All Is Not Right in "Capitalist" America
James Surowiecki, in a piece in the New Yorker titled "Private Inequity," discusses private-equity funds, leveraged buyouts, financial gimmicks, and how it has increasingly been possible to do exactly what Romney's opponents accuse Bain Capital of having done-- essentially, buy out a company, load it up with more debt, cash out on their initial investment (the key part, for them), and leave the company less able to weather tough economic times than when it started.
I am not an economic "populist" as it is commonly defined. I do not know what James Surowiecki's political predilections may be. What he describes may not have been what Bain Capital did. And it is wrong to implicate capitalism itself, or the very idea of private-equity firms, as the culprit here. The attacks on Romney may have been unfair.
But all is not right in "capitalist" America.
Those of us who truly believe in the free market and capitalism, more than any others, need to be vigilant to highlight and prevent abuses of that system, if we care to have it continue. When we turn a blind eye to practices such as those mentioned in the piece, we give ammunition to those who would dismantle or hobble the system itself.
The free market works best when each person's incentives are properly aligned with the greater good. In most cases this happens naturally. A buyer and a seller each have incentives to exchange, and they are each better off by the transaction. Society also benefits. But in a world of complex and arcane rules and regulations, and where high-multiple leveraged buyouts are allowed, firms can risk other peoples' money to buy, restructure and profit from companies without really improving anyone else's bottom line-- in many cases, damaging it.
Isn't this just another form of rent-seeking, of focusing more on transferring wealth rather than producing it?
Again, I'm not saying buyouts and restructurings should never happen. I'm just asking that we ensure those doing so are responsible for the results. If they are, their incentives will once again be properly aligned.
How do we do that? I don't know. I'm not a financial guru. I don't understand all the government regulations that we would have to change, remove, or even put in place. I don't know what kind of banking reforms are necessary.
I do know that all is not right in "capitalist" America, and we only hurt ourselves as conservatives if we ignore these problems or accuse each other of being "populists" or "liberals" for highlighting them.
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May '10
Re: All Is Not Right in "Capitalist" America
I agree with you, Chris.
Thanks for brining it up.
Aug '11
Re: All Is Not Right in "Capitalist" America
What Katie said. Thank you. I keep circling around these thoughts. Not everything we call capitalism is worth bragging about. Perhaps we shouldn't even call it capitalism. It's certainly not free-market.
May '10
Re: All Is Not Right in "Capitalist" America
People sold the company with full disclosure, people lent money with full disclosure. There is no malfeasance here. Just the messy process of risk capital being put to work and sometimes succeeding and sometimes failing. Bain is guilty of nothing other than trying to wring value out of the market for its investors.
Trying to regulate risk out of the equation results in travesties like Fannie/Freddie and TARP. If people want to loan too much money and owners want to borrow too much money, then they must both face the consequences. That's what free market capitalism means. Any attempt to regulate away outcomes you don't care for, places you firmly in Camp Obama. If it's any consolation, private equity firms are finding debt quite expensive these days.
Oct '10
Re: All Is Not Right in "Capitalist" America
Let's break down what Mr Surowiecki says:
But
Oct '10
Re: All Is Not Right in "Capitalist" America
Don't be led astray by talk of "gimmicks" and "loopholes" and characterisations of fundamental tax policies as "government subsidies". There may be an argument to be made about 'good capitalism' and 'bad capitalism' (the key, of course, would be who gets to decide...), but this isn't it.
Sep '11
Re: All Is Not Right in "Capitalist" America
Markets have an innate tendency towards monopoly and cartels, which is why they must be regulated in order to function properly. But there must be an elision between incentives and regulation, or at least they mustn't pull in opposite directions, otherwise the incentives will win and regulation will fail.
The separation of ownership and control, when combined with a target of maximising shareholder value, can and does lead to excessive leverage. In order to change that, incentives need to change. Bonuses should no longer be based on return on share capital but on return on total capital invested, including loan capital. Sorry if this is not relevant to Romney.
Aug '10
Re: All Is Not Right in "Capitalist" America
I dont think you can bust out the pension fund vested money. You can grab overfunding, but that's about it. It is all done within a structured agreement with PBGC.
Now, let's do a memory exercise- anybody remember Boesky, Milken, Icahn and why they are infamous ? I would bet that greenmail did as much damage as asset stripping. At least asset-stripping is just a bad name for market forces reallocating the value. Anyone agree ?
Edited on Jan 24 at 9:39amJun '11
Re: All Is Not Right in "Capitalist" America
"But in a world of complex and arcane rules and regulations, and where high-multiple leveraged buyouts are allowed, firms can risk other peoples' money to buy, restructure and profit from companies without really improving anyone else's bottom line-- in many cases, damaging it."
If the "other people" want to risk their money and lend it, why not?
As for laid off employees, any wage earner or salaried person who seeks guarantees concerning their employment should probably move to Greece.....or Spain....or France.....etc.
Surowiecki tries to disguise his bias but his next move would be economic collectivism and he would have us go there for the sake of "compassion."
May '10
Re: All Is Not Right in "Capitalist" America
Shouldn't there be some limits on the amount of leverage one can engage in?
My whole point is that you should be held responsible for the consequences of your actions. As currently structured, I see lots of loopholes that let people get away with putting the consequences of their own risk-taking on others.
May '10
Re: All Is Not Right in "Capitalist" America
And even if James has an agenda, my other point is that we wave it away at our own risk. The liberal side may be wrong, but we give them ammunition when we ignore or downplay the problems in the current system.
Aug '10
Re: All Is Not Right in "Capitalist" America
Chris Deleon: Shouldn't there be some limits on the amount of leverage one can engage in?
My whole point is that you should be held responsible for the consequences of your actions. As currently structured, I see lots of loopholes that let people get away with putting the consequences of their own risk-taking on others. · 1 minute ago
Banks are certainly restricted, but there are no limits on private corporations which are formed with full disclosure of risk. Don't forget risk here. It is a motivating force behind the market. Without risk, there is no reward. Try and limit risk, the markets will shut down.
Edited on Jan 24 at 10:43amJun '11
Re: All Is Not Right in "Capitalist" America
flownover
Chris Deleon: Shouldn't there be some limits on the amount of leverage one can engage in?
My whole point is that you should be held responsible for the consequences of your actions. As currently structured, I see lots of loopholes that let people get away with putting the consequences of their own risk-taking on others. · 1 minute ago
Banks are certainly restricted, but there are no limits on private corporations which are formed with full disclosure of risk. Don't forget risk here. It is a motivating force behind the market. Without risk, there is no reward. Try and limit risk, the markets will shut down. · 0 minutes ago
Edited 0 minutes ago
Yes. Excessive use of leverage has its own punishment.
The bailouts, the quiet nationalization of the banking system and the Government's acquisition of an automobile company are much greater causes for concern.
Aug '10
Re: All Is Not Right in "Capitalist" America
Brewster's (Barry Obama) Billions ?
michael kelley
Yes. Excessive use of leverage has its own punishment.
The bailouts, the quiet nationalization of the banking system and the Government's acquisition of an automobile company are much greater causes for concern. · 1 hour ago
Jun '11
Re: All Is Not Right in "Capitalist" America
flownover: Brewster's (Barry Obama) Billions ?
michael kelley
Yes. Excessive use of leverage has its own punishment.
The bailouts, the quiet nationalization of the banking system and the Government's acquisition of an automobile company are much greater causes for concern. · 1 hour ago
Edited 29 minutes ago
29 minutes ago
And let's not forget massive loans to "green" energy companies. Or the "LBO" of the healthcare system. Or the involvement in the mortgage markets. Or the bailout of the EU.
My oh my. I imagine President Brewster's morning to sound something like this:
"Axlerod. Let's get long pork bellies. I have a hunch something exciting is going to happen in the pork bellies market this morning."
I wonder when the IPO of this financial conglomerate will be announced.
May '10
Re: All Is Not Right in "Capitalist" America
There is an excellent rebuttal to this view on the Member Feed by Douglas Kimball.
May '10
Re: All Is Not Right in "Capitalist" America
Do you understand what I am getting at? Why so defensive?
Can capitalists do no wrong, ever?
Shall we continue to turn a blind eye, just because (sometimes ill-informed) criticism comes from across the aisle?
Edited on Jan 24 at 2:33pmMay '10
Re: All Is Not Right in "Capitalist" America
Let me also clarify that what I'm complaining about can be at least partly attributed to government over-regulation. This is why I put "capitalist" in scare-quotes. The system we have is not fully free-market or unencumbered capitalist, although the operations we're discussing are definitely based on capital transactions.
But to some degree, when people abuse opportunities, do not add much value but engage more in rent-seeking activities, or mislead and take advantage (in the worst case, when fraud occurs, for example, though I'm not implying this is the case here), shouldn't they be subject to scrutiny and criticism? Why do we give them a free pass? Is it a knee-jerk reaction to the often-ill-founded criticism of free markets from the left? Because the left criticizes something, we must defend it? What if something is literally indefensible? Aren't we hurting our own cause?
These are the questions I'm trying to get answered.
Edited on Jan 24 at 2:40pmAug '10
Re: All Is Not Right in "Capitalist" America
Chris Deleon: Do any of you understand what I am getting at? Why so defensive?
Can capitalists do no wrong, ever?
Chris, I think the point everyone is making is not that there are no abuses within capitalism but that any attempts by government to curb these abuses through regulation ends up being counterproductive, i.e. doesn't curb the abuses but distorts the market instead.
Many of the abuses in capitalism are caused by dishonest individuals breaking the law. These people are/should be prosecuted by the SEC and other government agencies.
There is a mistaken notion of "fairness" in our society that causes some folks to see a bogeyman where none exists. Business arrangements may appear to be"unfair" from one angle but actually quite beneficial to society when viewed in totality.
Most of the positive results in our system have come about as a result of people acting out of enlightened self-interest, which is the heart of capitalism.
Edited on Jan 24 at 2:48pmMay '10
Re: All Is Not Right in "Capitalist" America
I've always preferred the old fashioned limit: don't borrow more money than you can pay back. If you break that rule, bad things happen, and no one has to pass a law or issue a regulation.
Nov '10
Re: All Is Not Right in "Capitalist" America
For every seller, there is a buyer who sees value where the seller does not.