Angels and demons

One way to look at our economic activities is through the conventional framework of selfishness--we do what we do in order to serve our self-interests and that the "invisible hand" of the market produces all wonderful things that all of us get to enjoy.

That self-interest then leads critics to label the system as one that is driven by greed.  Of course, greed is not what most of us would consider to be a virtue.  Even as children, we instinctively understand that greed can be awful.  When we were kids, "greedy pig" was one of the many words that we yelled at siblings when unhappy about another's actions.  Michael Douglas, via his Wall Street character Gordon Gekko, made sure we would always equate the market economy with greed; remember that famous line?

Ricardo Hausmann offers a different way to think about the market:

But a market economy should be understood as a system in which we are supposed to earn our keep by doing things for other people; how much we earn depends on how others value what we do for them. The market economy forces us to be concerned about the needs of others, because it is their need that constitutes the source of our livelihood. In some sense, a market economy is a gift-exchange system; money merely tracks the value of the gifts we give one another. 

I earn my salary as a university faculty.  I get paid for educating students, whether or not I am really contributing to students' education in my classes.

My neighbor, "Archie," runs his own machine tool business, in which he makes products that others use.

I earn my keep by doing things for others.  Archie earns his by doing things for others.

Ah, if only it were that simple.  If only we were able to create a paradise in which we did things for others and everybody lived happily ever after!

We  humans are not always good-hearted.  That view of human nature is also why I, after a great deal of looking around, chose the Bernard Shaw quote as the title for this blog.

Of course, the understanding that we humans are not always good is not new; as James Madison put it:

If men were angels, no government would be necessary. If angels were to govern men, neither external nor internal controls on government would be necessary.

We humans are no angels.  There are all kinds of satans within us.  Most of us try our best to control the inner demons.  But, there are many who carry out the demon's instructions.  Government becomes a necessity.  But then, not all those who work in "government" are angels either!

Try as we can, as we do, I suppose we will forever be trapped in this struggle over dealing with our selves that are far from angels doing only good things for other people.

Why I hate the Facebook IPO: Greedy inside-trading bastards

Soon after my work Monday began here on the America's Pacific Rim, I checked the news and was so delighted with the update on the share price of Facebook that I tweeted:

Watching the #Facebook share price drop below the float price is pure schadenfreude :)google.com/finance?chdnp=…
— sriram khe (@congoboy) May 21, 2012

The schadenfreude was not because of the love-hate relationship that I have with Facebook; after all, there are many companies and individuals who trigger such emotions in me.

The joy at the falling share price was simply because of the manner in which Zuckerberg and his buddies demonstrated yet again at how much the system has devolved into a crony capitalism.  To begin with, they dragged out the whole going IPO process by initially offering big investors a slice of the company.  And then began the lengthy process that reminded me so much of how Lebron James went about choosing his bride team--remember that one?  Remember then how nauseating that was to most of us, even if we were not from Cleveland or cared about any sport?  And, therefore, how much we jumped up with joy with Lebron couldn't win the championship?

If you remember all that, you can easily begin to understand my schadenfreude, though I have no nickel to invest in any stock.

And then, one of his co-founders renounces US citizenship and moves to Singapore in order to avoid taxes, the news reports said.  Seriously, isn't that a cheap version of corporate-national prostitution to sell oneself for money?

By the time public (not pubic!) trading began, I was rooting for the share prices to go down.  And to go down fast.

This Forbes column clearly articulates what I would otherwise struggle to write (ht):

2. Mark Zuckerberg’s disdain for investors. He never wanted to be a public company. This became all too obvious during the IPO road show’s crucial stop in New York when (a) Zuck hid out in the bathroom and forced the audience to wait, and (b) he took the stage wearing his hoodie. Zuckerberg’s view of shareholders is like President Obama’s view of blue collar workers. He needs them but secretly laughs at them.
 3. Facebook left nothing for the common investor. The insider pig pile of PE firms and celebrity Silicon Valley angels took it all. This is a rather new, post-Sarbanes-Oxley fact and it should make Americans very, very angry. When Microsoft when public in 1986, its market value was $780 million. Microsoft’s market value would rise more than 700 times in the next 13 years. Bill Gates made millionaires of thousands of ordinary public investors. When Google went public in 2004 at a $23 billion valuation, it left less on the table for you and me. Still, if you had invested in Google then and held your stock, you would be sitting atop a 9x return. Zuckerberg and his Facebook friends took it all.

Yes, it is that attitude that makes me want to celebrate the plunge in the share price.

This attitude of not wanting to share--and we are not talking about taxes and redistribution here--is a continuation of the trend over the past decade during when, as the Economist points out, the number of public companies has dramatically fallen: "by 38% in America since 1997 and 48% in Britain."  This is worrisome because:

First, public companies have been central to innovation and job creation. One reason why entrepreneurs work so hard, and why venture capitalists place so many risky bets, is because they hope to make a fortune by going public. IPOs provide young firms with cash to hire new hands and disrupt established markets. The alternative is to sell themselves to established firms—hardly a recipe for creative destruction. Imagine if the fledgling Apple and Google had been bought by IBM.
Second, public companies let in daylight. They have to publish quarterly reports, hold shareholder meetings (which have grown acrimonious of late), deal with analysts and generally conduct themselves in an open manner. By contrast, private companies and family firms operate in a fog of secrecy.
Third, public companies give ordinary people a chance to invest directly in capitalism’s most important wealth-creating machines. The 20th century saw shareholding broadened, as state firms were privatised and mutual funds proliferated. But today popular capitalism is in retreat. Fewer IPOs mean fewer chances for ordinary people to put their money into a future Google. The rise of private equity and the spread of private markets are returning power to a club of privileged investors.

You say privileged investors, I say crony capitalism!

Turns out there is more:

the disastrous performance of the overwhelmed stock exchange and new rumors that Facebook might have broken the law before its first minute as a public company by leaking exclusive news about its earnings to large banks, who then went ahead and told big investors to sell Facebook at the opening.

You see why I wrote"Greedy inside-trading bastards" in the title?

The Faustian Bargain and the Great Recession

Over to Buttonwood, who says "now the devil is claiming his price":

We have set up economies where we have demanded "middle class welfare" (the tax deductibility of mortgage interest is an American example, cheap university tuition is a British one) along with rising house and share prices. To get the latter, governments liberalised the financial markets. This allowed us to borrow money to buy houses and allowed banks to expand from plain vanilla lending into the securities markets. We had welfare states without the pain; we ran trade deficits without suffering the kind of constraints we would have faced with a gold standard. 

"Greed is good"

In "The United States of Gordon Gekkos" I wrote about greed--not just on Wall Street, but on the metaphorical Main Street too. Without greed, for all purposes, we can't have the economic system we have. Can't live with it, and can't live without it!
Warren Buffett says that now is the right time to be greedy again:

Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now.

Borrowing to consume: is it always bad?

Fareed Zakaria sees a silver lining in the dark economic clouds. I think he is being a tad optimistic that we will change our ways and not consume more than what we can afford--the we as in individuals, businesses, and governments at every level. In fact, we have pretty much exported this way of life to other countries too.
Furthermore, I don't think that debt itself is the real issue. A former chancellor of the OUS once remarked over coffee that we need to make sure that students have financial literacy because being (economically) successful in the modern world depends a lot on how well we juggle our debts and revenue streams. The crisis was triggered by extreme leveraging--by homeowners, and by financial institutions.
Anyway, here is an excerpt from Zakaria:

This crisis has—dramatically, vengefully—forced the United States to confront the bad habits it has developed over the past few decades. If we can kick those habits, today's pain will translate into gains in the long run.
Since the 1980s, Americans have consumed more than they produced—and they have made up the difference by borrowing.
Two decades of easy money and innovative financial products meant that virtually anyone could borrow any amount of money for any purpose. If we wanted a bigger house, a better TV or a faster car, and we didn't actually have the money to pay for it, no problem. We put it on a credit card, took out a massive mortgage and financed our fantasies. As the fantasies grew, so did household debt, from $680 billion in 1974 to $14 trillion today. The total has doubled in just the past seven years. The average household owns 13 credit cards, and 40 percent of them carry a balance, up from 6 percent in 1970.
But the average American's behavior was virtue itself compared with the government's. Every city, every county and every state has wanted to preserve its many and proliferating operations and yet not raise taxes. How to square this circle? By borrowing, using ever more elaborate financial instruments. Revenue bonds were backed up by the prospect of future income from taxes or lotteries. "A growing trend is to securitize future federal funding for highways, housing and other items," says Chris Edwards of the Cato Institute. The effect on the projects, he points out, is to make them more expensive, since they incur interest payments. Because they "insulate the taxpayer from the cost"—all that needs to be paid now is the interest—they also tend to produce cost overruns.
Local pols aren't the only problem. Under Alan Greenspan, the Federal Reserve obstinately refused to inflict any pain. Russian default? Cut interest rates. Worried about Y2K? Cut rates. NASDAQ crash? Cut rates. The economy slows after 9/11? Cut rates. Whatever the problem, the solution was to keep the money flowing and goose the economy. Eventually, by putting the housing market on steroids, the strategy created problems too large to untangle.