The following is an excellent excerpt from the book “MAKERS AND TAKERS: The Rise of Finance and the Fall of American Business” by Rana Foroohar from the “Introduction” on page 1 and I quote: “It wasn’t the way Steve Jobs would have done it.
In the spring of 2013, Job’s successor as CEO of Apple Inc., Tim Cook, decided the company needed to borrow $17 billion. Yes, borrow. Never mind that Apple was the world’s most valuable corporation, that it had sold more than a billion devices so far, and that it already had $145 billion sitting in the bank, with another $3 billion in profits flowing in every month.
So, why borrow? It was not because the company was a little short, obviously, or because it couldn’t put its hands on any of its cash. The reason, rather, was that Apple’s financial masters had determined borrowing was the better, more cost-effective way to obtain the funds. Whatever a loan might normally cost, it would cost Apple far less, thanks to a low-interest bond offering available only to blue-chip companies. Even better, Apple would not actually have to touch its bank accounts, which aren’t held someplace down the street like yours or mine. Rather, they are scattered in a variety of places around the globe, including offshore financial institutions. (The company is secretive about the details.) If that money were to return to the United States, Apple would have to pay hefty tax rates on it, something it has always studiously avoided, even though there is something a little off about a quintessentially American firm dodging a huge chunk of American taxes.
So Apple borrowed the $17 billion.
This was never the Steve Jobs way. Jobs focused relentlessly on creating irresistible, life-changing products and was confident that money would follow. By contrast, Cook pays close attention to the money and to increasingly sophisticated manipulations of money. And why? Part of the reason is that Apple hasn’t introduced any truly game-changing technology since Job’s death in 2011. That has at times depressed the company’s stock price and led to concerns about its long-term future, despite the fact that it still sells a heck of a lot of devices. It’s a chicken-and-egg cycle, of course. The more a company focuses on financial engineering rather than the real kind, the more it ensures it will need to continue to do so. But right now, what Apple does have is cash.
Which gets us to that $17 billion. Apple didn’t need that money to build a new plant or to develop a new product line. It needed the funds to buy off investors by repurchasing stock and fattening dividends, which would goose the company’s lagging share price. And, at least for a little while, the tactic worked. The stock soared, yielding hundreds of millions of dollars in paper wealth for Apple board members who approved the maneuver and for the company’s shareholders, of whom Cook is one of the largest. That was great for them, but it didn’t put much shine on Apple. David Einhorn, the hedge fund manager who’d long been complaining that the company wasn’t sharing enough of its cash hoard, inadvertently put it very well when he said that Apple should apply “the same level of creativity” on its balance sheet as it does to producing revolutionary products. To him, and to many others in corporate America today, one kind of creativity is just as good as another.
I’ll argue differently in this book.
The fact that Apple, probably the best-known company in the world and surely one of the most admired, now spends a large amount of its time and effort thinking about how to make more money via financial engineering rather than by the old-fashioned kind, tells us how upside down our biggest corporations’s priorities have become, not to mention the politics behind a tax system that encourages it all. This little vignette also demonstrates how detached many of America’s biggest businesses have become from the needs and desires of their consumers–and from the hearts and minds of the country at large.
Because make no mistake, Apple’s behavior is no aberration. Stock buybacks and dividend payments of the kind being made by largest shareholders but often stifle its capacity for innovation, depress job creation, and erode its competitive position over the longer haul–have become commonplace. The S&P 500 companies as a whole have spent more than $6 trillion on such payments between 2005 and 2014. bolstering share prices and the markets even as they were cutting jobs and investment. Corporate coffers like Apple’s are filled to overflowing, and America’s top companies will very likely hand back a record amount of cash to shareholders this year.
Meanwhile, our economy limps along in a “recovery” that is tremendously bifurcated. Wage growth is flat. Six out of the top ten fastest-growing job categories pay $15 an hour and workforce participation is as low as it’s been since the late 1970s. It used to be that as the fortunes of American companies improved, the fortunes of the average American rose, too. But now something has broken that relationship.
That something is Wall Street. Just consider that only weeks after Apple announced it would pay off investors with the $17 billion, more sharks began circling. Corporate raider Carl Icahn, one of the original barbarians at the gate who attacked companies from TWA to RJR Nabisco in the 1980s and 1990s, promptly began buying up Apple stock, all the while tweeting demands that Cook spend billions and billions more on buybacks. With each tweet, Apple’s share price jumped. By May 2015, Icahn’s stake in Apple had soared 330 percent, to more than $6.5 billion, and Apple had pledged to spend a total of $200 billion on dividends and buybacks through March 2017. Meanwhile, the company’s R&D as a percentage of sales, which has been falling since 2001, is creeping even lower. What these sorts of sugar highs portend for Apple’s long-term future is anyone’s guess but one thing is clear: the business of America isn’t business anymore. It’s finance. From “activist investors” to investment banks, from management consultants to asset managers, for high-frequency traders to insurance companies, today, financiers dictate terms to American business, rather than the other way around. Wealth creation within the financial markets has become an end in itself, rather than a means to an end of shared economic prosperity. The tail is wagging the dog.
Worse, financial thinking has become so ingrained in American business that even our biggest and brightest companies have started to act like banks. Apple, for example, has begun using a good chunk of its spare cash to buy corporate bonds the same way financial institutions do, prompting a 2015 Bloomberg headline to declare, “Apple Is the New Pimco, and Tim Cook Is the New King of Bonds.” Apple and other tech companies now anchor new corporate bond offerings just as investment banks do, which is not surprising considering how much cash they hold (it seems only a matter of time before Apple launches its own credit card). They are, in essence, acting like banks, but they aren’t regulated like banks. If Big Tech decided at any point to dump those bonds, it could become a market-moving event, an issue that is already raising concern among experts at the Office of Financial Research, the Treasury Department body founded after the 2008 financial crisis to monitor stability in financial markets.
Big Tech isn’t alone in emulating finance. Airlines often make more money from hedging on oil prices than on selling seats–while bad bets can leave them with millions of dollars in losses. GE Capital, a subsidiary of the company launched by America’s original innovator, Thomas Alva Edison, was until quite recently a Too Big To Fail financial institution like AIG (GE has spun it off in part because of the risks it posed). Any number of Fortune 500 firms engage in complicated Whac-A-Mole schemes to keep their cash in a variety of offshore banks to avoid paying taxes not only in the United State but also in many other countries where they operate. But tax avoidance and even “tax inversion” of the sort firms like the drug giant Pfizer have done–maneuvers that allow companies to skirt paying their share of the national burden despite taking advantage of all sorts of government supports (federally funded research and technology, intellectural property protection)–are only the tip of the iceberg. In fact, American firms today make more money around, getting about five times the revenue from purely financial activities, such as trading, hedging, tax optimizing, and selling financial services, than they did in the immediate post-World War II period.
It seems that we are all bankers now.
It’s a truth that is at the heart of the way our economy works–ad doesn’t work–today. Eight years on from the financial crisis of 2008, we are finally in a recovery, but it has been the longest and weakest recovery of the postwar era. The reason? Our financial system has stopped serving the real economy and now serves mainly itself, as the story above and many others in this book, along with copious amounts of data, will illustrate. Our system of market capitalism is sick, and the big-picture symptoms–slower-than-average growth, higher income inequality, stagnant wages, greater market fragility, the inability of many people to afford middle-class basics like a home, retirement, and education–are being felt throughout our entire economy and, indeed, our society.
Diagnosing the Problem – Our economic illness has a name: financialization. It’s a term for the trend by which Wall Street and its way of thinking have come to reign supreme in America, permeating not just the financial industry but all American business. The very type of short-term, risky thinking that nearly toppled the global economy in 2008 is today widening the gap between rich and poor, hampering economic progress, and threatening the future of the American dream itself. The financialization of America includes everything from the growth in size and scope of finance and financial activity in our economy to the rise of debt-fueled speculation over productive lending, to the ascendancy of shareholder value as a model for corporate governance, to the proliferation of risky, selfish thinking in both our private and public sectors, to the increasing political power of financiers and the CEOs they enrich, to the way in which a “markets know best” ideology remains the status quo, even after it caused the worst financial crisis in seventy-five years. It’s a shift that has even affected our language, our civic life, and our way of relating to one another. We speak about human or social “capital” and securitize everything from education to critical infrastructure to prison terms, a mark of our burgeoning “portfolio society.”
The Kafkaesque story of Apple described above is just one of the many perverse outcomes associated with financialization, a wonky but apt moniker picked up by academics to describe our upside-down economy, one in which Makers–the term I use in this book to describe people, companies, and ideas that create real economic growth–have come to be servants to Takers, those that use our dysfunctional market system mainly to enrich themselves rather than society at large. These takers include many (though certainly not all) financiers and financial institutions, as well as misguided leaders in both the private and the public sector, including numerous CEOs, Politicians, and regulators who don’t seem to understand how financialization is undermining our economic growth, our social stability, and even our democracy.
The first step to tackling financialization is, of course, understanding it. This immensely complex and broad-based phenomenon starts with, but is by no means limited to, the banking sector. The traditional role of finance within an economy–the one our growth depends on– is to take the savings of households and turn it into investment. But that critical link has been lost. Today finance engages mostly in alchemy, issuing massive amounts of debt and funneling money to different parts of the financial system itself, rather than investing in Main Street. “The trend varies slightly country by country, but the broad direction is clear: across all advanced economies, and the United States and the UK in particular, the role of the capital markets and the banking sector in funding new investment is decreasing. Most of the money in the system is being used for lending against existing assets,” says Adair Turner, former British banking regulator, financial stability expert, and now chairman of the Institute for New Economic Thinking, whose recent book, Between Debt and the Devil, explains the phenomenon in detail. In simple terms, what Turner is saying is that rather than funding the new ideas and projects that create jobs and raise wages, finance has shifted its attention to securitizing existing assets (like homes, stocks, bonds, and such), turning them into tradable products that can be spliced and diced and sold as many times as possible–that is, until things blow up, as they did in 2008. Turner estimates that a mere 15 percent of all financial flows now go into projects in the real economy. The rest simply stay inside the financial system, enriching financiers, corporate titans, and the wealthiest fraction of the population, which hold the vast majority of financial assets in the United States and, indeed, the world.
The unchecked influence of the financial industry is a phenomenon that has played out over many decades and in many ways. So what is so urgent about it now? For one, the fact that we are in the longest and weakest economic recovery of the post-World War II period, despite the trillions of dollars of monetary and fiscal stimulus that our government has shelled out since 2008, shows that our model is broken. Our ability to offer up the appearance of growth–via low interest rates, more and more consumer credit, tax-deferred debt financing for businesses, and asset bubbles that make us all feel richer than we really are, until they burst–is at an end. What we need isn’t virtual growth fueled by finance, but real, sustainable growth for Main Street.
To get there, we need to understand the key question, which is really quite simple: How did finance, a sector that makes up 7 percent of the economy and creates only 4 percent of all jobs, come to generate almost a third of all corporate profits in America at the height of the housing boom, up from some 10 percent of the slice it was taking twenty-five years ago? How did this sector, which was once meant to merely facilitate business, manage to get such a stranglehold over it? That is the question this book will strive to answer, in particular by examining just how the rise of finance has led to the fall of American business, a juxtaposition that has rarely been explored. Many of the perverse trends associated with financialization, such as rising inequality, stagnating wages, financial market fragility, and slower growth, are often (rightly) spoken about in social terms and in highly politicized ways–with polarizing discussions of the 1 percent versus the 99 percent, and Too Big To Fail banks versus profligate consumers and rapacious investors. Indeed, the terms makers and takers were used in the 2012 US election cycle by conservative politicians to denigrate half of the American population (an issue I’m hoping this book will go some way toward rectifying by redefining those terms).
All these things are part of the story. But none of them captures the full picture of how our financial system has come to rule–rather than fuel–the real economy, the one that you and I actually live and work in. By looking at the effect of our dysfunctional financial system on business itself, an area that I have covered as a journalist for twenty-three years, I will move beyond sound bites into real analysis of the problem and illustrate how the trend of financialization is damaging the very heart of our economy and thus endangering prosperity for us all.
This is a book that will speak to average Americans, who have yet to be given a full or understandable explanation about what has happened to our economy over the last several years (not to mention the last several decades), and why many of the financial regulations promised us in the wake of the 2008 crisis never came to pass. But it will also speak to policy makers, particularly those of the new US administration that will take power in the coming year, who still have a chance to fix our system–a chance that has so far been missed in the post-financial-crisis era. It’s a rare opportunity that must be seized, because, as I will explore in this book, our financial apparatus has collapsed under its own weight multiple times in the last several decades, and without changes to our system, it’s only a matter of time before it does again, taking us all down with it.”
(THE FOLLOWING IS ABOUT THE AUTHOR AND I QUOTE:
RANA FOROOHAR is a business columnist at Time magazine and CNN’s global economic analyst. She is an economic and political contributor to New York’s public radio station WNYC, and has been a frequent commentator on NPR, CBS, NBC, ABC, MSNBC, and the BBC. She has appeared repeatedly on Real Time with Bill Maher, Face the Nation, This Week with George Stepanopoulos, Fareed Zakaria GPS, and MSNBC’S Morning Joe. She lives in Brooklyn with her husband, the writer John Sedgwick, and her two children, Darya and Alex.”
LaVern Isely, Progressive, Overtaxed, Independent Middle Class Taxpayer and Public Citizen Member and USAF Veteran