Category: Commentary

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.

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.

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.

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.

As I was flying over the Pacific to attend a conference in Bangkok on sustainability and the first teachings of the Buddha, I read St. Theresa of Avila’s story of her life.

The book was sent to me by my cousin Lynn in Taos, New Mexico, who makes painted retablos of saints as her vocation.

On where we can find the moral insight and courage to stand against the dark sides of life and capitalism, St. Theresa advised that we should not let the “mirror of our soul” become so clouded that we cannot see the good that is there.

This practice “teaches [us] that the Lord resides very deep inside [our] souls. This notion is much more attractive and fruitful than the idea that God is outside us.”

“Absolutely, the best place to look for God is inside ourselves. We don’t need to ascend to Heaven or reach any further than our own beings. Trying to go beyond our own center only wears the soul out and distracts her. Such efforts do not bear fruit.”

This insight that a vision of the good is already inside us, somewhere, resonates with Buddhism and Chinese Taoism and with Marcus Aurelius, the Stoic. It is an insight which leads to the conclusion that a moral capitalism is possible.

Since the dawn of the industrial age, critics of its reliance on capitalism for continuous innovation and growth have pointed accusing fingers at systemic aspects of private property, free markets and limited government regulation for capitalism’s many unequal outcomes and power imbalances.

But what if the root cause of the shortcomings of capitalism are not in its architecture but in the minds and hearts of those who make use of its structure for their own purposes?

Recently, I read an essay on Thucydides’ History of the Peloponnesian War. Two insights from that first Western historian would incline us not to blame systems but rather look for causes and offsetting remedies elsewhere.

Thucydides thought that “…the usual thing among men is that when they want something, they will, without any reflection, leave that to hope, while they will employ the full force of reason in rejecting what they find unpalatable.”

Markets generate wants, as honey draws flies. Is it any surprise, then, that people in markets cling to hope when they should not and rationalize away what is inconvenient or unsettling in their transactions, especially any personal responsibility for doing good to others?

Thucydides also said: “War is a stern teacher … it brings most peoples’ minds down to the level of their actual circumstances.” War throws “the ordinary conditions of civilized life into confusion; human nature, always ready to offend even where laws exist, show[s] itself proudly as something incapable of controlling true passions, insubordinate to the idea of justice, the enemy of anything superior to itself.”

Many have pointed out the supposed similarities between war and markets: dog eat dog competition; to the victor belong the spoils; survival of the fittest; no empathy for losers. So markets, like war, expose the rawness of human nature, bloody red in tooth and claw.

There is something to the comparison. People do not lose their human natures when they go to market. So when market realities – no free lunch, prices too low or too high – bring them down to actual circumstances and sow confusion in their framing of expectations and aspirations, their passions take over and become insubordinate to justice. They consider their own interests paramount and not subordinate to the concerns of others.

So in a sense, it is a system that creates our disappointments, a natural system, if you will. But the market system of our own devising for production, finance and consumption, at times, brings forward human nature in the raw – untrammeled, unpolished, un-burdened by virtuous sentiments, unadorned by beauty.

The solution: reform the market system or change our natures?

The Interim Australian Royal Commission report on abuse of marketing by financial firms was released last month. The executive summary of the report can be found here.

The techniques for enhancing firm revenues brought under scrutiny do not measure up to standards of moral capitalism. Once again. I s such taking advantages of customers inescapable in capitalism as a function of a human nature which is programmed to deviate towards selfishness or can market incentives be arranged to offset that propensity with more ethical fidelity?

Noel Purcell, Chairman emeritus of the Caux Round Table for Moral Capitalism who worked on CSR for WestPac Bank in Sydney, has submitted a response to the Royal Commission’s interim report, which can be found here.

In Noel’s distinctive and distinguished fashion, his response is short and forceful. I urge you to read it and let me know your thoughts.

One hundred years ago today, the fighting in World War I ended in an armistice agreement. An old order disappeared and our modern era began. The work of our Caux Round Table for Moral Capitalism (CRT) has evolved to challenge the darker sides of our modern temperament by providing ideals and standards for constructive globalism and just social orders.

Thanks to World War I, an imperial age evaporated. Russian, Ottoman, German and Hapsburg empires collapsed. The British Empire, though triumphant on the battlefields of Europe and the Middle East, was financially wounded and spiritually subverted. The 2,000 year Chinese empire in Beijing, in the process of collapse, would be replaced first by warlordism, then by civil war and then by an ideological, one-party dictatorship. The Japanese attempt to create a new empire in East Asia and the attempt by Hitler to build a similar empire in Europe would both fail. The United States emerged as a first among equals with a determining role to play in building a new international political and economic order.

The new norm for the global community became the self determination of peoples. Each “people” was thereafter entitled to a sovereign nation state, a legal order derived from the 1648 European Westphalian compromise between church and secular powers. To protect nation states, aggressive war was outlawed. This norm was incorporated into the League of Nations and today’s United Nations. To check the powers of such national sovereignties, international law on human rights was created and multilateral organizations were established.

But the definition of who a people entitled to its own state might be was left vague. Today, conflicts among “peoples” are a source of contention and violence. What is the proper status of the Scots, Catalans, Palestinians, North and South Koreans, Uighurs, Tibetans, Kurds and the Ukrainians? What is the proper balance of power between the peoples of the European Union and the Union’s central administration? Does China have sovereign territorial rights over the South China Sea or the Senkaku Islands? Are the Taiwanese a “people?”

The end of World War I ushered in modern culture with its angst and distempers of nihilism and narcissism. In Europe, history was abandoned as having led to failure of systems. Architecture abandoned classicism and turned to modernism with its clean horizontal and vertical lines and its ideal that form should follow function. Philosophy under Dewey and Wittgenstein embraced rational skepticism. Law turned more and more to legal positivism and instrumental response to contemporary values and policy needs. Music replaced symphonies with Jazz and syncopation. In literature, Joyce, Proust, Kafka and Hemingway set forth new modes of writing and chose new subjects for reflection. Innovation, embracing whatever was not old, became the common currency of culture. The marginalization of religion began. The spirit of the age became what Pope Francis calls “anthropocentrism” – humankind taking over from both God and nature.

Modernity was thus unsettling and still is. Reaction set in, perhaps most importantly under Hitler in Nazi Germany.

In economics, after World War I, socialism took on new power to displace capitalists as a ruling elite. Our economic order is still unsettled by the conflicting claims of capital and labor. Governments evolved a welfare state ideology to balance and compromise the respective interests of finance, production, workers and communities. The collapse of the Soviet Union and the shift to “socialism with Chinese characteristics” in China under Deng Xiaoping solidified a modern approach to economic growth and social justice which blends private goods and the common good on terms mediated by the state.

Thus, the CRT’s principles for business, ethical government and ownership of wealth address the central problem of our time.

Our need to move beyond the fears and power imbalances of today can be met by finding common cause in fundamentals so that the “upsettingness” of modernity becomes both constructive and comfortable for all.

Inscribed on his grave is Karl Marx’s Thesis Eleven on the philosopher Feuerbach: “The philosophers have only interpreted the world in various ways; the point, however, is to change it.“ And on David Livingston’s burial market in Westminster Cathedral are his last written words: “All I can add in my solitude, is, may Heaven’s rich blessing come down on everyone, American, English, or Turk, who will help to heal this open sore of the world.”

As I stood on the back of our Capital in Washington, D.C. on Friday, January 20th, 1961, I heard our new President John F. Kennedy urge: “Don’t ask what your country can do for you. Ask rather what you can do for your country.” Today, I would amend that to replace country with “world.”

One hundred years after the Great War – the War to end all wars, the War to make the world safe for democracy – ended, our task remains to act to ensure that modernity reflects the better angels of our nature.

Swiss bank UBS just released its 2018 report on the world’s billionaires. A few factual highlights I thought would be of interest to you:

• Globally, billionaire wealth increased by USD 1.4 trillion to USD 8.9 trillion in 2017, its greatest absolute growth ever, with China minting 2 billionaires a week.
• Billionaires have driven almost 80% of the 40 main breakthrough innovations over the last 40 years. Approximately 70% are technology-related and 80% of the companies behind them are based in the Americas.
• A new cohort of Chinese entrepreneurs is challenging Silicon Valley amid rising tensions over trade and intellectual property. With 50 unicorns produced in China and 62 in the U.S., the Chinese are proving restless innovators and disruptors.

A short comment on rent-seeking:

It may be that the most thoroughgoing distortion of free markets and capitalism is rent-seeking – consolidation of firms to give commodity pricing and market dominance to a few, benefiting from favorable government privileges and regulations (also obtaining market privileges through the prevention of regulation), cronyism of all sorts, agreements in restraint of trade,…

We should not, therefore, blame capitalism or those in finance and enterprise for the sins of rent-seeking, only those who engage in rent extraction.

I noticed recently in The Economist a claim that in the U.S., rent-seeking through special tax benefits is profitable. The money spent on lobbyists who arrange for the special tax advantages to be adopted by the Congress or through administrative interpretation of regulations earns a return for companies of 22,000%. Secondly, American financial firms which spent the most on lobbying benefited disproportionately from bank bailouts after the 2008 financial crisis.