Category Archives: Blog

Finance is Destroying the Economy

“In recent years, annual trading in stocks — necessarily creating, by reason of the transaction costs involved, negative value for traders — averaged some $33 trillion. But capital formation — that is, directing fresh investment capital to its highest and best uses, such as new businesses, new technology, medical breakthroughs, and modern plant and equipment for existing business — averaged some $250 billion. Put another way, speculation represented about 99.2% of the activities of our equity market system, with capital formation accounting for 0.8%.” – John Bogle, founder of The Vanguard Group

What this means is that the financial sector (banks, hedge funds, brokers, etc) does not do it’s job and it has a very basic job: to productively invest the nation’s savings, our savings, to create wealth. Instead it speculates, creates bubbles, and causes financial crises like the one that caused the Great Recession. As a reward for so poorly managing our savings and recking our economy, the financial sector takes home something like 25% of all corporate profits while representing something like 4% of employment. This is a sector that produces nothing, extracts wealth, and employs very few yet it is sucking up all the profits.

Worse yet is what the financial sector has done to the rest of the economy. Obsessed with the mantra of maximizing shareholder value (which somehow has translated into raising the immediate stock price even if it kills the company 5 years later), finance has taken hold of American industry. Our largest businesses no longer invest in research and development to remain competitive, they no longer invest in their workers, they no longer invest in capacity and efficiency.

Instead wages are stagnant, we have mass layoffs, off-shoring, extensive lobbying to accrue government handouts, selling off assets to temporarily boost profit margins, assuming massive debts to fund stock buybacks, all to raise the stock prices in the short term (so CEO’s and corporate raiders can sell off their stocks at the artificially created high and leave the company to flounder). It’s not just limited to those who work for a living though, all consumers suffer at the hands of an out of control financial sector, the financial sector was responsible for the spike in the cost of food around the time of the 2008 financial crisis for example (which partially led to the Arab Spring and the crisis in Syria and rise of ISIS, demonstrating how ludicrously connected the modern global economy is).

And most egregious of all is that we’ve been made complicit in our own destruction. Many people have a 401(k) or pension or other savings plans. These are typically invested with some hedge fund or other that manages your savings. Your savings gives these fund managers additional clout to buy larger percentages of shares, to become “activist investors”. And they’ll use this clout to demand the companies act to provide better returns and I’ve already mentioned what that means (layoffs, downsizing, off-shoring). Theoretically your retirement savings could be used to put you and people you know out of a job, in fact they most certainly have.

When the inevitable fallout comes, when the speculation and bubbles and deconstruction of the American economy becomes too much, we have recession and financial crisis like in 2008. But then what happens? Millions of regular people lost their jobs, millions of people had their savings wiped out, houses were foreclosed, small businesses shut down, factories closed their doors, immense wealth was wiped out in a matter of days. And then the United States government and the Federal Reserve bailed out the banks, they bailed out the financial sector with trillions of dollars (yes, TRILLIONS, it sounds absurd, but horrifyingly true), and everyone else who suffered at the hands of the financial sector’s gross negligence got NOTHING.

Is this how we want our country and our economy to be run? Is this what we believe to be right as a society? Fifty years ago this behavior was not tolerated but were we any less successful as a country, were our markets any less free, was our economy any weaker? Finance is not the economy, finance is meant to keep the economy running smoothly. It is time we took our country and economy back from the financial sector, back from the corporate raiders, back from absurdity of neoclassical economic theory! We survived the last crash but fixed nothing, every aspect of financial sector resilience is now worse than it was in 2008, can we survive the next one?

This is a disaster waiting to happen or more likely in the process of unfolding before our very eyes. My intent is not to fear monger or to drum up votes but to raise awareness of the serious problems we face as a state and a country, I care not at all if I win so long as someone is doing something to fix this. I believe Mark Romanchuk and Lane J. Winters will act when the seriousness of this issue becomes apparent but someone needs to make this clear to them now. If you care about Ohio, if you care about your neighbors, go tell your preferred candidates and your representatives in whatever district you live to act now! We need reform, we need alternatives, we need action, and yes, there are solutions we can take at the state and local level because we all know the federal government won’t do anything about it. The Ohio Investment Bank might not be the best solution but it’s the best I’ve got, what do you have? Seriously, I’m asking, everyone reading this, let’s figure something out to save Ohio.

The Ohio Investment Bank

What’s so great about the Ohio Investment Bank, the poorly named idea that I have put at the center of my campaign? Well I’ll tell you in 500 words or less!

The OIB is one stop shopping for all your entrepreneurial needs. Through an initial funding by the Ohio government, the bank provides seed capital to new businesses as well as existing small businesses not as loans or grants but as an investment which the bank aims to earn a profit on. So the bank has every interest in your business becoming sustainable and profitable.

The OIB offers a number of services through its municipal partners/branches for entrepreneurs to build a successful enterprise including:

  1. Business management services so that you have the expertise necessary to build your business right.
  2. Export and supply chain services so you can navigate the complexities of the global economy in building your product or service and then find customers around the world and build Ohio’s export surplus (that’s how you do it without starting destructive trade wars!)
  3. Help you raise capital from outside investors so your company can grow to keep up with demand. This in addition to any investment from the OIB which will allow you to choose where your capital comes from so you don’t have to rely on any shady investors or corporate raiders who do not have your economic success at heart.
  4. The OIB partners with the technology transfer offices of Ohio’s many exceptional universities so that technologies and advancements developed in the lab can be quickly brought to market and start changing the world while earning additional funding for the universities to pursue their work.

Targeting the right businesses and industries, the OIB will jumpstart Ohio’s economy and make us a leader not just in the United States but around the globe. The OIB gives Ohio’s economy the initial kick but the economy will begin expanding rapidly as economies of agglomeration and clustering make Ohio a destination for skilled workers, new industries, and investment.

Gradually the bank will create the technologies to transform Ohio, to deliver energy, food, health care, and transportation cheaply and conveniently to all Ohioans without the government directly providing them through large spending programs or welfare. And as the economy grows, unemployment will decline and wages will rise. The Ohio government will have significantly lower obligations and the size of government and the welfare state will shrink allowing us to lower taxes significantly. Additionally, as the OIB earns returns on its investments it will be able to reinvest the profit in Ohio’s businesses or, if need be, transfer funds to the Ohio government. Ideally, within a few decades, Ohio’s government could be entirely funded by the profits of the OIB and taxes in Ohio could be completely eliminated.

Seems like a fantasy but it is entirely possible given the right circumstances and the commitment of all Ohioans to break the mold. This is the role for government in the 21st century, a facilitator of the market, an investor in our future. We can do this; the opportunity is now. Let’s put the state ahead of the pack, let’s fight for our future, let’s save Ohio! Vote for me, Tim Grady, this November and make this reality!

The Next Recession

It is unusual for a bull market to last much longer than ten years. Increasing instability would suggest that this one is nearing its end. This has some important implication for the coming decade.
 
Since the financial collapse and the Great Recession we’ve seen little action by the government or anyone to fix the problems that caused the collapse. In many ways these problems have gotten worse; the Too Big to Fail banks are larger than ever, the shadow banking sector has expanded, private equity firms have caused housing prices to rise while homeownership has fallen, major US corporations have taken on considerable debt to fund stock buybacks (arguably stock market manipulation) rather than invest in R&D. Meanwhile government debt has skyrocketed and the Fed has held interest rates low for a decade. This means the government has little fiscal or monetary tools to counteract the effects of a financial crisis and ensuring recession.
 
Many households are in such a precarious economic position with debt and mortgages that the next economic downturn will lead to mass foreclosures and inability to cover both debt and living expenses. Considering rather stagnant wages the last decade, rising household debt, and the loss of wealth in 2008, most Americans are in a worse position than they were in 2007 meaning another recession has the potential to be considerably worse. Debt is dragging down growth and it has the potential to strangle the economy when the next recession hits. 
 
I am not fear mongering here, I am trying to properly express the urgency of the situation so that appropriate action can be taken while we still have the opportunity. Remember folks, before the Great Depression we used to call the depression of 1873 the Great Depression. It is a mistake to think the course of history is perfectly linear, that the present is a good indicator of the future. History has a way of taking sudden, unexpected turns.
tl;dr: The economy is going to slow down, the government and households aren’t prepared for it.

Believe in US

There is reason to be optimistic about the future. It’s true that the world is a safer place than it has ever been, that the world is a better place. Crime is down, the stock market is higher than ever, and the standard of living seems to just keep improving. To predict the next ten years on these statistics alone we’d say that things are looking up, the world is going to be better, and the good times will just keep rolling. But rarely is this not the case. When the times are good, why would anyone question that they will always be good?

The truth is the country can turn a corner and find itself in a very different place that no one would have predicted ten years before despite it being the path we were following all along. The truth is society is more than GDP and crime rates and people know this. People know that all is not well, that the country stands at a precarious point, that the worst is yet to come. The world is a better place but everything that helped get us to this point has crumbled. Like a business that fired all the employees and sold all its assets to report one last profitable quarter. How is it that the people know this when our experts and analysts and political leaders can’t even begin to comprehend it? It’s because the people are closest to the matter, they’re on the ground. You could call it intuition but the truth is we’re actually living it.

Over the last few decades we’ve lost our social cohesion, the fabric holding society together has been torn apart, and we’ve lost all faith in the institutions that used to hold the country up as they became gridlocked, corrupt, and unable to fulfill their duties.

Our public education is no longer an institution that seeks to improve the next generation, a grand effort to make the country better, instead it is a strict, bureaucratic system designed to push children through a series of hoops and tests. Our higher education is just as bad, a machine that profits off students and produces an abundance of worthless degrees.

Our criminal justice system is no longer designed to keep the innocent out of prison and stand up for society. Now it is a tool being run for profit and used to punish or threaten the innocent. Millions undeservedly have their lives and futures stolen from them. At the same time many are protected from ever facing justice by their wealth, corruption, or other influence. This is not justice and people know it. They know they live in a society that cannot be trusted to protect the innocent or stop the criminal.

Our government is run by lobbyists and party insiders with dedication not to the people or the country but to win elections, to win for their party, and to make money. We no longer have dedicated public servants, we no longer can elect regular people who just want to do good for their family, neighbors, and country. We elect politicians who work for corporations and interest groups, not the people. Politicians who would rather put the government in permanent gridlock than work together to pass laws that work. Our government is corrupt, it is gridlocked, and it does not represent us. How we believe in it?

Our businesses have changed their models away from innovation and building a lasting business to monopolizing industries and maximizing shareholder value. That is not how the free market works, that is not how capitalism should work, and that’s not good for business. People know this, they know businesses are as likely to cheat them as to benefit them. In the 2008 economic collapse people saw just how tenuous the new, global economy was, how insecure their investments, their jobs, their savings, their lives were and they have not forgotten. The bankers, the politicians, the economists can go on and on about how GDP is up, the stock market is soaring, and unemployment is down but the people know that nothing changed, the underlying problems were not solved, and the economy is one bad month away from crashing all over again. 2008 should have been a wakeup call, instead we glossed over it with bailouts and economic predictions of prosperity based on the same economic models that completely failed to predict the economic collapse to begin with.

Part of this is that we’ve conflated finance and business. Finance has grown over the last few decades to represent a much more significant portion of GDP despite not actually adding real value to the economy. Finance used to be properly regulated. Finance used to be a utility to spur the economy onward and to help businesses grow and expand. Now finance is the economy and the profits don’t extend beyond Wall Street.

Such degradation of our country’s institutions has a far greater side effect than just their own collapse. Social trust is at an all-time low. When social trust is low we won’t invest in each other, we won’t invest in our country, we won’t invest in our future. It all seems too complex, our problems are so monumental and so entangled that it seems no solution will ever present itself.

To accomplish great things, the things that we could not accomplish alone, we have to commit to each other, to our country, and our community. This point was in fact well made when our country began, in the words of Thomas Jefferson in the Declaration of Independence, “we mutually pledge to each other our Lives, our Fortunes, and our sacred Honor”. I believe we will recommit to this pledge. I believe that when America faces its greatest challenges it digs deep down and finds what made it great, the commitment to the idea that collectively we are strong, that we were the first country to prove the people could govern themselves, and that the United States of America is greater than the sum of its parts. I believe in us.