather are artifacts of other computers making similar guesses as to pricing patterns. This is what has changed "investment" in the stock market into a crap shoot. It is all gambling. What I have also noticed is that most of the profits of many companies are shifted into the pockets of senior management, while at the same time, their stock options dilute what little influence remains in the hands of the share owning peonage. Most of the annual meeting stock proxy booklets I still get spend most of their ink and paper on golden parachutes, ridiculous executive salary schedules, poison pills, and complex methods of aligning the interests of said senior management with those of the hapless shareholders. So, I have seen companies, (I won't embarrass Texas Utilities by mentioning any names) where dividends have been cut, share prices are dropping, and management is still rewarding themselves handsomely with bonuses for actions that have caused the company to fall flat on its face. It is a scam, and it is destroying the rest of the economy. Swindlers like present and past senior executive in the Federal Reserve have deliberately kept interest rates far too low for savers, for a variety of reasons, but one of the main ones was to force the sheep into the stock market to be fleeced by their cronies on Wall Street. I have been moving assets out of the stock market for some time, including shares that have been in my family for more than half a century. I am tired of getting screwed by a bunch of crooks running a casino, and am moving my meager wealth into things that promote self sufficiency and hopefully long term happiness and prosperity.
R. Oliver @ 27
I see what you mean about the difference between a loan and an investment. But I still think there is a strange thing to be explained here.
Bankers are, I assume, financially astute persons. They have experience in the entire business of making money. Well then, if they refuse to lend money to a businessman it must be because they know something or at least have a shrewd insight about something. If they sense that the man's idea is a good one, they'll surely lend him the money at the 8% interest rate that you mention. After all, why should they pass up making that 8% interest?
So let's say the businessman can't get a bank loan. Instead he tries to get investors to put money into his new idea. He surely doesn't say to them "The bank wouldn't take a risk on me for a mere 8% interest. I'm asking you to pick up the slack, on the off chance that I'll hit it big!" And it IS an off chance, because as you have said, most ideas fail.
So it would seem to me that what drives these "equity investors" is sheer hype and enthusiasm and a get-rich-quick mentality. The businessman pumps people up with all sorts of hopes and dreams and visions. It's what seems to be the entire delusional attitude of Willy Loman from "The Death of a Salesman" -- every day there's the chance of something new and big and wonderful, and you have to keep telling yourself that lie as a motivation to keep yourself chugging away at the treadmill.
E. Gervaise @ 23
I'm sorry but I still don't see why a business has to necessarily expand, even when making a respectable return. It's not stagnation to be meeting a payroll, producing useful items, and putting a profit in the bank. I think a great deal of our trouble today stems from the frenetic, over-the-top enthusiasm of obnoxious little MBAs who insist that every business has to be carried on in a white heat of energy and new ideas. Hasn't the last decade shown that we've had too much of that merde?
As you say, a barber or a dentist can only take care of so many patients. Well, why shouldn't a business be content with the share of the market that it currently has?
I think here at Chronicles we should be questioning not only leftism and cultural degeneracy, but also some of the root assumptions of capitalism.
@29
I did not say they had to expand, but rather stated that a business is not static. As I said many things change, but moving a factory to Mexico or China is not necessarily expansion, but more often maximizing stock price. As for putting the profits in a bank, well, bakns do not seem to be rock solid any more. And when the Fed drives down the value of the dollar there is great pressure to spend the profits on acquisitions instead. The government and its goofy policies are the problem, and Obama's stimuli will be more throwing gasoline on the burning economy.
Well, I will agree that a business can't remain totally static. It has to be aware of changes in the economic situation that may effect it. But the notion that the ultimate goal of the business is to maximize profit, at the expense of every other concern, is the real root of our trouble.
If a businessman thinks that the ultimate goal of his enterprise is to maximize profit, then he is guilty of the sin of avarice.
Sorry -- The word should be "affect" in the second sentence above. A silly sophomoric slip.
Wall Street benefits enormously from US tax laws which encourage the EXTREMELY attenuated form of stock ownership via mutual funds. This lack of oversight enables management to pay itself before the shareholders. These same fund managers and senior executives then get their earnings taxed at lower capital gains rates. Thus, the emphasis has shifted entirely from dividends to price appreciation, i.e., the "greater fool" theory of investing.
The endlessly touted idea is that we can all get rich by owning itty-bitty bits of enormous companies. The shareholders in funds that are the shareholders in companies (see how absurd this is?) are suckers being fleeced.
Agreed. However there is a proper function for credit, and that is to fund a productive enterprise. Such as mining for example, or construction. If I have a deposit of iron, but not the money to get it out, and I borrow money to do so, in a non usurious situation the one lending would get a percentage of the profit along with his money back, since his capital is just as necessary as the labor and equipment to get the iron out. This is totally different from an open ended unlimited amount merely from the borrowing of the money. If usury as such were illegal, this would lead to people only engaging in productive activity and not in speculative activity such as the derivatives market.
@34 Athanasius
There was an old axiom that said when you borrow from a bank, make sure you borrow enough to make them a partner. If you only need a million then borrow ten. That way if things go wrong, the bank will take the necessary steps to protect its investment. Now the banks have figured out how to borrow billions from the future.
The practice of "banking" or as it should be more accurately called, "money printing" is a fraud. Many people mistakenly believe that banking is the result of the free market, it is not, it is the result of corporate interests being protected by the government.
Say when you borrow money from the bank, where does the bank get the money from? It just "prints" it up, hands it over to you, then charges interest on the money it just printed up. (In actually they don't physically print paper bills, they just make a data entry in a computer and the nations total money supply is increased by the amount that you borrowed) How is this not fraud. It transfers wealth through inflation, from people who save to the banks and people who spend and borrow.
We need a 100% gold standard and outlaw the fraudulent practice of banking.
(( Mitchell’s research comes out at a fortuitous time ))
"Fortuitous" means "by chance," not "fortunate."
Writers should use plain words that they know instead of trying to use fancy words that they don't.
The current economic crisis is a natural result of the artificial boom that preceded it. That bubble was produced by a partnership of government and commercial banksters. The commercial banks were woefully undercapitalized and overleveraged. The government promoted and subsidized the over leverage.
If the govenment did not explicitly guarantee (through the FDIC), implicitly guarantee and subsidize the banks through the Fed reserve, depositors would have an incentive to make sure banks were adequately capitalized. Invetment banks were not able to compete against the subsideis offered to the commercial banks, and had two bad choices: die a slow death due to a business model that the government made obsolete due to its subsidization of commercial banks, or take huge risks with leverage. The investment banks, especially Bear Sterns and Merril Lynch, did the latter.
The solution is to take the painful medicine of this recession, and to require commercial banks that elect to go into government partnership via the Fed and the FDIC to have far more onerous capital standards than they have had.
By the way, it is stupid and ignorant to pee on Wall Street. The problem is Washington and the commercial bank, Wahington partnership.
>In fact, he (Mitchell) concludes, “the data raises the question of why we incur the very substantial economic and social costs of a public stock market in the first place.”<
We are still waiting for an answer to that important question.
And we will go on waiting til judgement day as there is no answer to it.
The thing about people at the highest levels of Wall Street is they make the money off the backs of the lower classes by "buying low and then selling high (to suckers)", and then they use the money to buy influence and access in Washington DC.
In regard to this, Pres. Obama isn't going to be much of anything except a servant of Wall Street because that's where he's counting on raising the money he needs for 2012.
The trend is that the Democrats get their money from the financial industry, the Republicans from Heavy Industry.
Our only hope is that the damned house of cards called Wall Street falls down, as maybe that'll turn people off of being traders and on to being good old fashioned investors.
It's like a mule utterly lacking in common sense; sometimes it just needs a damned good thrashing to knock some sense into it.
Derek Leaberry @3,
>I would add that Wall Street has almost always been reliant on big government interventions. Wall Street has almost always supported the political party that was more willing to support government intervention in the economy for the benefit mostly of big business. It supported Hamilton against Jefferson. Clay, Webster and the Whigs against Jackson and the decentralizing Democrats. Lincoln, Seward, Stevens, Sumner and the Republicans against the Democrats and the Confederacy. It was the Wall Street marvel J.P. Morgan who pushed the Federal Reserve and the income tax on Wilson and the Democrats to put order to the economy which the Street dominated. Today, Wall Street looks to the Democrats for succor.<
This is a profoundly important point. It is important to understand that the economic configuration we currently are saddled with was manufactured by the government at the behest of narrow interests with their American outpost centered in Wall Street.
Wall Street has been at the very heart of what's gone wrong with this country, and the sooner their seemingly hypnotic power over Washington is broken the better off we all will be.
In part, their power is based on the fool idea that the American Economy can survive the demographic displacement of the very people (White Americans) who made the damned country prosperous in the first place through their productivity and ingenuity, it is based on the fool idea that the degree of downward pressure placed on wage earners is somehow the measure of an industry's health, and it based on the fool idea that the trade deficit does not constitute money that's getting bled out of the American Economy.
Oh yeah, and that deficit spending is somehow good for the economy.
It is these insane notions that allow Wall Street to distort the entire economic system in such a way as to benefit themselves at the expense of Small Business, the American Worker, and the sustainability of the American economic system itself.
"I’m sorry but I still don’t see why a business has to necessarily expand, even when making a respectable return. It’s not stagnation to be meeting a payroll, producing useful items, and putting a profit in the bank."
Damn straight Joseph.
"Part of the problem is an unspoken assumption — namely, that every business, even when it is making a satisfactory profit, must necessarily expand. Why?"
Joseph, this doesn't really answer your question, which is more about the belief system built into how so many people think about business in this country, but nonetheless I found this quote from Steve Sailer's most recent article interesting:
http://www.vdare.com/sailer/090201_meltdown.htm
"Third, the high CEO compensation of recent decades has encouraged a get-rich-quick attitude.
Say a 45-year-old gets appointed CEO of a small bank, with a salary of $1 million per year. He could carefully steward his stockholders’ investments, and continue to make roughly $1 million per year until he enters a comfortable but not lavish retirement in 20 years.
Or, he could try to grow the bank fast via risky bets. If he could increase the size radically, he would show the Board that CEOs of banks that big usually get paid $10 million per year. Even if the bank blows up two years later, he’d still have earned $20 million in those two years, as much as he’d earn in 20 years of prudent management of his bank at its current size."
"Part of the problem is an unspoken assumption — namely, that every business, even when it is making a satisfactory profit, must necessarily expand. Why?”
Joseph, this doesn’t really answer your question, which is more about the belief system built into how so many people think about business in this country, but nonetheless I found this quote from Steve Sailer’s most recent VDARE Article quite interesting:
“Third, the high CEO compensation of recent decades has encouraged a get-rich-quick attitude.
Say a 45-year-old gets appointed CEO of a small bank, with a salary of $1 million per year. He could carefully steward his stockholders’ investments, and continue to make roughly $1 million per year until he enters a comfortable but not lavish retirement in 20 years.
Or, he could try to grow the bank fast via risky bets. If he could increase the size radically, he would show the Board that CEOs of banks that big usually get paid $10 million per year. Even if the bank blows up two years later, he’d still have earned $20 million in those two years, as much as he’d earn in 20 years of prudent management of his bank at its current size.”
But no matter what the future holds, and whether or not we are so lucky as to live to see the day the title comes true, this is an excellent and thought provoking article.