Letters                               

These letters have been written by Ray Carey to help further the cause of Democratic Capitalism..

 

To educators: March 16th, 2007                Our Founders conditioned the success of this great democratic experiment on the “will and wisdom” of well-educated citizens. America can again lead the world towards the benefits of freedom if educated people regain control of economic and foreign policies. This will not happen unless the universities embrace the mission of elevating and uniting the people. In this effort please consider my book Democratic Capitalism, in which I describe how to harmonize democracy and capitalism on The Way to a World of Peace and Plenty.             The post-modernists threw the baby out with the bath water when they rejected capitalism along with the other “isms,” communism, socialism, and fascism, as failed 20th- century “single solutions” for improvement of the human condition. They thus lumped the system, imperfect as it is, that has freed hundreds of millions of people to live a better life with the systems that denied freedom and killed hundreds of millions. If they had examined capitalism, instead of rejecting it, they would have found an underlying synthesis of Adam Smith, Karl Marx, and John Stuart Mill, according to which economic freedom, properly defined, can eliminate material scarcity in the world, and economic common purpose can raise the standard of living and steadily reduce the violence. Moreover, they would have found that this democratic capitalism maximizes the broad distribution of wealth because it encourages each person to seek their potential in a moral environment.             Any revision of the curriculum to educate students to be effective citizens will gain focus by defining the superior economic system as the centerpiece of social progress. The intellectual community has persistently favored political fixes for social problems but ignored economic solutions. This had led to failure and the abandonment of idealism by many. For example, Harvard professor John Rawls’s A Theory Of Justice (1971 ) sold hundreds of thousands of copies and encouraged many to seek a just society. Twenty years later he abandoned idealism and declared that political liberalism “had no such ambitions” to find a comprehensive secular doctrine for the advancement of society. This rejection of the ideal, the means, and process, the legacy from the 18th--century Enlightenment, is the root cause of why our universities are failing to adequately prepare citizens. It is the reason that cynicism and relativism dominate our society, with knowledge fragmented and over-specialized in academia’s inadequate integration. It is the reason that many in academia would ridicule any mission to unify and elevate.              Harvard professor Edward Wilson took the opposite view and challenged the universities in his book, Consilience, to integrate knowledge for human betterment. He defended the Enlightenment as having “got most of it right,” and proposed an end to the culture war between sciences and humanities by treating the boundary as “unexplored terrain needing cooperative entry from both directions.”             President Bok of Harvard commented that in two decades of faculty meetings he never once heard a serious discussion of how to better educate students for their responsibilities as citizens. He further commented that the results of that neglect were all too visible. Dean Stanley Fish of the University of Chicago, however, disagrees with Bok’s mission to educate students to be better citizens. He declared in an article in The New York Times that education for citizenship is not the function of the university.             How then should society view “higher learning” in which administrators and professors have differences this fundamental about the university’s mission? As Francis Bacon advised early in the 17th century: “It is not possible to run the course aright, when the goal itself has not been rightly placed.”             The world was ready after the demise of communism to unite in economic common purpose. Instead of leading in this unique opportunity, the country that had shown the world the benefits of economic freedom corrupted its own economic system to one that is short-term and greedy, and corrupted its foreign policy to one that is militaristic and imperialistic. Capitalism and democracy are in tension whereas they should be in harmony. America is in urgent need for reform in both areas, but the corruptions have happened because the lack of citizen education has allowed a policy vacuum to be filled by an arrogant and ignorant few. What could be more important than to educate students at every level in the reasons why tension between democracy and capitalism dominates and how it can be displaced by harmony?             The universities are now failing to unite and elevate society because their post-modern politicized environment demeans idealism. Since universities left their religious roots in the 19th century, they have not found a secular alternative consistent with the values of religion. Democratic capitalism, however, can break this distracting gridlock because it is based on moral principles common to religion and humanism: the worth and potential of each human harmonized in an environment of trust and cooperation. This teaching is consistent with Marx’s advice that: “the free development of each, is the condition for the free development of all.” Marx’s proposal to change the work culture from alienation to cooperation is also the way to maximize broadly distributed wealth. Whether one draws on religion, Enlightenment philosophy, social sciences, or Information Age business practice, harmonization of individual ambitions with the instinct for social cooperation leads to superior performance in a powerful, universal moral system.             This is not abstract theory. Studies by Harvard Professor Robert Putnam in northern Italy of a community with a concentration of cooperatives led him to the conclusion that trust and cooperation in the work place do flow into the contiguous community. This benign infection was documented by a reduction in crime and cost of protection.             My book should be helpful because I examine democratic capitalism as the superior mode of production for the post-capitalist society. This economic system, by providing opportunities for every human to seek their potential, is rooted in optimism that will displace the pessimism of the post-modernists. Democratic capitalism has been in gestation for over two centuries since the time of Adam Smith, and later, Marx and Mill, but current developments make its emergence and further refinement especially promising: The superiority of democratic capitalism has been demonstrated in thousands of companies in terms of humanization of the work place, and positive effect of long-term profitability; economic freedom has now been verified by China and India where 500 million humans have been released from extreme poverty in a mere decade; Information Age industries around the world demand the democratic work culture as a competitive necessity; and in the United States, wage earners’ pension and 401(k) savings are now a major source of investment capital. The fact that this capital is now being exploited is an intolerable contradiction. During this same time, the European Union has confirmed that economic common purpose can stop the violence: They have ceased centuries of killing millions of their young men in stupid wars.             Please visit the Carey Center for Democratic Capitalism website: www.democratic-capitalism.com for my background, and a description of the Carey Scholars program. Although my career was running companies, I have had the opportunity to examine what students were learning, and not learning, through my communication with more than fifty Carey Scholars over the past thirteen years.             Never has the responsibility of the university to educate, elevate, and unite been greater. Is it not time for the universities to engage in the intellectual process necessary to formulate this mission? In my book, I propose “Enlightenment II” for undertaking this examination.            Resolution of this confusion of mission in the universities will determine the direction of society in the 21st century.     Sincerely,   Ray Carey

 

To political candidates: March 6th, 2007             Your agenda lacks specific reforms of the economic system. By studying and assimilating my proposals you can present a comprehensive populist platform for economic reform. The people have a deep sense that the system is unfair, but they do not know what to do about it. Enormous latent democratic power is there to be activated.                     The political parties are now gridlocked between the Republicans who proclaim free-market benefits at the same time that they successfully lobby corruptions of capitalism and then use the money to corrupt democracy. The Democrats have a pathetic agenda that criticizes globalization and wealth concentration but only offers wealth redistribution by government.             The most critical component for social progress is the economic system that can maximize wealth and distribute it broadly. I can help complete your agenda with my book, Democratic Capitalism, The Way to a World of Peace and Plenty. It sets forth the reforms that can harmonize capitalism and democracy.             Optimistic Americans are counting on democracy to produce new leaders in urgent times. I quote from my book on page 442:   A hopeful solution, in these troubled times, is emergence of leaders with the intellect of Jefferson, the relentless determination of Washington, and the capacity of Franklin to get things done, people of statecraft who will draw on the will, wisdom, and votes of the majority to reform America and lead the world to peace and plenty.           Please visit my website:www.democratic-capitalism.com where you can read my bio, find out about Carey Scholars, and sample various materials produced during my thirty years of experience running companies, and my twenty-year study of the world’s economic-political systems. My experience included designing and implementing Care and Share, a profit-sharing and stock-ownership plan while CEO of ADT, Inc, my contribution to ways to build worker ownership. I recently received an announcement that Robert Rodriguez is the new Chairman of Community Board 11 in East Harlem. Robert was in the first class of Carey Scholars in 1993 from Cardinal Hayes High School in the Bronx, and is a graduate of Yale.             Social progress depends on movement to the superior economic system, but few understand that demand. Although Marx pointed it out in the mid-19th century the intellectual community has persisted in their preoccupation with political solutions and the world has continued in folly and violence. All political agendas so far do not indicate an understanding of this economic priority or appreciation of what economic freedom really means. The reforms proposed here are original with me, but I was pleased to find them confirmed through my study of the 18th century Enlightenment, including Adam Smith and the American Founders, with later refinements by Marx and Mill.             Economic freedom-properly understood and implemented-at home, and economic common purpose abroad means a grasp of Adam Smith’s few conditions for the proper functioning of economic freedom. These includes peace; neutral money, that is, a simple medium of exchange without influence on the commercial process; and control of the speculators, “prodigals and projectors,” as Smith called them. The excessive liquidity and volatility that now dominates world commerce is a flagrant contradiction of Smith’s conditions. Trillions of dollars are traded daily in currency, a casino of speculation that dwarfs all commercial transactions by many multiples.             Many are predicting an economic upset of significant magnitude during the next two years. If you integrate democratic capitalism into your agenda you will be positioned to respond to this crisis.             The reforms proposed in my book address the impediments to be removed, but they also outline why this is a special time for democratic capitalism to flourish. Peter Drucker described in The Post-Capitalist Society how every few hundred years there are transformative events that redirect human history: The founding of our great country was the last of those events. As described in Federalist Papers # 1, we were the first country organized by educated, studious people engaged in reflection and choice instead of force and accident. Now, the post-capitalist age should be another transformative event that opens the whole world to the benefits of freedom enjoyed by Americans. Economic freedom has demonstrated that it can feed, clothe, shelter, educate, provide health care and hope to the two billion humans struggling to live on $2 a day. Economic common purpose has demonstrated that it can unite people and gradually stop the violence. Satisfaction of this universal human yearning to be free and live well is now a pragmatic opportunity.             This opportunity includes the reality that the wage earners are now a major source of capital and that Information Age industries demand the democratic work culture to release the cognitive power of their people. The capacity of economic common purpose to displace the violence has been demonstrated by the European Union when they stopped centuries of killing millions of their young men in stupid wars. China and India have demonstrated the power of economic freedom by releasing 500 million people from desperate poverty in a decade. Democratic capitalism is so powerful that it works not only in free societies but also under authoritarian regimes, if the mission is improving the lives of the people. China understands economic common purpose and is going around the world making commercial partnerships with the message “Let’s get rich together!” China has increased both imports and exports with Africa from a few billion dollars to almost $30 billion in only a few years. In contrast, as you well know, America is going around the world with the message: “Do it our way, or else!” while devastating the economic base of millions of innocent people.             The democratic part of democratic capitalism is ownership participation that motivates wage earners to innovate and produce more wealth that, then, becomes automatically and broadly distributed. At present, there are 25 million wage earners benefiting from direct types of ownership and all wage earners are owners through their pension plan and 401(k) savings. The “ownership society” has arrived, but the wage earner has yet to enjoy the rewards because corrupted capitalism, which previously exploited their labor, has now learned how to exploit their capital, an intolerable contradiction that must not be allowed to continue.             Chapter 5 in my book “Worker Ownership, The Democratization of Capitalism,” confirms that worker ownership has enormous appeal to the whole political spectrum as the long-sought third way. Please read in my book the enthusiastic testimonies to Jeff Gates’ Ownership Solution. My favorite is Coretta Scott King who commented:   Somewhere in between unbridled capitalism and the welfare state, there has to be a more just and equitable economic system, which provides genuine opportunities for all citizens, while preserving incentives for investment.           Democratic capitalism continues to grow and demonstrate its superior capacity to build and distribute wealth, but it has been limited by the lack of assimilation by the intellectual community, by lack of support by political parties, by lack of institutional investors’ honoring their long-term fiduciary responsibility, by lack of advocacy in education, and lack of appropriate visibility in the popular media. It is offered neither to Liberal Arts students as the way to improve the human condition nor to Business School students as the way to manage for superior performance. It is the core of the post-capitalist society, a potentially unifying force of great power. It is available for you to integrate it into your agenda.             The problem, however, is not just greedy people who make obscene amounts of money on money, but, rather it is bad government policies that are the product of the lobbying by these ultra-capitalists. For example, Congress had the greatest opportunity in the history of capitalism with ERISA in 1974, when they mandated full funding of future pension needs. As much a $100 billion a year was available for investment in the job-growth economy as well as in educational, environmental, and infrastructural needs. But Congress made a colossal mistake in assuming that the stock market would effectively convert these savings into job-growth investment. Instead, the money became the monster that converted the economy into short-term and greedy, and this initiated a quarter-century of sacrificing future growth for present earnings. Institutional investors’ results were measured quarterly and annually and they passed this short-term measurement onto companies. Enormous rewards or punishments for a few cents per share in quarterly earnings conditioned the CEOs like Pavlov’s dog: They learned quickly how to avoid the electric shock of corporate takeover to snap at the stock-option bone.             We are in the middle stages of a financialization of our economy in which people are again treated as disposable cost commodities, and finance capitalism dominates rather than supports the job-growth economy. In this perversion of the post-capitalist society, taxes are shifted from capital to the middle class, the revenues and profits of financial services explode, the manufacturing base shrinks, and wealth becomes even more concentrated. In my book, I discuss the effect of this financialization that has put other great nations into irreversible decline during the past few centuries. Please read the CATO letter in the “letters” section.             “Private equity” is an example of the financialization of our economy that some have called “21st century capitalism.” It is a buy it, strip it, flip it game played by celebrities of politics and industry. In most cases, they follow mercantile philosophy by suppressing wages and benefits. “Acquire and fire” has been the technique for a quarter century, now enhanced by more aggressive cuts in pensions and health care. One of the rationales for going private is to relieve public companies of the ERISA induced short-term pressure. It would be a lot simpler if the institutional investors would change measurement of companies to one based on long-term performance.             For example, in 2002, Goldman Sachs and Bain Capital acquired Burger King. The strip it included $22.4 million in “professional fees,” quarterly management fees of $29 million, a $367 million special dividend financed by borrowed money, and finally $30 million in management fees to terminate the agreement. They then flipped it by taking it public again which “earned” them $1.8 billion, more than triple their original investment.             The demeaning of dividends is another manifestation of the financialization of the economy. Before the last quarter of the 20th century, 5- 6 % dividends represented one-half of the return from capitalism; the rest was a modest, secure annual appreciation in stock value. Under pressure by finance capitalists, however, dividends shrunk to under 1% and have not recovered to more than 2%. Why? Because Wall Street does not make money on dividends and would prefer that the money be kept in the companies either to attract a deal, finance a deal, or be used to buy back stock.             For example, Exxon Mobil, the world’s most profitable company, recently demonstrated the financial capitalist’s preferred distribution of surplus: $20 billion for capital improvements; $30 billion to buy back stock; and $7 billion returned to the economy in dividends. Was there a public debate on this distribution of corporate surplus? Certainly not! But this is where the profit motive and public policy intersect. Presumably, the distribution of surplus by public corporations should maximize public benefit as well as the private benefit of the wage earner capitalist. None of this happened because distribution of surplus is dominated by finance capitalists with most of it going into their favorite toy, stock buy-backs.             For another example, Motorola plans to spend $2 billion a year on stock buy-backs, five times the dividends returned to the economy. Corporate raider Carl Icahn however, has bought 1.4% of the stock to force them to increase the stock buy-back. Motorola is sitting on $11 billion in cash, and they produce about $3 billion a year in new cash. The stock went up on Icahn’s move, probably including purchases by the institutional investors supporting, as always, the short-term effect, while ignoring the long-term benefit for their constituency.             Few are pointing out the broad economic benefits of returning surplus cash to the owners of the capital. Instead it has become the source of record riches for the handlers of the peoples’ capital. In the last quarter century, over a trillion dollars has been wasted on stock buy-backs and non-strategic acquisitions. In the post-capitalist economy, this money should have been returned to the people as a “capital wage,” a large return on their pension and savings capital to be spent or saved, both of which uses would have benefited economic growth.             Defenders of stock buy-backs argue that they enhance the value of the wage earners’ stock, which it may do for the short time it takes for the speculators to make more money. The long-term value of retirement money will be more affected, and negatively so, by a quarter-century of sacrificing future growth for present earnings, and by the baby boomers selling stock to live on in retirement instead of buying stock for their pension funds.             A cruel example of the domination by finance capitalism is the seduction during the past five years of the least credit-worthy home-buyers, wooing them from fixed-rate mortgages to floating rates. The terms offered were irresistible: for example, no principle repayment for over a year. The packaging of these loans into mortgage-backed securities with the credit risk passed along like a hot potato has become a big industry in finance capitalism and provides an estimated 15% of the industry’s fixed-income revenue. Credit- derivative contracts have gone up to $26 trillion, $9 trillion more than early 2006 and seven times as much as in 2003. Respected Wall Street economist Henry Kaufman observed: “The real surge of these instruments is not just about reducing risk; it is fueling speculation.” (WSJ 8/24/06) Like victims out of a Dickens novel, the weakest will lose their homes. But the worst is yet to come: Mortgage delinquencies have doubled in the last two years. The loans are too far removed from the source, and there are too many layers of handlers of money in the process. Our economy has no relative experience of this phenomenon. No one knows its true make-up, and it is unclear who is actually holding the risk. In the meantime, speculators are using derivatives to “short” foreclosures, that is, they expect to make money betting that more people will lose their homes             The above are examples of the damage to the people from corruptions of the economic system at home, all products of the “ideologues of the liberalization of capital markets.” In foreign policy, these ideologues joined forces with the “ideologues of the American Empire” to stop the momentum towards a beautiful world of economic common purpose and thereby caused terrible economic damage and war. I offer studies of three disasters of lasting consequence in my book: the CIA’s dumping of the democratically elected leader of Iran in 1953; fundamental errors of policy in Vietnam caused by a small group sharing a narrow cultural conditioning; and the devastation of the Indonesian economy by the combination of hot money and currency speculation followed by IMF actions that made the problem worse.             All of these disasters could have been avoided if America’s priority were economic common purpose and if America had purged the corruptions in our own economic system. America’s image can change quickly, however, because democratic capitalism not only can eliminate material scarcity in the world, but also do it in a moral way that will make it easier to unite people. This economic system that we can present to the world is one that we will be proud of and one we know will have universal appeal.             The priority is to reform the economic system at home first, and then help unite the world in economic common purpose, the only way to stop the violence. It will take hard study and hard work however, because finance capitalism has successfully lobbied government policy from the beginning and their domination has become even greater during the last quarter century. Reformers must write rules for the economic system that truly have the mission of “controlling currency and credit for the general welfare.” The following policies would be essential in such a reform:   • Make dividends tax-free for low-income and middle-income wage earners. This new “capital wage” will be a financial incentive to return hundreds of billions of dollars a year to the wage earners and to the economy. If half of these dividends were spent, it would energize the economy and add jobs; if only half were reinvested it still would amount to many times the modest savings now from dividends. From this single action, the peoples’ capital would be activated, dividends would again be an important component of capitalism, ownership plans would spread, and companies would be highly valued for large steady dividends as well as fast growth. Very little tax revenue would be lost by this action that should be coupled with elimination of tax cuts for the wealthy. • Move the economy from short-term and greedy to long-term and patient simply by changing the measurement of corporate performance from quarterly earnings per share to a three year running average of sales growth, profits, and cash flow against management’s predictions. This requires no new laws just promotion by various government agencies which means that their loyalty will have to shift from Wall Street to Main Street. It will follow the advice of respected investors like Warren Buffett. This cash flow protocol, for example, would have prevented most of the damage to the peoples’ pensions by Enron. • Take the privilege away from speculators to borrow many multiples of their own capital to make bets by bank reserve requirements, tighter brokers’ margins, and taxes that penalize short-term gains and reward long-term holdings. This discipline would eliminate asset inflation in stocks and real estate that has caused great damage to the people in recessions and depressions. • Align the personal financial motivation of the handlers of the money with the objective to maximize the peoples’ money available on retirement. For example, use tax policy to change brokers’ compensation from commissions that motivate them to churn stock sales to straight salary. This was Mr. Merrill’s way to avoid a conflict of interest when he founded Merrill Lynch. • Stop the practice of using interest rates for political purposes. Nearly zero-cost money for the past five years has over stimulated the real estate market and helped get Bush reelected; at the same time, it hurt the bond income of pension plans and funded the speculators for their high-risk adventures. Low returns on bonds made the apparent higher returns from the stock market, hedge funds, private equity, and deals irresistible to the pension fund managers seeking quick returns. • The implicit assumption by Congress that the trillions of dollars of fully funded pension money would pass through Wall Street and fund economic growth for Main Street was not only wrong but did not anticipate that the money would be used to pressure companies to actually sacrifice long-term growth-a double whammy! Reformers must ask the question: Where does the money go? How much does it cost to get there? This is “Capitalism 101” and there are many ways to get the money into new equity for job growth and into bonds for education, health, infrastructural, and environmental needs. Broad based index funds held to retirement at an annual cost of less than .15% coupled with tax-free 5-6% dividends is one alternative. • Government agencies must promulgate no more suspensions of free market disciplines such as the bail-out of Continental Illinois in 1994. The argument that these bail-outs prevent systemic damage does not pass examination. • Regulate hedge funds through disclosure and accountability requirements similar to other financial institutions. Successful lobbying has opened up these high-risk adventures for pension money investment. • Pass laws to repair the damage done by the repeal of Glass-Steagall in 1999. The conflict of interest between bankers loaning too much money in exchange for their investment bankers getting deals with huge fees was the original reason for the law in 1932. This was exactly what happened at Enron within a year of the repeal when the bankers gave incredibly easy credit to fund Enron’s various misadventures which then got their investment bankers the deals with the huge fees. Many of the deals then lost more money.           These policy changes in the domestic economy will finally control currency and credit for the general welfare and organize government support to make democratic capitalism the universal system. The following are changes in the international monetary system, needing American support, that will spread economic freedom and economic common purpose globally:   • Tobin taxes on international currency speculation should be instituted. A win/win, they exert some control on speculation while providing hundreds of billions of dollars for helping developing counties, health care, environmental needs, and infrastructure. • End American subsidies to cotton farmers in agreement with the European Union to end sugar subsidies and Japan to end rice subsidies. The consumers would save hundreds of billions of dollars, and workers in poor countries would have jobs, and the hypocrisy would be taken out of America’s “fair trade” posture. • Reform the global reserve system in which wealth flows from the poor countries to the rich. Joseph Stiglitz has estimated that the present system costs developing countries over $300 billion a year, four times total foreign aid assistance-- money that is desperately needed to pull people out of extreme poverty. • Support BIS, the central bankers’ club in Basel, Switzerland, in their new efforts to eliminate the damaging boom/bust cycles caused by asset inflation. Their first paper on this subject was issued in April, 2006. • Support efforts of BIS to control hot, or short-term money, from rapidly leaving a country exacerbating a financial crisis as it did in Asian countries in 1998. This can be accomplished by requiring a mix of short and long-term investment and/or protocols that convert short term to long term in a crisis.           It is a long and complicated list but the handlers of money have filled the policy vacuum for a long time. There is no question that democratic power is there for reform; the question is whether enough reform-minded people will do their homework? I believe that these proposed reforms can be pivotal in the 2008 election, and this means that they will be pivotal in the direction of our nation and the world in the 21st century. With American leadership, it can be a world of plenty from economic freedom, and a world of peace from economic common purpose. Good luck. Sincerely, Ray Carey Locust NJ March 13, 2007

 

Harvard Business Review, The HBR List  Feb 2007   Dear Sirs;           We’ve entered into the post-capitalist age in which the wage earner is a prime source of capital but we have not yet aligned the rewards of capitalism with this new reality. Paradoxically the trillions of dollars of mandated pension funding was used to pressure companies to sacrifice long-term growth for short-term earnings in an environment in which rules are written for the benefit of the handlers of the money, not the owners. The institutional investors have assisted in this process in contradiction to their fiduciary responsibility to the wage earners.           An example of this domination by finance capitalism is the effect on dividends that historically provided one-half of the return from capitalism. Now they are demeaned because finance capitalists do not make money on dividends and prefer to keep the money in the company to either buy back stock or attract a deal. This mind set was demonstrated in # 8 of the HBR List with the observation that paying out cash in dividends “effectively signals that management has run out of promising new growth ideas.” The author’s alternative was to go find a deal.           To benefit the new owners of capital dividends should be repositioned as a valued part of capitalism with 6% dividends, not the 1-2% of recent years, and portfolios untouched for six years, not churned every one-two years. When Mr. Merrill founded Merrill Lynch he insisted that brokers be on salary to prevent this churning. Where did Mr. Merrill go?           Companies should be valued both on their ability to grow sales and profits rapidly as well as produce large amounts of cash for dividends. This alternative would also relieve companies from the pressure for annual profit improvement because many long-term investments lower earnings first.           Motorola’s distribution of surplus policy is an example of favoring the handlers of capital over the owners. They are apparently conditioned by finance capitalism to commit $2 billion a year to stock repurchase but that’s not enough for Carl Icahn who has bought 1.4% of the company and is demanding a bigger buy back. Motorola should be celebrated for its cash management that has accumulated $11 billion in cash with the expectation of adding $3 billion a year. They could return an incredible $20 billion to shareholders and the economy in the next five years and still have billions of dollars in reserve. The institutional investors should be pressuring the company for such a pay back consistent with JP Morgan’s comment “Don’t talk to me about return on capital, tell me about return of capital.           Peter Drucker identified the emerging post-capitalist society: “Every few hundred years in Western civilization there occurs a sharp transformation.” He identified one now in which “ In developed countries pension funds increasingly control the supply and allocation of money.” This transformative event has yet to bring the rewards of capitalism to the wage earner because the capitalism that traditionally exploited the wage earners’ labor has now learned how to exploit their capital, an intolerable contradiction that cannot continue.           Imagine the benefits to world economic growth if the trillions of dollars wasted on stock buy backs and non-strategic acquisition during the last quarter century had been returned as a “capital wage” to these new owners of capital. Capitalism would have been “democratized” and the “ownership society” arrived. With the help of the institutional investors this way to a world of peace and plenty is still an exciting opportunity. Sincerely, Ray Carey, MBA ‘50

 

Forbes Magazine Moral Capitalism Forbes 60 Fifth Ave NY NY 10011 Dear Sirs:      I would like to compliment Mr. Karlgaard for his article “How Moral Is Capitalism?” that provided the correct context for Adam Smith with priority for benevolence and unity, followed by his ultimate benevolence: economic freedom that could eliminate material scarcity in the world. You missed, however, the strongest argument for moral capitalism: because it is moral, it is more profitable You are in good company because the intellectual community has been missing this from the time of Smith, and it is not offered for student examination in Business Schools, Law Schools, Liberal Arts colleges, and is ignored by the popular media.      With the wage earner now a main source of capital and the Information Age industries needing a work culture of trust and cooperation as a competitive necessity, its time has come and the government can write rules in its support. At present, however, capitalism that traditionally exploited the wage earners’ labor has now learned how to exploit their capital, but that can’t last.        The basic premise of democratic capitalism is that performance improves in every human association in an environment of trust and cooperation, from the family, to companies, to nations, to the world. We had a recent validation of this principle from the two Super Bowl coaches. It was nice that they were the first African –Americans but they were also the first who demonstrated that leadership and encouragement in an environment of trust and cooperation produced superior results in competition with the command-and-control types who depended on an environment of fear and intimidation.     Once this simple concept is understood and applied the standard of living will go up, the violence will go down, and the world will unite in economic common purpose. Ray Carey Carey was Chairman and CEO of ADT, Inc for 18 years and author of  Democratic Capitalism, The Way to a World of Peace and Plenty, available from the Carey Center web site www.democratic-capitalism.com

 

Letter to CATO Institute Financialization of the Economy Feb 25, 2005 Cato Institute 1000 Massachusetts Ave. Washington, D.C. 20001      I hope that this letter can add focus for further discussions. My proposition is that our country’s economy is in the middle stages of a “financialization” in which financial services dominate the job growth economy rather than support it. The threat that this presents to free markets is huge, complex, and fast moving. Cato is one of the few organizations with the free market mission and the sophistication to turn back this tide, if not tsunami.      Concentrated wealth is at record levels and has provoked the usual outrage from the “have nots” and their representatives, along with the usual nonsense from the “trickle down” representatives of the “ haves.” This concentration, with visible evidence of individual greed, has helped change our international image from the beacon towards freedom to an arrogant bully trying to run the world. Less attention is paid, however, to broad wealth distribution, as a critical principle in Smith’s economic dynamic to spread wealth around the world. Free markets work when additional volume reduces costs and prices that then allow more people to buy if they have spendable income. (Democratic Capitalism, 278-284) Henry Ford figured this out in 1915 and raised wages to $5 a day so his workers could buy the model T’s. Globalization is now managed on the mercantilist philosophy in which profits are presumably maximized by suppressing wages and benefits. (p.182, 193). This cannot work in the long-term because people need money for reciprocal purchases in order to energize the economic perpetual motion machine that can eliminate material scarcity in the world.      Kevin Phillips in Boiling Point called attention to what financialization can do to great nations: first Spain in the 16th century, Netherlands in the 18th, Great Britain in the 20th, and now our turn? The manifestations are a shifting of taxes from capital to the middle class, shrinking of manufacturing, an explosive growth of financial services, and record concentration of wealth. (p. 258). Profits are now so good in financial services that they seem insulated from the big cash settlements required by so many cases of wrong doing.      In your mission to support free markets you properly identify the ideologues of the American Empire who push a strong government agenda that is in contradiction to the proper role of America, which is to spread the benefits of economic freedom around the world. I regard, however, the ideologues of the liberalization of capital markets as an equal threat to America’s future. The two in combination are truly scary. Apparently the ideologues of the liberalization of capital markets quit studying Smith before they got to the part about neutral money, and control of the speculators. Financial services have grown from 4% to 40% of total corporate profits with the share of total S&P market capitalization up to 25%. GM and Ford make 125% and 157% of their profits from financial services, that is, they are losing money on cars. Imagine what the overall numbers would look like if we followed Smith’s advice and treated financial services as administrative expenses to be subtracted from the wealth of nations      The financialization threat to our long-term economic success is the result of mistakes caused by the lobbying of Wall Street and the inability of Congress to dig deep and get it right. These mistakes are in fiscal and monetary matters that few have the financial sophistication to examine and challenge. The two big mistakes were Nixon floating the dollar without an alternative stabilizing mechanism, and ERISA pumping $100 billion a year into Wall Street with no examination of whether the money went into investment in the job growth economy or only into pushing up stock prices. There was similar lack of examination of how much it cost to get from savings to investment. The mutual funds, for example, contradicted the laws of supply and demand by raising their prices at the same time that the volume of their business was growing strongly. (p. 204) These two mistakes caused the excessive liquidity and volatility that provoked the financialization of the economy. Inattention to the fundamentals of this savings-investment equation continues in the discussion of privatizing social security, that is, where does the money go, and how much does it cost to get there?      Greedy CEOs are a popular target as many were seduced by ultra-capitalism with millions of stock options. (pp.118-123) All CEOs, however, were pressured to choose short-term earnings over long-term growth. The short-term choice gave some the high P/E to acquire other companies. Others were forced to sacrifice long-term plans because they knew that if they did not protect their high P/E they were easy targets for the take-over artists. (Chapter 8) M&A activity is heating up again but with a new twist, the presence of the hedge funds including lots of wage earners’ pension money. They will do new damage with their large war chests, unregulated status, and knowledge of how to play games with derivatives.      In Democratic Capitalism I examine the rise of ultra-capitalism in detail but only after a full examination of democratic capitalism, its philosophy and protocols. (Chapters 4&5) Despite the clarity and comprehensive treatment of democratic capitalism by Adam Smith, Karl Marx and John Stuart Mill, and the experimental verification by Robert Owen, (chapter 3) it has never been presented as a coherent whole for student examination in Business or Law schools or, for that matter, in the liberal arts despite their mission to improve the human condition. There has been a massive intellectual default during the whole industrial revolution by those who could have presented the good capitalism but have preferred to stay with their contempt for commerce that has persisted from the time of Plato. The result is that democratic managers must continue to reinvent democratic capitalism.      The democratic capitalist proposition has not changed: investing in people in a moral environment maximizes profits. Owen demonstrated this synergy of quality of life, moral values, and profits in practice. Mill later connected the dots among these crucial components but few paid attention then and now. (p.49) If democratic capitalism is not examined in the university, and is rarely mentioned in the popular media, as Bill Greider asked in one of his books: Who Will Tell the People? I hope that Cato will examine this opportunity.      Fortunately the problems are susceptible to simple solutions that are detailed in my book: they include tax-free dividends for low-and-middle income wage earners, (pp.183, 193) a change in measurement of corporate performance from quarterly and annual e.p.s. to a three year running average of sales, cash flow, and profits, measured against predictions (p. 395) and a steady reduction of the borrowing leverage for speculation. These actions would activate the trillions of dollars of 401(k) and pension money that are now subsidizing Wall Street, move the stock market away from its casino function back to being a source of equity capital for growth, and regulate speculation with borrowed money, the persistent impediment to capitalism functioning at full potential. There are other actions needed in support of democratic capitalism including reform of the U.N. but they are not relevant unless lives are being improved and the world is uniting in economic common purpose. (pp.482-493) The intention of our Founders to harmonize democracy and capitalism was partially accomplished and the concept is still attractive to a huge democratic majority—if properly presented. They now have little influence on the political process but represent the potential voting power to support reform once an agenda is defined.      I appreciate that you find my book of interest and hope that others at Cato have read it. It is the product of 30 years of running companies, including 18 as Chairman and CEO of ADT, and then almost 20 years of intensive study about what free markets need to function at full potential. Full potential meaning feeding, sheltering, clothing, educating, and providing good health for over 6 billion humans, and meaning the substitution of economic common purpose for violence in a world now trapped by reciprocal atrocities. Chapter 10 includes ten hypotheses in a logic trail that leads, according to my analysis, to a world of peace and plenty. Please study hypothesis # 1 that requires validation before proceeding to the other hypotheses. It argues that Marx was right when he rearranged the economic system, culture, and political structure to give priority to economics to be assimilated by the culture with government then restructured in its support. Acceptance of this hypothesis has profound implications.      Cato concentrates on the pathologies of collectivism, which you do very well. You do not, however, in your examination of the role of government in the free market, emphasize acceptance of Adam Smith’s qualifications for the free market to function. The “peace, easy taxes, and a tolerable administration of justice” is understood by most, but the specification for neutral money and control of the speculators, (prodigals and projectors as Smith called them) does not seem to register with many. Neutral money was highlighted by our Founders as the responsibility to “control currency and credit for the general welfare” The importance of neutral money has also been emphasized by 20th century free market philosophers such as Friedrich Hayek who identified the worst sin of government as non-democratic privileges that result in money having a dominating influence in the commercial process. We are in the grip of the Great American Contradiction that frees what should be controlled, and controls what should be freed. The government tells companies what shoes to wear and ladders to use while simultaneously deregulating monetary matters and suspending market disciplines. (pp 263-265)      From the time of Hamilton the wealthy and powerful have enjoyed privileges to speculate with borrowed money resulting in economic panics from 1818 to 1929. In the past quarter century, however, this impediment to free markets has escalated into a dominance that threatens permanent damage to our economy. Imperial overstretch, budgets deficits, and current account deficits puts America into uncharted and dangerous territory. Reform must begin by purging ultra-capitalism (chapter 7) and moving to democratic capitalism in the domestic economy followed by leadership of the world to the benefits of free markets. How did the most successful free market economy in history give up economic leadership for the use of military power to run the world?      Please consider that Collectivism with all of its micromanagement waste and inefficiencies is the Democratic response to concentrated wealth from privilege. In a vague way the Collectivist thinks that they are justified to tax and spend because they see the enormous concentrated wealth and know that much of it is the product of government privilege. Our government is polarized between those protecting privilege to concentrate wealth and those trying to redistribute it. This grid lock can be broken only by discovering that democratic capitalism is the superior free market system, based on traditional values, that improves the human condition thus satisfying the missions of the left and the right. The problem is that no one, except those enjoying the feast, understands the fiscal and monetary policies that provide the privileges and consequently the free market continues to be corrupted. This is where I believe that Cato has a unique capability. You have the mission to support free markets, the financial sophistication to understand the corruptions and solutions, and the infrastructure to promote real reform.      I argue that the best way to defeat collectivism is a move to democratic capitalism that not only distributes wealth broadly but before that creates more wealth. Once wage earners are enjoying a “capital wage” along with their labor wage they will pressure government to copy democratic capitalistic principles and restructure from rules based micromanagement to results based decentralization and empowerment. Conversely, the “starve the beast” Republican plan now being followed, in combination with the expected economic decline, can cause social tensions worse than the Great Depression that came close to destroying this great democratic experiment.      In my first letter to your President Ed Crane in 1989 I identified ERISA pension money as the reason that Wall Street was able to dominate Corporate America. At that time, you will remember, the world was a promising place with economic freedom spreading to Eastern Europe, South America, and Southeast Asia. I was convinced that the end of Communism was the beginning of the world of peace and plenty, and that the parts of the world still full of violence and misery would gradually be changed to economic freedom by the pressure of their people who could see the benefits of economic freedom on TV and the Internet. I used Singapore as the case study in how economic freedom can improve lives in an authoritarian government with political freedoms following once the freedom genie is out of the bottle. (pp. 449-451) Despite this encouraging progress the competing momentum from ultra-capitalism caused me to warn of an insidious development as our economy was becoming steadily more financialized.      Democratic Capitalism, in chapter 7, defines ultra-capitalism as the combination of old-fashioned mercantilism that treats the wage earner as a disposable cost commodity, and finance capitalism that is dominant over, not supportive of, the job-growth economy. Chapter 8 is a play that depicts the terrible choice facing CEOs, and chapter 9 is “Enron, the Poster boy for Ultra Capitalism.” It argues that while Enron may be about greedy executives it is, more importantly, about how the Wall Street-Washington nexus provides government privileges for the easy credit that allows an Enron to happen. Several chapters of my book are a textbook about democratic capitalism and promote a “capital wage” through tax-free dividends for low-and-middle income wage earners. Also presented are ways to create more wealth and spread it broadly through profit sharing and ownership plans like the Care and Share that I designed and put in place at ADT. These plans are the most motivational because the wage earner has to put up some of their own money. These plans will not work unless the culture is changed to participation through trust and cooperation. (pp. 45-47) (United Airlines gave worker ownership a bad name because they did not change the culture.) .      I have a tendency to concentrate on the evils of ultra-capitalism and not describe the wonders of democratic capitalism sufficiently. This is because ultra-capitalism is the bone in our economic throat that must be removed before the benefits of economic freedom can be released again. I hope to have the opportunity with CATO to present why democratic capitalism is the most profitable because it is moral. Not quite conventional wisdom about any type of capitalism, but I think it is a proposition that can be validated. Similarly, the conventional wisdom that the government and the culture must contain the “animal spirits” of a economic system that is amoral at best, and more likely immoral, is reversed because there is evidence that the moral environment of democratic capitalism actually spreads a benign infection to the contiguous community. This should not be surprising as trust and cooperation is the natural condition of humans and will be carried into the community from people in companies that encourage this culture. I also propose, contrary to conventional wisdom, that the Great Depression did not destroy the theory of free markets finding equilibrium. The cause of the Crash of ’29 and the Great Depression was speculation with borrowed money in contradiction to Smith’s classical economic theory, followed by three monstrous mistakes by Hoover. The free market will find equilibrium if currency and credit is, in fact, controlled for the general welfare. (pp 209-216).      Another case study that I believe is critical to understanding the economic threat is the damage done to the Asian “Tigers” in 1998. Rubin and Clinton jawboned emerging economies into taking down cross border capital controls so that “free capital could roam the world looking for the most efficient investment.” A good theory but in practice it became speculative capital rushing around the world looking for a quick chance to make money. The lack of controls of hot money (short-term loans) and currency speculation (or even the threat of it) drove the currency down as much as 70%. It had been clear since Soros defeated the British in 1992 that the speculators with borrowed money have more power than the central bankers. Basel I, written by the central bankers club, BIS, in Switzerland, did not find ways to monitor the quality of loans by requiring a matching component of long-term money and, in fact, wrote reserve rules that encouraged short-term loans. Neither did they have ways in a crisis to automatically convert short-term loans into long term. Hot money was able to rush in and out at great speed. BIS is now working on Basel II but these deliberations can take six years and there is no evidence of popular participation. The money tree is now $2 trillion a day in Forex, $1.2 trillion a day in derivatives. Soros warns of calamities ahead if we do not learn how to purge the instabilities. Who is representing the people in Basel II?      Indonesia, the world’s largest Muslim nation, was the poster boy of how to improve the lives of people through economic freedom because it lowered the number of those under the poverty line from 40% to 10% in a few decades by standard free market moves. American led ultra-capitalism then drove the Indonesians living in poverty back under 50% in a matter of weeks. Another Muslim, the prime Minister of Malaysia, called currency speculation unnecessary, unproductive, and immoral at a speech at a World Bank meeting in Hong Kong. Footnotes to this tragedy: Indonesia became a location for terrorist training and funds; the popular media did not understand the economic causes and turned it into a political event easier to report; and finally the “Tigers’ did not even need more capital because of a high level of savings. The earlier opening up of Indonesia for foreign investment was real investment with real people working, not speculative money going into their stock market or excessively risky ventures. The Treasury Department and the IMF then treated a liquidity problem with standard cures and further slowed down growth. (pp 278-284). Joseph Stiglitz examined the confusion between a liquidity crisis and a capital crisis in Globalization and Its Discontents. (p. 280)      It is the ideologues of the liberalization of capital markets that I want to address in this letter, but before I leave the ideologues of the American Empire I want to call attention to Niall Ferguson’s 2004 book Colossus. Ferguson wishes that we were imperialists like Great Britain because he believes that Empires must stay and manage like the British did. In other words, we have the worst of both worlds in that we start actions like an Empire, but do not follow up with the requisite administration. Contrary to Ferguson’ sentimental and sanitized retrospection of British imperialism, Joseph Nye, former Dean of the Kennedy School of Government and former Secretary of Defense, positions America as a leader towards economic common purpose and a strong team player in containing the violence. The title of his book summarizes it well: The Paradox of American Power, Why the World’s Only Superpower Can’t Go It Alone. (p.486)      In FDR’s view World War II was fought for two reasons, certainly to defeat Fascism but also to end Empires in the world. Subsequently the British left India but unfortunately DeGaulle was repositioning France in the worst possible way and refused to leave Vietnam or Algiers until a lot more blood of young people was shed. Later America followed the French into Vietnam and 54,000 young Americans lost their lives.      Back in 1987 Prof Paul Kennedy of Yale called attention in The Rise and Fall of Great Powers (p. 170) to “imperial overstretch” that precedes the fall of great nations. America now represents about one-third of the world’s economy but one-half of all military spending. The share of the world’s economy is shrinking while the percentage of military spending grows. This spending, combined with the financialization of our economy, has put this great democratic experiments in jeopardy. According to Hegel, the humans’ move toward freedom is one of struggle and contradiction with three steps forward and two back. Is it possible that for the first time we are in serious danger of two forward, three back? If true, what a tragic, unnecessary failure. Additional matters for discussion include: • The savings investment equation, fundamental to the success of capitalism, was largely ignored in ERISA and is in danger of being ignored in the privatization of social security discussions. The assumption is that the stock market is an efficient way to move savings into productive investment. Not true, the stock market is a casino with a mission of making money on money with some of it flowing into the job growth economy. At the time of ERISA companies were putting cash away for only a fraction of their pension obligations. ERISA in effect took trillions of dividend or growth dollars out of companies and gave it to Wall Street where only a part of it ended in real investment. IPOs peaked at about $45 billion dollars but they became another scam. I have been unable to find out how much other equity capital comes out of the stock market each year, does Cato know? Most of the ERISA money goes into a hydraulic pressure to buy stock while M&As and stock buy-backs reduce the total stock. As demand goes up and supply goes down, the price has only one way to go, until fear takes over from greed.   • ERISA funding gave the market the clout to dominate companies through enormous rewards and punishments for quarterly and annual e.p.s. (pp. 254, 255). CEOs became Pavlov’s dogs and after receiving enough big juicy bones for beating quarterly e.p.s., or electric shocks for missing by a few cents, all became trained and some even learned how to cheat to get the big bones and avoid the shocks. This quarterly/annual measurement is not responsive to the normal dynamics of business and until we change the measurement to a three-year running average of cash flow, sales, and profits ultra-capitalism will continue to dominate and companies will continue to manage for the short term. Can it be that simple, just change the measurement and accountability to three components and a three-year average? Yes, and until we do the analysts will run the economy.   • The reforms coming out of Congress are, as usual, cosmetic “gotcha” oversight rules that will cost money and reform nothing. Every CEO I know feels responsible for the numbers in the annual report. Telling him or her that they will go to jail for 20 years for bad numbers is both insulting and silly. Predictions of cash flow could have prevented the Enron smash up as it would have demonstrated that they did not know how much cash they were burning every year from their many screwed up projects. A clever CFO can fake cash flow but not for long and not against predictions.   • Once Investment Bankers shifted to pricing their services on a percentage of the deal, the deals exploded most of them either bad or not very good in the long-term. (pp. 120, 121). Bankers, lawyers, accountants, serial CEO acquirers, and acquired CEOs, all feasted on billions of dollars with no risk and little accountability. Even CEOs responsible for making the models work insulated themselves with multi-million dollar severance agreements. Anti-trust is a delicate instrument in a free market but we have gone too far in the wrong direction. Serial acquirers like Sandy Weil and Dennis Koslowski must be constrained by reasonable percentage of market controls. In 2005 the M&A game is heating up again energized by the investment bankers salivating over the big fees and the CEOs who know that playing monopoly is easier than running a business and is sure to stick millions in the CEO’s pocket. The pattern will be the same: fire thousands, hype earnings, pump the stock, collect on options, and do not worry too much about how much red meat was cut in the process. It takes years to realize how dumb most of these deals are.   • The “ fairness opinion” is a joke. How many bankers are prepared to recommend or write an opposing opinion when a deal means millions of dollars and no deal means zero? Until investment bankers go back to pricing their services by time related advisory fees, deals will proliferate and stockholders will be exploited. A quaint idea now that they are all public companies with their motivation the price of their stock.   • Asset inflation: Speculation with borrowed money has caused every recession and depression in this country’s history from 1818 to 1929 to the recent bubble economy. (pp. 209-216). The Chairman of the Federal Reserve Board, however, does not think that preventing asset inflation is their job although vigorous action to prevent price inflation is. The latter protects the asset value of the wealthy and favors the creditor class while action to prevent asset inflation protects ordinary people. Contrary to Greenspan’s testimony to Congress asset inflation can be prevented by transaction taxes, higher short-term capital gains taxes, and bank reserve requirements that move up as stocks appreciate beyond corporate earnings growth, or real estate beyond inflation. (pp. 216-222; 271-274). ( Feb 2007 addendum: please read BIS paper # 205 April 2006 “Is Price Stability Enough?”)   • LTCM is a good case study in the extremes of leverage up to 98% of the bets. It is a good case study of how hedge funds raise the risk in order to feed the steady demand for increasing earnings as they moved from “market neutral” to “directional.” It is a good case study of how the government suspends market disciplines by bailing out private interests who have screwed up. (pp. 287-292). The argument that no public money was used in the bankers’ bail out does not pass scrutiny as the S&L debacle showed how fast the insurance money runs out leaving the taxpayer holding the bag.   • Glass Steagall and Citigroup: The lobby power of Wall Street was demonstrated by the repeal of Glass Steagall including Citigroup’s arrogance in putting together their various enterprises in anticipation of the repeal. (pp 298-300). It is a case study of why we need to protect the system from the conflict of interest of commercial bankers providing easy credit for bad loans, so that the investment bankers can get big fees for the bad deals. These banking functions were separated in the 1930s and Enron in 2001 showed why it was a good idea to prevent the damage from easy credit from government privileges. Greedy executives are a symptom not a cause. Volker’s purchase of Continental Illinois in 1984 ushered in the “too big to fail” era, a major violation of market disciplines.(pp. 264, 265). The repeal of Glass Steagall in 1999 ushers in the “really too big to fail” threat to market disciplines. Free of regulation, criminal actions by Citi bankers have become endemic from the U.S. to Japan, to Europe.   • Enron, along with Freddie Mac, Fannie Mae, Goldman Sachs, and many others are case studies of the danger from derivatives. When they needed better quarterly earnings at Enron, they put out the call to “crank the dials,” meaning raise the risk on trading and even revalue certain future estimates. (Chapter 9). Goldman Sachs is now a public company motivated by the stock price, and as more than a quarter of their earnings are from “trading” they do the same type of pumping when their earnings are weak. Warren Buffett and his partner Charlie Munger called derivatives time bombs that will explode damaging both the players and the economy. (pp. 311-316). Greenspan, however, with his liquidity obsession, has consistently opposed regulation of derivatives and hedge funds and the game playing goes on. Both parties to a contract can change the future value taking the difference into current earnings free of audit or necessity to reconcile the two estimates. Derivatives are not only unregulated but are increasingly used to avoid regulation of basic banking. Balance sheets and traditional references like a debt-equity ratio have become meaningless. This zero-sum game will be reconciled only when the future contracts mature. How many bi-lateral self-serving estimates will do damage then no one knows. OFHEO is now requiring Fannie Mae to write off $9 billion of losses on derivatives. Why do we have so many agencies involved in monetary and fiscal matters?   • It is hard to find a single financial motivation on Wall Street that is consistent with the obligation to the customer, the wage earner. Specialists became technically obsolete over two decades ago but still manage to take their slice of the pie. There are more stockbrokers than steel workers now, most of them on commission. When Mr. Merrill founded Merrill Lynch he insisted that brokers be on salary to avoid the obvious conflict of interest, where did Mr. Merrill go?   • Big bang accounting. Under ultra-capitalism serial acquirers maintained earnings momentum by the acquire and fire method with write offs of future expenses guaranteeing a good following year. Once on the merry-go-round they had to keep acquiring or the music would stop. The big bang announcements were usually made with an estimate of how many would be fired which became the CEO manhood check by Wall Street and bumped the stock up. (p.109). Conversely, a CEO building a company who chooses to reduce manpower by attrition and retraining does not have the same benefit of the big bang and has to report lower earnings during the years of reduction. Tax laws consistently favor ultra-capitalism.   • Stock buy backs. Another example of tax laws favoring ultra-capitalism is the inducement to buy back stock instead of spending the money on growth programs or sending the money back into the economy through dividends. (pp. 123, 187, 212). Stock buy backs were defended as “tax efficient” which they were until taxes were relaxed on dividends for the wealthy. Hundreds of billions of dollars were wasted on stock buy backs to arithmetically improve the price of the stock.   • “Lightly regulated” Hedge funds have tripled in number in six years and now include smaller investors and the wage earners’ pension money. Their defenders describe their function as providing a “discipline” but most of their mission is to make money on money. (pp. 270,271). Derivatives and the influence of hedge funds are spreading through the economic system like a cancer and now infect Mergers and Acquisitions and specific events such as the run up in the price of oil. Speculators with borrowed money thrive on volatility, businesses hate it. The rules favor the speculators and protect them from regulation (pp. 300-304).   • Forms of worker ownership have been recognized for a long time as the way to motivate the wage earner to produce and innovate with an automatic broad distribution of wealth resulting. (Chapter 5). How can we continue to ignore the system that can create more wealth and distribute it broadly? Jeff Gates in Ownership Solution presents support for worker ownership as the long-sought “Middle Way,” including prominent Republicans and Democrats as well as Martin Luther King’s widow and Gorbachev, one of the 20th century’s visionaries. (pp 150, 151). When ERISA was passed into law Senator Russell Long’s committee down the hall was passing 15 laws that gave ESOP tax benefits for worker ownership.(p. 149). What a tragedy that the committees working on these laws were not introduced to each other. The greatest savings-investment opportunity in history was lost when they neglected to couple the ERISA’s trillions of dollars with some place to go with tax-free-dividends for a secure double digit return to the wage earner, their “capital wage.” In the immortal words of J.P. Morgan “Don’t tell to me about return on capital, tell me about return of capital!”   • Greenspan did not want two Bushes to miss a second term and propped up the economy with artificially low interest rates resulting in an explosive housing market. The signs are now scary: since 2001 the economy has grown $1.3 trillion while debt has grown $4.2 trillion; our savings rate of 1% can be compared to Europe’s almost 10%; and home values have gone up $ 4 trillion. The financially sophisticated, however, are getting ready as the majority of the home refinancing is being converted to floating rate and over half of the $365 billion of corporate bonds issued last year were also on floating rates. Many were hedged with derivatives like rate swaps but many others were doing reverse swaps converting long-term interest rates into short term in order to reduce costs and hype earnings. I study the problem all the time but like most do not really understand all the other things going. At this writing, for example, there is confusion about the yield curve with short-term rates going up while long-term rates are going down. Derivatives encourage metaphors: are they time bombs, the tip of the iceberg, or “Alligators Lurking in the Swamp” as Carol Loomis of Fortune called then back in 1994? (pp. 268-271)?   • Citi had trouble making their quarterly estimate in the fourth quarter of 2004 so they took over $800 million out of their reserve for bad loans, 15 cents a share, and beat the analyst’s estimate by 1 cent! Back when the NY banks destroyed many South American countries’ economies by pushing too many petrodollars on them, they had a way to avoid writing off non-performing loans, they just loaned them more money so they could pay the interest and avoid being classified as non-performing. (pp. 258-261). Much more sophisticated game playing now goes on in banking stimulated as usual by stock options: SPEs, structured finance, off-balance-sheet debt, and many other artifices that make bank statements a work of fiction. $171.8 billion, or 15.7% of Citi’s total debt, cannot be found on the balance sheet; it had to be searched for in the footnotes. (p 369). For these reasons bankers should be on straight salary with five-year performance bonuses corrected for loan write offs and reserve increases. Chairman Greenspan regularly advises Congress that derivatives do not need regulation because they get their money from banks that are regulated, and he’s not kidding.   • The Fed has been between a rock and a hard place for many years because the efforts to prop up the economy has required zero cost money while the growing current account deficit (p. 196) normally needs higher bond yields to keep the Japanese and Chinese reasonably happy. The experts do not agree but it seems probable that when our foreign bankers have a better alternative we are in for big trouble. A couple of points higher on interest rates and imagine all those floating rate loans bankrupting homeowners, companies, and our government.   • Our position as the world’s reserve currency has many benefits but the Euro is making steady progress as an alternative with our share of the total shrinking from around 85% to 65% in a few years partly caused by its lower value. South Korea just dumped dollars provoking a strong negative stock market response. The more polite term is “diversification.” Is this another part of the gathering “Perfect Storm?”   • One aspect of our financialized economy is the ability of financial services companies to make money playing the interest-rate, “carry trade,” game. Hedge funds have borrowed lots of 2% money and have gone into junk bonds because as long as the leveraging opportunities exist, and the interest rate does not go up too high, it is a license to steal. If the government were controlling the currency and credit for the general welfare there would be an exit strategy for the taxpayer but only the unregulated hedge funds have an exit strategy- get out first.   • ERISA’s mission was to protect pensions, however, many pensions are now under-funded. During the 1990’s bubble economy companies were allowed to hype their earnings by using the fictitious stock price to lower their pension cash-funding obligation. Now many industries’ pension plans such as automobiles, airlines and steel, with big obligations under defined benefit plans, are broke to the tune of hundreds of billions of dollars. Again the only question is how long the insurance will hold up and when will the taxpayer take up the load. In support of my call to Cato for help I resort to one of Cato’s Letters dated November 26, 1720: National credit can never be supported by lending money without security, by raising stocks and commodities by artifice and fraud to unnatural and imaginary levels, and consequently delivering up helpless women and orphans, with the ignorant and unwary, but industrious subject, to be devoured by pickpockets and stock- jobbers, a sort of vermin that are bred and nourished in the corruption of the state. I hope that we have learned from our misfortunes so that we may expect that no privileges and advantages be granted for which ready money might be got. I dare pronounce before-hand, that every scheme which they themselves propose to make their bubble and roguery thrive again, will be built upon the life and misery of this unhappy nation. If our money be gone, thank God, our eyes are left. Sharpened by experience and adversity we can see through disguises, and will be no more amused by moon-shine. Sharpened by experience and adversity these questions remain:        Are financial services progressively dominating the economy?        If so, is this a serious threat to the free market economy?        If so, will the Cato Institute analyze and recommend actions? Sincerely. Ray Carey