Democrats & Liberals Archives

Honesty Is The Best Policy

The Red Column pushes the good financial news. The Blue talks about the average person’s perception, that of an economy not doing all it should be doing. I think there’s good reason, in the wake of Enron and the other corporate failures, in the view of the industry-wide culture of corruption it revealed, to doubt that the growth we’re seeing in this economy is what it’s cracked up to be. Maybe we’re wrong. Ironically enough, though, the lack of timely disclosure and real action on corporate reform makes it difficult for the Republicans, much less anybody else, to prove our economy is not just another bubble waiting to burst.

Personally, I'm not pessimistic about our economic strength. I think America could do an awfui lot without any problem While expectation of the boomtimes of the late nineties are unrealistic, with good reason, expectation of strong growth isn't.

Our real problem in today's economy isn't capability, it's management and accountability, the latter term in both senses of the world accounting. But those things depend heavily on one particular thing: A culture of integrity.

We don't want disclosure laws because we want to bury corporations under a mountain of paperwork. We want them because we want to see, good or bad, how a company is truly doing.

We don't want to write laws to prohibit certain conflicts of interest in order to deny businesses opportunities. We do that to ensure that people do their jobs with the right loyalties in mind. A man selling stock should not be put in the position of having to cater to the banking divisions wish to keep a company afloat. He should be able to dump bad stock if it doesn't do good for the investor, not have to convince the investor to do something against their financial interest. Likewise, a corporate financier should have no interest in loaning a company money to keep its balance sheet up, just so the stock the company is peddling to investors doesn't take a dive.

We don't want corporate accounting standards and finance reformed because we want to drown businesses in regulations. We want it so that the owners of stocks and bonds can look at the company's balance sheet and make that oh-so-American decision to buy or sell according to how they see the value of the stock being.

Let us be frank about this: The Stock Market is about the redistribution of wealth, not necessarily about anybody making money or profits. The Stock Market deals secondarily with that, but its essentially concerned with whether the value of the stock is trully where it belongs. People make their money in the stock market by properly estimating value, financial potential, especially where others don't see it.

Republican policy, though, has supported a culture of speculation, which is essentially a cheat on this evaluation. Stocks are artificially raised and lowered, both by people inside the company and outside of it, to where investors supposedly in the know, supposedly filled in on the character of the stock, are in actuality decieved as to the real shape of things. At the point where speculation becomes more important than evaluation, the system is broken, and the market does not truly perform its function.

The refrain of all this is "What's Good for the Economy", and it has been used to justify all manner of abuse and deception. The truth is, while people selling and buying in a market can make temporary short-term gains by deception and unfair advantages in knowledge, such practices make investors overly paranoid, and drive them to invest less than they could at optimum. That, of course, is a problem.

Over the past few decades, we have seen a parade of companies and finanical institutions collapse or burn their investors. Enron is merely one of the worst and most damaging. These failures do damage to people's willingness to invest their money.

But the dishonesty can spread to other parts of our lives. No business is truly just in the business of making money. Although profit motive is strong, the means by which corporations make money, as anybody who's taken high school economics knows, is by providing goods and services. Some folks look at the financial redistribution that goes on in the stock market, and within any company, though, and get the funny idea that it should all be working for the purpose of making them rich. After all, it is their business, isn't it? There's a dangerous sense of aristocratic entitlement there, where the investors are merely the vassals of the CEOs and CFOs, instead of them being Vassals themselved, delegated a responsibility by their investors.

Being prosperous is supposed to be a side effect of doing something to satisfy somebody else's best interests in a manner responsible to the rest of society. With Enron, customers in an entire state were starved of energy, and charged way above fair market value for what they did get. One could charitably describe it as highway robbery. Uncharitably, one could call it highway robbery by your own tour guide. Energy trading should have dropped prices, not let them be artificially inflated.

The side effect of that is one of our largest economies was subjected to a period of inconstant electrical service. Another side effect of Enron was the runaway bursting of the bubbles elsewhere, leading to one of the largest craterings of shareholder value, market-wide, that people have ever seen. If I'm not mistaken, the top three corporate bankruptcies of all time are filled by companies that failed in that dismal season.

What makes it worse is that there has been little movement to force greater disclosure, prohibit conflicts of interest, and pull accounting closer to reality. That reality is very important. The further we are from reality in the numbers, the more our economy relies on things that are not true. To lay such a poor foundations for an economy is against our interests as a nation. It breeds needless anxiety about real opportunities, and prevents us from getting properly concerned with real problems while there's time to solve them.

For our markets to run efficiently, we must work towards regulations that are as simple as possible, but also as strongly enforced as they can be. We must require the full disclosure we are entitled to, and hold white-collar criminals as responsible for their thefts as we do the common street thugs. Making off with a hundred million dollars should not let you off with less jail time than if you stole a car off the streets

If we don't get tough about it, we can only worry. Worry will only create resentment, and resentment will create anger, because people don't like to be passive in their anxieties. They want to be able to do something about the problems in their lives. We have a choice: make good, efficient regulations now, and get people back on a friendly basis with big business...

...or we wait until things get so bad that all faith in the free markets is thrown out the window. That is what will happen if outrages continue to build, and people in government continue to do nothing. Make the investment of a stitch in time now, or be prepared to see another eight come along in due course.

Posted by Stephen Daugherty at February 27, 2006 9:46 AM
Comments
Comment #129877

Steve

The market has,and always will be,a shell game.

There is no difference picking a stock after pouring over the Wall Street Journal than picking your favorite horse at the local racetrack after studying the tip sheet.

In both cases,both are fixed every day and the little guy is always the sucker.

Posted by: sicilianeagle at February 27, 2006 11:32 AM
Comment #129879

Krugman’s article in the NY Times today really shows were the economic growth is happening.

http://www.truthout.org/docs_2006/022706Z.shtml

Posted by: Vihar Sheth at February 27, 2006 11:37 AM
Comment #129882

Nice article, But I figured out a long time ago that while the Japanese can make great computer chips, the Germans can make fine cars, but when it comes to stealing money nobody begins to measure up to Wall Street. Unfortunately the same people stealing anything they can find are the same people backing the campaigns and appointed to oversee the process. Can you say bend over here’s your grease?

Posted by: richard at February 27, 2006 11:43 AM
Comment #129926

Richard

SSSSSHHHHH…here’s a tip…buy this stock…a German company is is opening up a chain of Chinese restaurants in America,and it’s a can’t miss….eat their food and one hour later you’ll be hungry for power….
shshhhh…remember…don’t say a word….

Posted by: sicilianeagle at February 27, 2006 1:17 PM
Comment #129929

Stephen:
“The Red Column pushes the good financial news. The Blue talks about the average person’s perception, that of an economy not doing all it should be doing. I think there’s good reason, in the wake of Enron and the other corporate failures, in the view of the industry-wide culture of corruption it revealed, to doubt that the growth we’re seeing in this economy is what it’s cracked up to be. Maybe we’re wrong.”

Yes, the rose colored column (as d.a.n. has so appropriately named it) is always pushing good financial news, but it is a dishonest claim. The good news really only applies to the wealthiest segment of our society. Liberals are not wrong on this subject. Everyone but the wealthy is struggling in America, hence, we see recent articles like this one:

More Americans Turn to Soup Kitchens
America’s Second Harvest Is Helping More Than 25 Million People, an 8-Percent Increase Over 2001

Posted by: Adrienne at February 27, 2006 1:20 PM
Comment #129938

The stock market has a great deal of randomness, but the odds are in your favor. Over time, the value of your investments increases. We always make the mistake of looking at falls from peaks. If you made the mistake of investing all your money in stocks between January and March 2000, you are still underwater. Of course if you bought at the valley, you have a great deal more money. But those who try to time stocks end up with holes in their shoes.

If you invest every month in a reasonably diversified portfolio you almost always make money. An investor who did this from in the last ten years has more than doubled his money, even with the downturns from 2000-2002. Sure you bought some stocks during the overpriced market in 1999, but you also bought during the down times and over the period you did all right.

People lose money in the market when they make a couple fundamental mistakes. Greed/fear is one. People tend to buy stocks when they are already high because they want to get in on the payoff (greed) and they sell them when they are already low (fear). Another is lack of diversity. You can’t guess which stocks will do best, so you need a variety.

People who got screwed by Enron made this latter mistake. Even those with Enron pensions had options. As part of their pension plans, Enron employees had to keep the part of their portfolio contributed by Enron in stock of the firm. Their own contributions and earnings (which accounted for about 2/3 of their portfolios) they could diversify. Most did not because Enron seemed such a good deal. This is just a bad mistake.

U.S. Stock regulations are already among the strictest in the world and our markets are fairly transparent. Many foreign firms don’t list on U.S. exchanges BECAUSE of the reporting requirements. You can’t protect people from themselves, however.

Some people should stay away from investing in stocks. They don’t have the temperament. Notice I didn’t say knowledge. That also is essential, but temperament is more important. If you go crazy each time you lose 10k or get exuberant when you make it, you may not have the temperament.

In the long run (5+ years) you will win if you stay in the game and follow some simple rules. But the ride can be rough.

Your porfolio should also be diversified internationally. My favorite stock in Compania Vale do Rio Dolce (RIO). That is my tip. It is still a great investment.

Posted by: Jack at February 27, 2006 1:29 PM
Comment #129940

Thanks for the link Vihar. Krugman’s point of a historical relationship between rising inequality and corruption really fits what we are seeing.

Posted by: Schwamp at February 27, 2006 1:31 PM
Comment #129961

Jack,

I just want to offer an observation about those screwed by ENRON.

Talk to a group of Texas teachers sometime about ENRON. It seems a significant chunk of the teacher retirement fund in Texas was lost on ENRON investments made by an appointee who was in charge of that fund. The teachers had no control over the fund and could not ‘diversify’ there portfolio. They just got screwed.

RGF

Posted by: RGF at February 27, 2006 2:48 PM
Comment #129964

The corporate scandals which were revealed in 2001 (to include Enron) just months after Bush’s inaugural… well … let’s put it this way: The trials in these matters talk about dates WELL BEFORE January 2001.

So, I think we’re starting to admit how the meteoric rise of the stock market in the 90’s took place. It got a little momentum and then execs felt the pressure to keep up by publishing false financial reports. Of course the Clinton administration didn’t want to piss on good news! Why investigate good news??!!! Why not just hope that everything crash a handful of months after leaving power and then blame Bush for years of Clinton turning a deaf ear to an epically loud and obvious problem? It’s the Clinton morality in all its glory!

Posted by: Ken Cooper at February 27, 2006 2:54 PM
Comment #129968

>>Of course the Clinton administration didn’t want to piss on good news!

ken,

I think the Boxer Rebellion and WWII and Korea and the great depression and Viet Nam and our being in Iraq and, and, and…are Clinton’s fault…let’s impeach that sucker!

Posted by: Marysdude at February 27, 2006 3:10 PM
Comment #129970

Ken Cooper,

The accusation in your last comment is absolutely rediculous. Stunningly so. We are TO THIS DAY still trying to get to the bottom of all that ENRON, WORLDCOM, ADELPHIA pulled.

WE know this:
Enron gave MOST of it’s political backing to BUSH. Not all, I grant you, but MOST.

BUSH then pushed for an enrgy bill ( and GOT it)that specifically legalised the same kind of secondary market tactics that Enron used to manipulate and pilfer California during the artificial power problems they were having immediately prior to Enron’s collapse. It would have allowed the same kind of manipulation on a FEDERAL level had ENRON survived the collapse.

CLINTON NEVER KNEW BEANS ABOUT WHAT ENRON WAS UP TO!!! The problems were NEVER “epically loud” or “obvious” BEFORE ENRON Collapsed! That’s why the crime is called FRAUD! Get REAL!

Your post is the first I have EVER heard of anybody trying to pin ENRON on “Clinton Morality.”

It just doesn’t wash. Your argument is preposterous.

RGF

Posted by: RGF at February 27, 2006 3:14 PM
Comment #129992

SE-
In a horse race, there’s no way to tell what’s going on while the race is being run. In the Stock Market, you’re dealing with companies that have income, debt, and other facts. What went wrong with Enron wasn’t that people picked a bad investment, but instead that they had picked a bad investment made to look good by fraud and financial manipulation.

There is always risk in business, but typically that risk is not so arbitrary as a game of cards or roulette, nor so uncertain or one shot as a horse race. Typically, at least some of that risk can be anticipated and acted upon. Enron investors were not allowed the opportunity to learn of the risk their wealth was in until the company cratered. What’s more, this wasn’t unexpected- the executives managed to loot the company and prevent the little people from getting out of the losing game before they were out.

We should not allow such things to become the common character of our economy. Why invest then, or take the kind of risks needed to keep our economy fresh?

Posted by: Stephen Daugherty at February 27, 2006 5:03 PM
Comment #130006

Stephen

I am just an ordinary guy without special information or connections. I have invested in stocks since 1991. I have not made a fortune, but I have done well. I have lost money on some things, but made up for it - and more - in others. It is possible to do. The game is not fixed.

Anybody who puts too much money in one investment is a fool and a fool and his money are soon parted. An investment in any ONE stock is too risky for anyone. You don’t have to know a thing about Enron to know that.

Re Enron

I don’t blame Clinton, but you can’t blame Bush. Most of what happened in Enron happened before Bush took office. The energy bill did nothing (obviously) to help Enron and the Bush people did nothting to protect the firm.

Re losing money on Enron
People invested in Enron because they wanted to make greater than market returns. With high returns come high risk. When something is too good to be true, it probably is. If Enron made up too big a part of anyones portfolio, they should have sold some off. They would probably have made a profit. If the teachers’ union fund was overinvested in a risky firm (and it always was a risky firm) they should hire a new manager.

This is how the risk works. You invest in five firms at $10 each. You figure that four will go out of business entirely and you will lose all your money, but you also figure one will go to to $100. If you invest in only one, you could get sell for get $500 or you could lose it all. Chances are better for losing it all. Which dominates, prudence or greed?

Posted by: Jack at February 27, 2006 6:02 PM
Comment #130028

>>There is no difference picking a stock after pouring over the Wall Street Journal than picking your favorite horse at the local racetrack after studying the tip sheet.

se,

If horse racing wasn’t monitored, folks would stop betting. If Wall Street isn’t monitored, investors stop investing. The key is ‘trust, but varify’. ENRON is not the only culpable corporation. It is one of many. The ‘free market’ only works with supervision.

Good financial news is not that the market is up or that the market is strong…good financial news is that you can believe those who inform you of corporate value. As long as CEOs are rewarded for driving companies into bankruptcy and committing fraud is rewarded with fines or stays in pussy-prisons, good financial news will be suspect.

Posted by: Marysdude at February 27, 2006 7:28 PM
Comment #130032

This just in:

Christian Science Monitor reports: “From 2001 to 2004, median income fell 8 percent for householders under 35, a survey shows.”

This is exactly what I have been railing about for years. My 15 year old daughter is going to earn less in the early part of her career, and see sustained high levels of taxation for most if not all of her working life, thanks to the combination of Repubicans and Clinton’s whole hog free trade policies without conditions or level playing fields, and this Republican government’s doubling our national debt to over 10 trillion dollars by the time Bush leaves office.

My daughter is taking Chinese, she is keeping her options open. I am so very proud of her wisdom at such a young age.

Posted by: David R. Remer at February 27, 2006 7:43 PM
Comment #130035

SE
Gee thanks for the hot tip. Don’t know how I’d ever make any money if it weren’t for the insight and kindness of folks like you.

Posted by: richard at February 27, 2006 7:47 PM
Comment #130062

Ken Cooper-
Fun Fact: Bush hired a lobbyist to run the SEC who previously had campaigned for Accounting Reform. That “reform” allowed companies to get away with much looser accounting, including the accounting that allowed Enron to take place. The standards up to that point would have prevented much of the shenanigans.

The deregulation that the Republicans championed also encouraged conflict-of-interest generating mergers between financial institutions like banks and brokers, meaning the people giving loans to companies were also the ones with the interest in selling their stock. That played a key role in the financial abuses. Clinton did not get in the way of the Republicans on these things. I wish he had, and I think less of him as a president for not doing so. However, as much as Clinton allowed this, the Republicans promoted it actively, with the constant refrain that it was good for business.

Both Clinton and the Republicans failed to realize that markets depend on information, and undependable environments for information make markets inefficient, because people will not spend optimally if they cannot be sure that their risk won’t be swallowed in an out-of-left-field business failure or on a product and service that turns out to be much less than ideal.

Do us a favor, Ken- when you find it so easy to sling mud back our way, look down and see how deep you are in it yourself first.

Jack-
It seems to me that you’re blaming the victims of Enron’s fraud for not realizing it was a fraud before the numbers started turning sour. I think that’s an unfortunate position to take.

The game is fixed, as long as insider investors and board members can conceal the ill-health of their financial statements behind walls of false corporations, and off balance accounting. It’s good to be diversified, but what good is that if problems are industry-wide, and stock collapses hit all your stocks? Then it’s only different kind of gamble, instead of the calculated risk it should be.

What you accept here would be tantamount on the street to you accepting getting pickpocketed every other week. You are paying good money into your stocks and bonds in order to make money back on the basis of the growth potential you see in a company. If you are denied the means to accurately judge that, doesn’t it just amount to a con game? Caveat Emptor may be a considerate warning, but it’s not an invitation to invest confidently.

Posted by: Stephen Daugherty at February 27, 2006 8:26 PM
Comment #130067

Jack,

I, too, have been an investor for approximately the same period of time as yourself. What you say is both true and wise. I may disagree with a lot of what you say, but it is clear that what happened at Enron is nobody’s fault but the greedy corporate officers involved such as Fastow, Lay et al. The same can be said of the shinanigans at Adelphia, Worldcom, Arthur Anderson, etc. etc.

But there is a related issue here. Enron used a great deal of money and influence to achieve favorable legislative goals. While it is true that they collapsed before they could realy take advantage of that, it is, and should be, disturbing that did that just the same. I don’t wish to blame either Bush or Clinton for this and I beleive this problem is essentially OUTSIDE of plitics. What we should learn from this, is that we, as responsible Americans, need to be sure that corporate America does not take advantage of us in a way that undermines the health and stability of our country or our society. After all, as you know from being an investor, corporations are generally focused on the bottom line. That’s how we want them to be as stockholders. Unfortuneatley, that means they can get so focused on that goal that they forget they are entities made up of people just like the rest of us. That’s why we have laws, courts, lawyers and judges.

RGF

Posted by: RGF at February 27, 2006 8:37 PM
Comment #130080

RGF

Yes.

It is a constant battle to keep ahead of the crooks. I don’t mean to make a depressing statement because I don’t think it is. I always ask people if they ate yesterday and plan to eat again today, does that mean that they made a mistake yesterday. Eternal vigilance etc.

A while back I invested in a firm called Loral. When I found out how politically active the firm’s management was, I sold. I don’t follow stocks after I get rid of them, and I don’t how well it did, but it is not a good idea for anyone for firms to get too involved in partisan politics.

I believe in transparency. We have legal safeguards, but the best safeguard is the market and smart investors.

Stephen

I am not condoning what Enron executives did. It was illegal.

But no matter what the condition of a firm, investors should not put too many eggs in any one basket. I understand the people with Enron provided pensions are a partial exception. But other investors were being greedy, stupid or both. I have little sympathy for anyone who lost more than 5% of his portfolio because of Enron.

Posted by: Jack at February 27, 2006 9:16 PM
Comment #130083

>>What we should learn from this, is that we, as responsible Americans, need to be sure that corporate America does not take advantage of us in a way that undermines the health and stability of our country

RGF,

You must be talking about Wal-Mart…

Posted by: Marysdude at February 27, 2006 9:21 PM
Comment #130085

>>I believe in transparency. We have legal safeguards, but the best safeguard is the market and smart investors.

Jack,

I don’t know where you stood on Cheney/Bush’s Social Security reform, but if you were for it, would’t this statement be a recant? How could young, inexperienced citizens, with little education be expected to venture into the market?

Posted by: Marysdude at February 27, 2006 9:29 PM
Comment #130088

I think that SS is going belly up and soon. Private accounts would help to save it. We dumber investors can piggy back on the smarter ones by investing in index funds.

The USG already has a pretty good system for its own employees, called the thrift savings plan (www.tsp.gov). I would give private workers some of the same sort of options.

Posted by: Jack at February 27, 2006 9:35 PM
Comment #130111

Marysdude,

Walmart is a good example. From an investors point of view, they would look good. Their employment practices are reprehensible and they create markets which sustain the sweatshops in the third world. But anyone invested in them must be enjoying the returns!

RGF

Posted by: RGF at February 27, 2006 11:23 PM
Comment #130200

>>But anyone invested in them must be enjoying the returns!

RGF

Posted by: RGF at February 27, 2006 11:23 PM

RGF,

That is more true for early investors than later ones, but Wal-Mart is also a major poluter, a union buster, a major hirer of illegals and many many more things that makes me think their CEO, Lee Scott, doesn’t like America or Americans very much…he kinda reminds me of Cheney/Bush. He likes the IDEA of America, but not America.

Posted by: Marysdude at February 28, 2006 12:04 PM
Comment #130212

Marysdude,

That brings up another point. You umention illegals in your referrence to Walmart. Until recently, I lived in Austin. I just moved out of there a few months ago. I witnessed a problem there I was previously unaware of. The abuse of illegal labor by major construction firms un our country.

The neighborhood I lived in was still being expanded and many new homes were being built. The company building them was a company named ‘Miller.’ They were recently bought out by DH Horton. I hope the new owners are not up this trick, but the old company sure was! It goes like this: They typically build neighborhoods in sections several blocks square. The homes go in in stages for things like laying foundations, framing, siding and interiors etc. A great many of the construction workers are Mexicans, some legal but most illegal. Rather than paying these crews their final payment when the homes are completed, the forman calls INS and the laborers have to scatter or be picked up, possibly jailed but definately deported.

I had hoped that this practice was rare and not widespread. I recently visited Mexico where I ran into a couple of guys fresh back from the US. One had been done this EIGHT times and the other SIX. They had endured this treatment in Kansas, California, Arizona, Texas and Louisiana. This treatment IS widespread and any American buying a hoouse in a neighborhood where this practice is excercised reaps the reward in reduced construction cost on their house from the theft. I want more Americans to be aware that this is going on because I want it to stop.

RGF

Posted by: RGF at February 28, 2006 12:41 PM
Comment #130264

>>I want more Americans to be aware that this is going on because I want it to stop.

RGF

Posted by: RGF at February 28, 2006 12:41 PM

RGF,

I am not surprised, but was not aware of this neat trick. I’ll join your chorus…how about other posters…don’t you all think this is sick?

Posted by: Marysdude at February 28, 2006 2:31 PM
Comment #130337

Jack-
The thing that bugs me about privatization is the untrammelled optimism with which these people believe this radical change in policy would work. It’s the same untrammelled optimism associated with GOP tax and military policy- that is, one that ignores the facts if necessary to say positive things about its subject.

That’s not the kind of governance we need, one based on a conflict of interest. That’s what will be central to any fund management for this system. From what I hear, the Bush plan is to have people able to invest in certain funds. Well, those funds are going to be flood with SSI money, and most people will leave it up to the professionals. What will the professionals do, without proper regulation? They will make decisions oftentimes that benefit their friends.

Already with Enron, we see what happened with the pension funds. This seems little different. I think Enron went a long way to dulling the excitement about private accounts, so much as it existed.

There are no individual guarantees with the stock market. Social Security is an individual guarantee. I don’t think people should have to live their elder years in destitution simply because they trusted the wrong brokers or agents.

Posted by: Stephen Daugherty at February 28, 2006 5:34 PM
Comment #130660

rgf, if those builders where doing that practice what a dirty cheap trick. is it possible that the el hefes that bring them in would do that and blame the builder.since they have a class system much worse than ours.like the film the treasure of sierra madre with mr bogart and mr holt! they work on a oil well and the el hefe steals the money? and the find him in a bar and beat him up and get the money back! possible!

Posted by: rodney brown at March 1, 2006 9:25 PM
Comment #130696

stephen d.yes in principle it is a individual guarantee, but just like any other pension plan when the money is gone so is the guarantee. i get a statement every year from social security, but in the last two years it states, from the trustees of social security in the year 2012 social security will pay out more than it takes in!! i always understood that it was a safety net and not as a full means to rely on. ive put my eggs in a lot of areas not just one basket but i dont want to sound greedy but i sure would like for me or my wife to get the 76,000 i paid in. of course they never gave me any intrest on it. and almost every year the full retirment age goes up now it is 67 .i was not crazy about mr bushs idea. but the democrats did not do anything. we need to face it head on. you guys think it is bad now .how about in 15 years when the well is dry in social security.ask most people under 28 and they say social security is a scam. we need some really good people to get us through the crisis.can you think of any??

Posted by: rodney brown at March 2, 2006 12:55 AM
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