Down with financial entrepreneurs
TEXT OF COMMENTARY
Scott Jagow: The problems in the credit market have pounded the stock market value of banks, insurance companies and asset managers in the U.S. and Europe. $860 billion in stock market value has just vanished in recent weeks. Commentator Robert Reich isn't surprised.
Robert Reich: America is the greatest entrepreneurial nation in the world. But there are really two kinds of entrepreneurs here — product entrepreneurs and financial entrepreneurs — and only the first kind really builds the economy.
Product entrepreneurs find new ways of satisfying customers. Financial entrepreneurs find new ways of. . . making money.
Thirty years ago, finance was the handmaiden of American industry. Now industry is run by finance and we're paying the price.
Competition in the real economy generates better products. But competition in the financial economy doesn't do squat. For every speculator who wins, there's another who loses.
Now financial entrepreneurs say they make capital markets more efficient, but the added efficiencies are often minuscule — beating rivals by a tenth of a second or coming up with ever-fancier derivatives, collateralized loan obligations, mortgage-backed securities. The results are ever harder to value.
Hedge fund managers say they make financial markets more stable by diversifying risk. Baloney.
When something goes wrong in one small slice of the economy like the subprime mortgage market, their highly-leveraged portfolios make the whole economy shake.
Private equity moguls say they're freeing corporations from having to meet quarterly targets, but their deals weigh down companies with so much debt they have to focus on short-term cash flow more intently than ever.
So what's the answer?
First, force the hedge funds and private equity partnerships to disclose what they're doing so investors know the real risks.
Second, bar pension funds backed by government guarantees from investing in them.
Finally, level the playing field. Stop giving financial entrepreneurs huge tax advantages over product entrepreneurs. Treat their compensation as income, not capital gains. And tax their partnerships that go public at the same rate public corporations are taxed.
Jagow: Robert Reich was Secretary of Labor for President Clinton. He's teaching at the University of California Berkeley now.