Evil Geniuses: The Unmaking of America: A Recent History (24 page)

Essentially every CEO now does buybacks because everyone else does them. Their stock-price-based performances will be judged this quarter and this year against all those other CEOs, so it’s a mad recursive loop. How is the result not a stock market bubble—an extremely long-lasting bubble but a bubble nevertheless? It’s unsustainable: you can take 10 percent of your company’s shares out of circulation, then 20 percent, then 30 percent or even (as IBM has done over the last two decades) 60 percent, but you can’t keep doing that forever.

For a decade, since before she was in the Senate, Elizabeth Warren has been saying that stock buybacks provide only a “sugar high for companies in the short term.” That metaphor seems too benign. It’s more like the high—and addiction—produced by cocaine, another craze that swept America in the 1970s and ’80s, and that makes addicts neglect their important but mundane duties and long-term health in favor of the next jolt of artificial self-confidence.
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Consider this remarkable fact: from 2010 through 2019,
most of the money
invested in U.S. stocks came not from true investors but from companies buying back their own stocks. If it “makes sense” for corporations to devote such a stupendous fraction of our economic resources to stock buybacks, it’s because the rules of our political economy were written—that is,
rewritten
—forty years ago to make it so.
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When
shareholder value
became a new capitalist article of faith in the 1980s, the word
shareholder
was being imbued with a kind of sacred democratic sheen, like
citizen
. I own stocks, you probably own stocks, half of us are shareholders. But we should all keep in mind that the 90 percent of Americans worth less than $10 million own only 12 percent of all shares. In other words, it probably made personal financial sense for most rich people to support the shareholder supremacy movement. However, for most American shareholders (let alone the half of Americans who don’t own stocks at all), maximizing corporate profits at the expense of all other economic and social goals and values now looks like a bad trade-off. What’s more, being a shareholder is
really not
like being a citizen. It’s temporary. Indeed, as shareholder supremacy was turned into an inviolate American principle, the average shareholder was less and less like a true owner and more like a short-term renter. In the 1970s a given shareholder in a given company owned shares for more than five years on average. By 2000 that average ownership period was only a year, and in the full digital age, with lots of people holding shares for days or hours or fractions of a second, the average period of ownership has shortened to a few months.

The final piece of financialization comes from the enormous growth of the so-called institutional investors, in particular mutual funds. Owning a share of stock isn’t the same as being a citizen of a corporate domain, but stock ownership used to be much more directly democratic, and the finance industry didn’t run the show. In the 1950s individual Americans directly owned more than 90 percent of shares. My parents kept their paper certificates of the few stocks they owned in a filing cabinet in our house. Even by 1980, only a quarter of Americans’ stock holdings were managed by people paid to do that, and the biggest mutual funds held only 4 percent of all shares. But then everything changed. By the 2000s,
most
stock shares were being bought and sold by professional asset managers. The several biggest mutual funds are now the majority shareholders of 90 percent of the four hundred biggest companies, and such institutional investors control 80 percent of all the stock in all U.S. public companies.

It’s a huge concentration of economic power. I always imagined
the market
as a vast democratic hive mind producing the self-correcting wisdom of crowds. But for practical purposes, the financial market has been reduced to a small group of people, in the low thousands, who share a mindset.

That’s financialization. So in addition to the new power of stock-price obsession over corporate executives, and VCs often effectively running companies they fund, and private equity guys actually running companies they take over, the big mutual funds also now closely meddle in the operations of most big companies, ranging from being backseat drivers to co-pilots sitting on boards. In effect, the managers of the big funds have made themselves corporate America’s national shadow management, a kind of upper house of the congress of the capitalist party of the U.S.A.

Mutual fund companies are reincarnated equivalents of the excessively powerful trusts that made us enact antitrust laws in the first place. Economists and others across the ideological spectrum now worry about the effects of this new stratum of command and control. Because mutual funds have controlling interests in the big dominant competitors in almost every major business—food, drugs, airlines, telecommunications, banking, seeds, whatever—they aren’t naturally inclined to make those rival companies compete aggressively against one another. As the top dogs in a small, not-very-competitive oligopoly, why wouldn’t Fidelity and Vanguard and the others see their comfortably less competitive arrangements as the optimal model for the companies they control? Until 1980 the stock market generally valued smaller companies more highly than big companies. But then as mutual funds gobbled up more and more stock and effectively
became
the market, they overthrew that conventional wisdom. With their new power, institutional investors decided for the rest of us that companies should be as big as possible, regardless of any damage that caused to our economy and society. Because if the stock price is
everything,
whatever got companies to that end—less competition and thus less innovation and lower salaries, draconian cost-cutting—was justified.

At the end of their exhaustive 2013 paper called “The Growth of Finance,” consisting almost entirely of quantitative research, two Harvard Business School professors pose the right question: “Has society benefitted from the recent growth of the financial sector?” Financialization was okay in a couple of ways, they conclude—ubiquitous credit cards allowed people to smooth out the ups and downs of their personal cash flows, people who own stocks sensibly diversified, and newer companies got much easier access to investment capital. But otherwise, not so much. The hysterically expanding credit industry “made it easier for many households to overinvest in housing and consume in excess of sustainable levels.” The enormous increase in the number of professional financial people neither made stock prices more rational nor improved corporate management. And they conclude it’s also bad, “costly to society,” that all the easy money going to the finance industry “lure[s] talented individuals away from potentially more productive sectors” such as science and engineering. In 1965 only 11 percent of new Harvard MBAs went into finance; in 1985, 41 percent did. In the early 1970s, 6 percent of new Harvard College graduates went into finance; by the 2000s, 28 percent did, and that fraction has continued growing.

When the Nobel economist James Tobin gave that lecture in 1984, he described financial professionals’ suddenly ballooning pay as “high private rewards disproportionate to social productivity.” One of the ways the alliance of the right and the rich and finance was just then managing to change the social contract and transform our political economy was to
disallow
such moral judgments concerning money—to convince enough of the correct people that there
can be
no such thing
as disproportionate private rewards in a market economy. They convinced people that the market and only the market must be the supreme authority, that only it can determine what’s fair or unfair, right or wrong. Thus began America’s radical increase in economic inequality—fully a quarter of which, research shows, might be attributable to just the increased pay and wealth that has gone since the 1980s to the people working in finance.

What’s more, all those smart financial professionals’ advice and judgments about what stocks and bonds to buy and sell, so-called “active management,” apparently don’t even make clients more money. In other words, much of this financial priesthood is superfluous, unnecessary. The evidence in study after study is that active management of financial portfolios by professionals “is not directly beneficial to investors on average…especially after taking into account fees.” In 2016, for instance, two-thirds of the professional portfolio managers buying and selling shares in the four hundred biggest companies did worse for their investors than if the clients had simply bought shares in all those four hundred companies. And of the pros managing investments in smaller companies,
85 percent
did worse than the untouched-by-human-hands average of those stocks’ prices. Of course, that’s just their performance in one year; over longer periods of time, they do even worse.
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Even hedge funds, asset management for which the rich are so eager to pay such premiums, mainly make investors
feel
special,
which all luxury products do: since the mid-1990s, hedge funds on average have basically done about the same as the stock market.

It’s ironic that a realm presenting itself as relentlessly quantitative and rational indulges in such magical thinking.

It’s ironic that just as we entered an economic era all about eliminating inessential middlemen and corporate bloat, one bloated sector filled with inessential middlemen, finance, has flourished as never before.

It’s ironic that one of the rationales for America’s 1980s makeover was to revive the heroic American tradition of risk-taking—given that so much of the story has turned out to be about reckless financiers insulating themselves from risk by shifting it to customers and, through the government, to taxpayers.

It’s ironic that finance, a service industry created to help business and the rest of us, so bubbly and booming on and on these last four decades, has mainly helped itself. “There is no clear evidence,” the chief financial industry regulator of the U.K. and former vice-chairman of Merrill Lynch Europe concluded in 2010, “that the growth in the scale and complexity of the financial system in the rich developed world over the last 20 to 30 years has driven increased growth or stability.”

A final disturbing effect of financialization can’t be proven with statistics or experts’ quotes. It’s the damage to the human spirit that comes from making everything everyone is or does literally and strictly reducible to dollars and cents, and how such a cynical system makes everyone in it more cynical. A finance-obsessed society makes us each a little less human, a lot more of an abstraction. An employee of an LBO’d company is
only
a cost that needs to be kept down or eliminated. A shopper is a credit rating. Somebody with a home mortgage is an anonymous revenue stream—and barely that after she’s transmogrified into one infinitesimal bit of a mortgage-backed security. In all this, financialization has done what people back in the 1950s and ’60s and ’70s worried and warned that the Communists would do if they took over: centralize control of the economy, turn Americans into interchangeable cogs serving an inhumane system, and allow only a well-connected elite to live well. Extreme capitalism resembles Communism: yet another whopping irony.

When John Kenneth Galbraith wrote
American Capitalism
in the 1950s, the idea that American capitalism was in any sense run by a financial cabal, Wall Street, seemed like an obsolete cartoon. “As the banker, as a symbol of economic power, passed into the shadows,” he wrote, “his place was taken by the giant industrial corporation,” which

was much more plausible. The association of power with the banker had always depended on the somewhat tenuous belief in a “money trust”—in the notion that the means for financing the initiation and expansion of business enterprises was concentrated in the hands of a few men. The ancestry of this idea was in Marx’s doctrine of finance capital; it was not susceptible to statistical or other empirical verification at least in the United States.

But what struck this leftish economist in the bright, new, modern American 1950s as a ridiculous, antique caricature of our system came true starting in the 1980s, after the laissez-faire dogma of the old days was revived. It was a kind of systemic time travel: we returned to a level of economic inequality as extreme as it had been in the 1920s and earlier, entered our second Gilded Age, and our second era of unregulated, swashbuckling robber barons creating cartels and monopolies. We’ve gone back to a political economy closer to the one that existed in the 1870s and ’80s, when Marx (with Engels) was finishing up his vision of how industrial capitalism would evolve into a new financial capitalism dominated by trading in the “fictitious capital” of stocks and credit.

In
Capital,
Marx reviled various kinds of capitalist middlemen as “parasites” (as well as “vampires”), and near the end of the final volume, published in the 1890s, he discussed “a new kind of parasite in the guise of company promoters, speculators, and merely nominal directors; an entire system of swindling and cheating with respect to the promotion of companies, issue of shares and share dealings.” Blame Marx for the horrors of Communism if you want, but the guy had some prescient insights about the capitalist future.

Until 1980, a more reasonable metaphor than Marx’s parasite for our financial industry was the remora. Those are the fish that attach themselves to sharks and whales for the bits of leftover food and the essential oxygen that the free ride provides. Remoras apparently provide benefits to the big sea creatures by eating those hosts’…
parasites
. A purely parasitic relationship, on the other hand, “is one in which one organism, the parasite, lives off of another organism, the host, harming it and possibly causing death.” A lot of the financial players since the 1970s have indeed evolved into parasites, like tapeworms. Tapeworms live in the gut, to which they attach themselves by “hooks” and “suckers,” then “get food by eating the host’s partly digested food, depriving the host of nutrients.” They can grow hideously large, many feet long, and live inside hosts for decades. Thinking about the future of our political economy, though, I was heartened when I read that “hosts also develop ways of getting rid of or protecting themselves from parasites.”