Wednesday, August 10, 2011

The Market and You

Since we are now all invested in the stock market, even if it is indirectly, it is important to understand certain key aspects of how Wall Street functions today. One aspect is that while many people are invested through pensions and 401k plans, few people understand how the market works, and many do not have any control over their own investments. Moreover, although the media often says things like, “the market went down today on news of the debt deal,” the market is not a single entity speaking with a single voice; however, dominant players in the markets often follow each other, and the result is that large movements can occur based purely on a herd mentality.

Some people are now asking why the markets have gone up the last couple of years, while the economy appears to be doing very badly. One reason for this disconnect between the real economy and the financial economy is that the Federal Reserve has sought to strengthen the banks by essentially allowing them to borrow money for free. The idea behind this policy is that during the fiscal meltdown of 2008-9, the banks stopped lending money, and there was a real credit crunch that cut off the flow of cash to major corporations and financial institutions. The Fed also felt that if they gave money to the banks, and the banks lent money to corporations, the companies would start hiring people and stimulate the economy. However, it is now clear that companies and banks are sitting on trillions of dollars, and they have shown that they would rather make money through financial transactions than through producing new jobs.

Another reason why Wall Street has gone up while Main Street has gone down is that Wall Street rewards companies for shedding jobs because this increases the profit margin. There is thus an inherent push for companies to cut their labor costs and increase compensation for people at the top, and many banks and corporations have used their profits and debt to buy their own stocks and increase bonuses for their top earners.

Another powerful player in the markets are the private equity firms that often use borrowed money to take over companies (leveraged buyouts) and make these corporations more profitable by laying off workers and selling parts of the companies. These takeovers often go bad because the bought company has to take on so much debt, while it reduces its productivity. Moreover, Mitt Romney, who is now running for president, made much of his money through his private equity firm, Bain Capital, and so it is possible that our next leader will pursue the leveraged buyout model on a national level.

While many people in our federal government now feel that the key to a healthy economy is to put more money in the hands of the banks and large corporations, it is clear that our multinational companies and financial institutions have no incentive to invest in job creation. In the past, corporations knew that they needed to produce well-paying jobs in America so that there would be enough people with cash to buy their products, but now in the global economy, multinational corporations often look around the world for consumers. There is thus little incentive for companies to hire more workers or provide a good wage for Americans.

The only solution is a national job policy or industrial plan that would push companies to use their savings to increase employment. However, the only way to do this would be massive subsidies, tax breaks, trade tariffs, or penalties for exporting jobs. Of course, the other solution is to have the national government feed money into new industries like green technology. Yet, not only is the Congress blocking this type of program, but the move against government spending means that more jobs will be lost through the reduction of federal and state budgets.

Adding to this employment problem is the growing power of the bond raters and bond buyers who believe that the key to economic health is reduced taxes and a reduction of governmental spending. These financial players are not interested in job growth or stagnant wages; in fact, bond raters often reward companies that fire workers or eliminate benefits.

Only a strong national leader can reverse this course, but it appears that the president and Congress have bought into the idea that we must follow the demands of the markets and the raters. It is clear that we must organize against these forces to rebalance the economy and take back our jobs from the financial raiders.

4 comments:

  1. As an unrepresented staff employee at the University of California, I have come to the conclusion that my career success is tied more to the twists and turns of the financial markets and CA politics than anything I can accomplish at work. Since the pension fund has gone below 100% funding in 2008 there have been zero raises, what happened to the performance based system that was outlined at inception of employment? Did I miss the memo announcing its cancellation? (No it has never been formally cancelled). With approx. a 9% raise (minus a 3.5% pension contribution- soon to be 5%) over the last 7 years (soon to be 8) the situation is near hopeless as inflation devours my salary at a greater rate than raises replace its buying power. Never in a million years did I ever think that my alma mater would abandon my family as it has, but a historical review of annual salary increases over the last 16 years of employment reveals that this system is broken beyond repair. I cringe when I hear the UC referred to as "a world class research instition", the truth is "world class" should be replaced with "mediocre". I have spent enough time anonymously whining this morning, time to send off some resumes. Continue to work for the UC at your own risk, as it is a shell of its former self and the regents are unable to execute any of their pie in the sky plans (google: UC RE-61). Sorry to be the bearer of bad news... but sometimes you have to face the facts.

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