Saturday, October 24, 2009

Proof of Entropy

Way back in early 2004, when I first started playing with a blog, I wrote a piece titled 'The Entropy of Capitalism'. Positing that Capitalism is constantly in a state of entropy. In other words, that without careful attention, it will naturally spiral into corruption and chaos. After the last year of financial ups and downs, I went back and re-read it. I found it just as valid now as it was then. Maybe more so. Certainly we have even more examples of how wrong our financial system can go in a short period of time.

I have always heard, from the Conservative side of the aisle, that the 'Free Market' is the way to go. That we should setup some basic, minimal guidelines and just let corporate America manage itself. After all, the Free Market will adjust. Right? Yeah, sure! I think we can finally put a fork in that particular bit of idiocy. Let's be clear. Capitalism runs on one thing, and one thing only . . . Greed. That one vice is the fuel that makes the whole thing work. Now, it's easy to say that greed is good and inspires people to work and push harder and that's true to a degree. But only to a point. Beyond that point it truly becomes one of the seven deadly sins.  And that is the problem. It can be deadly. Greed is a creature that will happily begin devouring itself and only discover the problem as it bleeds to death. And this is what our entire financial system is based on. Just look at Wall Street, everything is based on quarterly profits and growth. Quarter over quarter and year over year. Fail to keep your growth rate solid and, even if your company is stable and profitable, your stock will plummet. More, more, more. Now, now, now! Tell me how this system can be trusted? It's a gambling addict that we're told can be trusted to walk past the Bellagio with a $100 in his pocket.

Need examples? Junk bond collapse in the '80s. WorldCom. Enron, Maddoff, Mortgage crises, and this is just off the top of my non-economist head! Over and over this supposedly self-regulating financial system has attempted to devour itself. Either with monster corporations doing ridiculously stupid things or entire sectors of the economy succumbing to temporary insanity. Or in the case of Maddoff type incidents, people who are happy to destroy the lives of others, just to add to an already bulging bank account. Enough is NEVER enough. It might be different if these implosions only hurt those who took the risks, but the reverse is often true. In many cases, the masterminds behind these financial nightmares are little more than inconvenienced when things go south. These are the people who already have millions in personal wealth and iron clad, platinum parachutes. Thus allowing them to get out with only a slight tarnish on their reputations to show for the damage they've caused. Meanwhile, everyday people, i.e. the ones that do the actual work that generates corporate profits,  see life savings and jobs vanish almost overnight.

We would all like to think that the government might be of some use in reigning this in, but it's also part of the problem. Money has been corrupting politics more with each election. Campaigns that once cost candidates hundreds of thousands or maybe a million dollars now require tens of millions just to be in the running. Where does all this money come from? It certainly isn't from individuals, or at least not the majority of it. It's coming from corporate America. Individual companies and entire industries are dumping obscene amounts of money into the coffers of political candidates. Explain to me how this cannot provide a corrosive and corrupting influence on local and federal governments? How can a candidate not feel beholden to a corporate lobby that dumped massive amounts of money into their 'war chest'? It sure wasn't donated out of generosity. They expect 'their' candidate to support and protect them. Let them slide when they are under scrutiny and push through bills that benefit them. Now you might say that this is no different than any individual might want. Theoretically this is true. But how many families can inject a million dollars or more into a campaign and support dozens of highly paid, full time lobbyists? Do you note the imbalance?

The problem is that these corporations hold ridiculous amounts of sway on our political system. Totally swamping any grass-roots citizen movement. One of these groups might demonstrate and inspire letter writing campaigns to clean up pollution in a river, but how much chance do they stand against a huge chemical company who's spent decades cultivating close relationships with dozens or more members of Congress? Exactly. Experts can smile condescendingly and explain that Capitalism is a financial system and not a political one. But the truth is that this distinction is becoming more blurred every year. And any argument that a company represents thousands or tens of thousands of workers is, ridiculous. A person's job is not their entire world view. For example, do you really think every service member supports the war in Iraq? Simply working for a company doesn't mean you support the policies of the Board of Directors. The reality is that a corporation's millions are really only put into play to represent the top executives and perhaps the major shareholders. Essentially an Oligarchy. A relatively small group of elites controlling the revenue output of a multi billion dollar corporation. Not exactly what I'd call Democracy in action.

In the late 19th century, Lord Acton gave us one of those truisms that are as unyielding as gravity itself. "Power tends to corrupt, and absolute power corrupts absolutely." And in America, money is power. In this country, enough money can fix or cover up almost any problem. And enough money can turn pretty much any head. We see it over and over in the news. And we all know that what we see is only the tip of the iceberg. It's only when they are caught that we even know about it and you and I both know that only a fraction are actually being caught.

As the current healthcare reform debate rages, it's surprising to no one that many politicians who are fighting hardest to stop reform are the ones who've gotten huge financial injections from the Health Insurance Industry. I'm not claiming that anyone who got a check from Etna is an insurance company drone, but how can you trust anything they say or do when you know they took a huge donation? Maybe they are completely ethical and just standing up for their core beliefs, but the seeds of distrust have been sown and their motivations will now always be in question.

Today, top executives in the major financial corporations make seven figure salaries with bonuses that sometimes exceed their entire yearly income! These are the people who made and approved the decisions that led to the most recent, global financial crisis. These, supposedly, intelligent financial minds managed to do something criminally stupid and cost the world economies dearly. But did it hurt them? A few, maybe. But the vast majority can go on about their days, just as they did a year ago. All the risks they take are with someone else's money. If they do well, they get bonuses that dwarf the LIFE EARNINGS of the vast majority of Americans. If they screw up, even as massively as they did this time, the worst most will face is that they might not get their bonus this year. They'll just have to get by on their paltry million dollar salary. Where is the motivation to properly weigh risks? Why wouldn't they take huge gambles, when they know they have nothing to lose? Sure, some poor schmucks who agreed to loans they should never have been offered in the first place will lose their home and declare bankruptcy. So? Not someone that lives in his neighborhood! Nobody he knows!

This is not a system that can police itself, much less be trusted as the bedrock of our nation. In fact, I hesitate to trust any of these clowns with my lunch money! Many conservatives would like you to believe that the free market will always self-stabilize. And in a vastly macro view, maybe there is some truth to it. But from that same vantage, families and individuals are just buried in a pile of numbers. There's nothing on the balance sheet to show how lost homes and life savings destroy the lives of those who've worked hard for what they have. These are the kind of people conservatives like to call the 'Real America'. But every little 'correction' of the vaunted, unregulated, free market rings out with the sound of thousands and sometimes millions of broken lives and families. And once again, these same conservatives can step down from the lectern and go home to their secure lives and happy families. Upper middle-class, and in many cases affluent, families with comprehensive health insurance and no mortgage worries. I suspect this might alter one's perspective on life's priorities. Just a little bit.

So what am I saying? Am I calling for the end to Capitalism and a headlong dive into Socialism? (Real Socialism this time, as opposed to the phantom kind that so many uninformed Americans are whining about currently.) Of course not! For better or worse there are too many pluses to just discard it, even if that were possible. But Conservatives in particular and everyone in general need to wake up to the reality of our financial system. Capitalism is like riding a tiger. As long as we stay in the saddle and keep our wits about us, it's a beautiful thing! But if we let our attention wander, even in the slightest that lovely creature will eagerly devour us whole. It's time to stop looking at Wall Street through greenback glasses. I know how exciting it is to gather up the money as it rushes into the system, but sometimes that's an indication that the boat is sinking. The financial system and it's Las Vegas swagger needs to be bounded by checks and balances. We need a tight, intelligent framework of laws and regulations to childproof our nation's financial system. Because, make no mistake, in many ways these companies and individuals cannot be trusted unsupervised anymore than a two year old can be trusted with a match. Just like a child, these supposedly smart adults will become so mesmerized by all the shiny coins that they will completely ignore that the house is on fire.


  1. I think back to the movie "Wall Street" and the statement Greed is Good.
    I can see that wanting more is a motivator. But I have to agree with you that getting more has to be done in a way that is sustainable.
    I see the same kind of cavalier attitude in dealing with the environment. I remember having a guest over to my house one time during a particularly dry summer. I told them, when they were about to visit the bathroom to not flush if all was just liquid. I was told no way! NO WAY! It was more important that she was comfortable. It didn't matter that we were under such strict water restrictions that rationing was on the horizon.
    I am not one to fly a "The Sky is Falling' flag but we have to be cognizant of consequences. Financial, physical, personal. Most of us are going to be around for more than the next 3 months, and perhaps we can learn to act like it.
    This isn't about who is right and who is wrong. It is about coming together to find a better way.
    Keep writing, Erik. You have a keen ability to rise above the fray and offer a new perspective.

  2. This was from an email response:

    I would like to apologize for my brother, the communist. I can assure all that he was not raised that way, and can only hope that this is a passing affectation. Since Erik has steadfastly refused to publish my three previous blog rebuttals, and therefore I must assume other's conflicting responses, I'll elaborate on a few of the most obvious errors in his latest thesis.

    Wall Street does not punish companies that are "stable and profitable". Do I say this because of something I heard on the news? No, I say this because I own a few companies that are "stable and profitable". For example Dominion Resources (symbol D on NYSE) has shown consistent growth over the years in spite of being in a sector that is very much over-regulated. It also produces a sweet dividend exceeding the insulting and absurd 0.5% interest rate that my bank offers on savings accounts. Well managed, responsible companies are, and have always been a hedge against market volatility, and rewarded under our capitalist system.

    Citing a few specific examples: The Eron collapse had nothing to do with "Wall Street", but was the direct result of accounting fraud plain and simple. The author seems to imply that crime is a result of greed particular to the United States and therefore capitalism must be bad, when in fact accounting fraud is as old as the oldest profession. Then there are the "Mortgage crises". Clearly a result of people buying houses they could not afford with the blessing of congress and mortgage brokers more than happy to write the loans. A "Wall Street" problem? No, this had it's roots on Main Street and in a congress that sponsored the pseudo-corporations Fanie Mae and Fredie Mac. These entities buy mortgages on the secondary market, and sell them as mortgage-backed securities to investors. This is an important point. The government has essentially been selling their own dubious investment instruments to Wall Street. The "Mortgage crises" was a result of government intervention, mis-management and social engineering, not free enterprise or capitalism.


Please let me know what you think, even if it's to disagree.