“Market Failure: What is Wall Street Telling Us?” Please Join Us on the 31st

What was Wall Street telling us in the closing months of 2018? How can we know? Should we care?

Who drives prices in financial markets anyway?

Financial markets happened just about from the birth of capitalism in Holland and England. The Tulip Mania, the South Sea Bubble and the Mississippi Company Bubble demonstrated early on in the evolution of capitalism the incentive power of finance and the frequent irrationality of its pricing.

As we move into more and more advanced post-industrial capitalism, it seems prudent to reflect on the role of financial markets with the borrowings which keep them robust.

As the 2020 campaign begins, the issues around Wall Street will take center stage for the next two years.

Please join us for a round table discussion about Wall Street at 9:00 am on Thursday, January 31st at the University Club of St. Paul.

Registration and a light breakfast will begin at 8:30 am and the event at 9:00 am.

Cost to attend is $15 for Business and Public Policy Round Table members and $35 for non-members. Payment will be accepted at the door.

Space is limited.

To register, please contact Jed at jed@cauxroundtable.net or (651) 223-2863 (email preferred).

The University Club is located at 420 Summit Ave in St. Paul.

Parking will be available along Summit Ave.

The event will conclude at 11:00 am.

What Are We Worth?

Recently, we have been wondering at the emphasis in capitalism placed on income earned rather than on asset value. Not marking the value of assets is particularly odd because it does not account for vital assets such as social or human capital, which contain moral qualities or for natural capital, which is subject to degradation.

I recently saw a story that in the U.S., a credit rating agency for individuals will add to its consideration of one’s “asset” potential to support a loan one’s habits of paying cellphone and utility bills. Timely payments indicate a person of more “worth” as a capitalist.

I am, thus, reminded that a person’s credit is a reflection of their asset value, not just their earning capacity. A good credit is a worthy asset. And one’s credit does not depend on one’s income but more on one’s character and good judgment.

A good credit rating is a capital account in some important way, standing us in good stead through the vicissitudes of material ups and downs.

The great Wall Street tycoon J.P. Morgan was once asked: “Is not commercial credit based primarily upon money or property?”

Morgan answered: “No, sir; the first thing is character.”

Untermeyer: “Before money or property?”

Morgan: “Before money or anything else. Money cannot buy it.”

This is from Morgan’s testimony before the U.S. House Committee on Banking and Currency in December, 1912.

As We Reflect

On this last day of 2018, I wonder as I do often during this time of year as to the meaning of these holidays. We are so parochial in so many ways – each confined within certain traditions and so most likely distant from others with their traditions who, in turn, may feel themselves to be distant from us.

Yet, I am reminded listening in our family’s rather ordinary Protestant tradition to English Christmas carols with very young grand-daughters sitting on the rug entertained by new toys of one part of the meaning of Christmas – which is the freedom and the burden of personal choice.

The story of Jesus as told in the New Testament and retold in the carols is that of a gift – a gift, if you will, of choice. We are not commanded to follow Jesus. He just appears and teaches. We can adopt his teachings or not. It’s up to us individually.

No ultimate power commands us. That is the reality of ethics and morally. It is up to us. How should we live? How should we treat others? How should we regulate ourselves?

As I wrote in my 2004 book Moral Capitalism, moral capitalism is not a power, not a self-actualizing system that runs on its own. It must be made to happen by our decisions, made one by one, person by person. A tall order, perhaps, but one that follows nature, just as streams must flow from high to low.

Thus, I felt affirmed by the following comment in an article on homelessness in the quite wealthy city of Seattle, Washington, here in the U.S.:

“Advocates point to Zillow and McKinsey studies that show a high correlation between rent hikes and homelessness in Seattle, for example. But correlation is not causation and the survey data paint a remarkably different picture. According to King County’s point-in-time study, only 6 percent of homeless people surveyed cited “could not afford rent increase” as the precipitating cause of their situation, pointing instead to a wide range of other problems—domestic violence, incarceration, mental illness, family conflict, medical conditions, breakups, eviction, addiction and job loss—as bigger factors.”

We live in systems and are subject to powers and principalities, in the words of the New Testament. They constrain our choices. We are raised to believe in this or that. Such beliefs constrain our choices. We are moved by emotions. Such emotions constrain our choices.

But what efforts should we make to make our choices truly our own and in our best interest and with regard for the common good?

We are significantly free and our freedom can be used for good or for ill. Let’s use it for good in the New Year.

Data, Data Everywhere and Not a Drip to Drink

The dynamic process of capitalism in providing for human needs and wants relies on pricing that which has value. Pricing facilitates exchange. It internalizes the multiple values meaningful to buyers and sellers.

The internet, like markets, provides for the needs and wants of its users. It creates goods which have value. Who, then, gets to price these goods and who gets to buy them?

Should internet platforms be regulated as markets often are to protect consumers from exploitation?

On the one hand, the goods provided by internet platforms to its users are price-less – they are free. The users of such platforms are free riders. Use of platforms is undisciplined, not subject to the usual market rationality of price elasticity with an opportunity cost to the user only of how the time spent in consumption could be alternatively spent. Consumption of what internet platforms offer is a pure intangible value play; there is no cash nexus between provider and consumer.

So what is the business model at work?

As with television and radio, the internet takes advantage of electromagnetic waves. It uses electromagnetic technologies to provide convenient “entertainment,” “infotainment” and social connectivity with which to attract an audience. Platforms sell attractions to pay for the time spent absorbing their content in order to obtain suppliers of consumer preferences and personal data. Access to those preferences and data can then be priced and sold by the platforms as a “good” desired by certain specially interested purchasers.

Those who consume the free goods provided by the platforms are actually suppliers of what the platforms sell in order to make profits. The value which users of platform services provide is 1) the potential to purchase goods and services for cash and 2) the data they provide to the platform about their likely purchases and other actions they are disposed to take. The platform sells this value to their real customers – advertisers and others seeking to exploit collected user data. The cash proceeds received by the platforms from their customers is not shared with the suppliers of the potential spending preferences and other data which the platforms sell.

The data provided to the platforms by those who use them is a new form of wealth which can benefit many companies and others, such as political actors and issue advocates.

In a recent speech, Microsoft CEO Tim Cook took pains to point out features of this new wealth which raise ethical issues of responsible conduct on the part of platform companies.

His full remarks can be found here.

Why is Wall Street Going Down, Down, Down?

Yesterday, Wall Street was entering bear pricing levels of low expectations for the future. Why?

Yes, there are worries about new reputational and regulatory difficulties facing some FANGs (Facebook, Amazon, Netflix, Alphabet, et al) and other idiosyncratic corporate ups and downs which allegedly drive investors to buy or sell the stocks of various companies. And the uncertainty over global trade wars, Chinese debt and Brexit has raised the generic risk level of world markets. When risk of return rises, prices must compensate by going lower. A bird not in the hand is worth much less than one already caught.

But there is a bigger, systemic story here which should center our attention on the workings of global capitalism.

In short, money has been cheap since the 2008 collapse of credit markets (caused by Wall Street if memory serves). Money has been cheap not because of private market decisions but because of political decisions, because of state power applied to the economy. Money is fiat currency these days, created by governments, mostly by central banks. The supply of money – liquidity – can be controlled independently of market demand. The supply of money, and therefore its price, can be intentionally manipulated on a grand scale.

Starting 10 years ago, governments and central banks did all that they could to prevent a global depression. What they did was flood financial markets with new money, driving interest rates way, way down to entice everyone to buy and spend and so keep up demand for goods and services.

With the supply of liquidity high and its price low for 10 years now, we may rightly ask the old question about public policies: “Qui bono?”: who benefits.

Cicero in his speech Pro Sexto Roscio Amerino, said “The famous Lucius Cassius, whom the Roman people used to consider the most truthful and wisest judge, often used to say in evaluating cases “Who stood to profit” [cui bono fuisset]. This is the human way: no one pursues a crime without the hope of some profit.”

While we are not evaluating potential criminality here, we are facing the “human way” when we consider the mores of Wall Street: people take action with the hope of gaining some advantage.

A low price of money (low interest rate) benefits those who want to buy money. Now such buyers of money can include firms which want to invest in expansion, creating new goods, services and jobs but they can also include those who want to buy houses and others assets, including those who want to borrow money to buy and sell securities.

The lower the price of money, the cheaper it is to speculate on Wall Street. And speculation is the fat king living very well off financial market activity.

Another thing is certain, the poor and the middle class benefit less from cheap money than do the rich. Trading in securities is not for the many but for the few, the top 10% really. And they have done very well since 2008.

Yes, with lower interest rates, credit cards have placed less onerous repayment obligations on their middle class users than otherwise would have been the case. But while asset prices in all classes have risen, income for the middle class has not. The middle class lives off income, not capital assets. And the poor have been completely locked out of economic advancement.

We must also ask “cui bono” from higher interest rates: is it not those who save? And how can the poor and the middle class ever build wealth if they do not save? The low price of money favors borrowing and spending, not saving. Which, over the long run, does what to social justice in a society?

What is the transcendent good, as Christmas gift giving approaches, for many families of having a $1,000 iPhone when you have no retirement savings to speak of?

It was once said that habits of thrift build good character which has very positive externalities in all aspects of life – from being good parents to serving as admirable citizens being sensible in their politics.

For 10 years, those who benefitted from the low cost of money have kept Wall Street prices on the rise. Pricing of securities has internalized for today projections about the future, that the price of money will stay low.

Now that the Federal Reserve is raising the price of money, Wall Street prices must readjust. With higher prices for money, we can accurately predict that speculation will fall off. The human way is to seek gain and not loss, to empower the self and protect one’s dignity. As prices rise, demand falls in order to not deplete one’s wealth. As the price of money rises, the marginal utility of the next dollar earned or spent goes up, forcing more thoughtful consideration of market decisions. We need higher or more certain returns in order to spend willingly when the cost of spending goes up.

Wall Street over the past few months has only acted very sensibly – it has re-priced the value of securities for today to take into account coming higher prices for money and lower demand for trading in securities. And for most of us, that may be a good thing in the long run when we think about social justice for our children and grandchildren.

Intangible, Yes; Reality, Very Much So; Measurable?

Goldman Sachs has just given us a demonstration of an article of faith for the Caux Round Table for Moral Capitalism – reputation is a capital asset.

With public disclosure that Goldman was negotiating with the U.S. government over its role in selling bonds for the 1MDB investment fund in Malaysia, the price of its stock dropped.

In the minds of investors – either speculators or real equity investors – something was now less valuable about the Goldman franchise.

One market commentator wrote last week:

“Shares of Goldman Sachs Group Inc. extended their selloff Monday, to fall 7.3% in afternoon trade to put it on track for the lowest close since Nov. 16, 2016. The stock was also headed for the biggest one-day decline since it fell 7.4% on Nov. 9, 2011. The selloff comes after the shares shed 3.9% on Friday, after Bloomberg reported that former Goldman Chief Executive Lloyd Blankfein was the unidentified high-ranking executive referenced in U.S. court documents who attended a 2009 meeting with former Malaysian Prime Minister Najib Razak involved in the 1MDB scandal. The stock’s two-day plunge of 10.9% would be the worst since it plummeted 11.4% over the two-sessions ending April 19, 2010. The stock has now shed 10.1% over the past three sessions while the SPDR Financial Select Sector ETF has lost 4.6% and the Dow Jones Industrial Average has gained 0.7%.”

On Monday, Goldman was criminally charged in Malaysia for its engagement on behalf of 1MDB.

Goldman’s involvement in servicing 1MDB began after the 2008 collapse of credit markets when the firm’s revenue fell by a third.

As ancient wisdom has it: the love of money is the root of all evil.

Or from the same text: “What does it profit a man to gain the whole world, yet lose or forfeit his very self?”

For Goldman, its stock price is a handy measure of its reputation. The market puts a price on the reality of an intangible.

Four Minnesota Think Tanks Tackle Poverty

I wanted to provide you with a set of essays titled “Grasping and Reducing Poverty in Minnesota” that the Caux Round Table for Moral Capitalism (CRT) and three other Minnesota-based, local think tanks recently released.

From my point of view, the important fact about these essays is the demonstration that collaboration and constructive discourse is both still possible in America and effective.

When one steps back from the infantilism of our current politics and the limited intellectual resources brought to bear on our challenges, the thought easily emerges that maturity of judgment implies ethics and ethics demands consideration of others.

Our powers, to be used ethically, must be under self-restraint and certainly never egregiously dismissive of others.

Thus, our project to engage with the Center of the American Experiment, Growth & Justice and the Citizens League is ethics in action.

We hope this precedent in collaboration can be a model for politics in Minnesota going forward.

Minimum Wage – Yes or No? Please Join Us Thursday

What is a fair wage? What is a living wage? What is a just wage? Why work at all? “From each according to his ability, to each according to his needs,” reasoned Karl Marx in 1875.

But who gets to decide my ability and who gets to decide my needs? Me, perhaps, or you?

The threat to employment coming from Artificial Intelligence, automation and robotics has many proposing a universal basic income to carry us through the ups and downs of life. The St. Paul City Council just voted to use municipal police powers to mandate hourly wages for certain employees, seeking to give those who work more money for the exercise of their abilities in order to help them meet their needs.

Is this a good idea? Is it a slippery slope leading us to the embrace of Marxist doctrine? Who will pay and in what ways when certain prices rise?

Please join us for a round table discussion of work and wages at 9:00 am this Thursday, December 20th at the University Club of St. Paul.

Registration and a light breakfast will begin at 8:30 am and the event at 9:00 am.

Cost to attend is $15 for Business and Public Policy Round Table members and $35 for non-members. Payment will be accepted at the door.

Space is limited.

To register, please contact Jed at jed@cauxroundtable.net or (651) 223-2863 (email preferred).

The University Club is located at 420 Summit Ave in St. Paul.

Parking will be available along Summit Ave.

The event will conclude at 11:00 am.

Keeping the Mean

I returned home yesterday from a stimulating conference in Zhengzhou, China, discussing Chinese contributions today to a “community of shared future for mankind.” The gathering of scholars was the 10th International Symposium on Chinese Culture in the 21st Century. Opening the sessions was Mr. Wang Zhengwei, Vice-Chairman of the Chinese People’s Political Consultative Conference and a member of the 16th and 17th Central Committees of the Communist Party of China.

Zhengzhou is in the center of north China, along the Yellow River in Henan Province. Henan is the birthplace of Chinese civilization several millennia ago. The topic for discussion at the forum was how to apply to our world today perspectives from China’s ancient Yan Huang philosophies on human destiny, ideas which arose among peoples and kingdoms living in and around Henan.

My paper was an exploration of the over-looked essay in the Confucian tradition entitled The Doctrine of the Mean, which links Confucian social ethics to a never-ending cosmic dynamic of the Tao. Briefly, the Doctrine of the Mean advises that individuals must discipline their minds and hearts to find balance and equilibrium between the authority of absolutes and the realities of pluralism. Finding the Mean permits living in the Tao, which is sustainability and wholesomeness.

Delivered today to my home in St. Paul, Minnesota, the Wall Street Journal has two commentaries on the West – Europe and the U.S. – falling short of the Mean in their culture, economics and politics.

First, Willam McGurn writes on U.K. Prime Minister Theresa May having inadequate support for her plan to have her nation leave the European Union but maintain some advantages of association with that larger international confederation. The future of the U.K. is now up for grabs. He then notes that in France, President Emmanuel Macon has just retreated in concession to protests against his elitism by offering the “masses” a higher minimum wage and cuts in taxes on some pensioners. Thirdly, McGurn reports that in California, 200 civil rights leaders have gone to court to oppose the state’s greenhouse gas emissions regulations as discriminating against poor African Americans and Hispanics to favor the preferences of the very rich, who live in Hollywood and Silicon Valley.

Secondly, Walter Russell Mead opines that voter distemper in the U.K., France, Germany, Italy and the U.S. is happening when those economies are doing rather well. What is driving protest is therefore not simply economic discontent. The storm of populist angst has other causes. Our time is out of joint. Something is upset in how we are governed, in our levels of self-respect, in our expectations of the future and in the answer to the question of “Cui Bono?”

The ideas of the Caux Round Table of Moral Capitalism seek to provide such balance for the economy, public governance, civil society and the ownership of wealth.

Today’s Wall Street Journal also brought forth in a book review a most relevant piece of advice from Samuel Williams from his 1794 book History of Vermont: “Behold here the precarious foundation upon which ye hold your liberties. They rest not upon things written upon paper … they depend upon yourselves; upon your maintaining your property, your knowledge and your virtue.”

Confucius could not have said it better.

Nirvana, Right Here Where it has Always Been

I have just given a paper at a conference in Bangkok cosponsored with the World Fellowship of Buddhists and the World Buddhist University.

My paper attempted to apply some early teachings of the Buddha as best practices in this world for individual moral self-government and then, progressively, governance of communities and institutions, including nation states and multinational organizations.

I was given a copy of an old lecture by a famous Thai Buddhist monk, Buddhadasa Bhikkhu. On Nirvana, which I had largely understood as the ultimate goal of Buddhist thought and practice coming at the end of our possible reincarnations as a sort of heavenly existence.

To a different way of thinking, Buddhadasa Bhikkhu reminds us that the root meaning of “Nirvana” is only “coolness.” In other words, we can achieve “coolness” of mind, heart and personality in this life before any rebirth into a new incarnation. The word most simply understood indicates the cooling of the fires of upset and distraction, the feelings, anxieties, desires, passions, motivations and thoughts which unsettle us and give us unease instead of ease in this life.

I find this an important reminder that there are ways of living which are under our control in this temporal span between birth and death and in this physical space subject to what we know as natural laws of causation and which can prepare us for service of ends larger than our own ego-centricities.

In the sense of achieving “coolness” of heart, mind and spirit, Buddhism might take on new constructive importance for all of us no matter our traditions and our ambitions.