Comment Cards November 23 - December 3

Q: If banks could invest half of their fractional reserve in stock, just enough to make a profit and still be safe, would that boost the economy? Do we need a boost?

R: First, the Federal Reserve would never allow banks to invest in stock while the government is insuring deposits. If the stock market took a nose-dive, it would mean the taxpayer would have to foot the bill. Banks would not be prudent managers of money if they were allowed to invest in risky instruments. Buying existing stock only inflates the value of existing stock, it does not provide more capital to the firm whose stock is being swapped back and forth by Mrs Moneybags on the east coast and Mr. Gotrocks on the west coast.

Q: Couldn't the rich just buy the majority of the production?

R: Yes. But if workers principally produced for the rich while subsisting on a bare minimum income, the resentment might destabilize society. A reason why the rich aristocracy in developing countries are always looking over their shoulders.

Q: Can someone, such as Bill Gates, take control over the stock market and raise the price on his or her own?

R: In a small way this has happened before. The Hunt brothers of Texas attempted at one time to corner the market in silver. They almost pulled it off.

Q: [Speculative]...Financial investments... [can]...wreck the mainstream economy. The value of the company's stock isn't valued enough [relative to the value of the firm's assets]. Who values it? The company owner? Could a friend sell it for cheap then share the profit with the friend in the end?

R: If you're thinking about "insider trading" , then yes it could happen that a friend (with enough $$) drives up the price of the stock and then sells it off, making a killing that he/she shares with the person inside the company that gave him/her special inside information. This is still illegal and the SEC would likely pick up on unusually large transactions by a single investor and check to see if he or she knows someone in the firm.

Q: If a business goes bankrupt do the lenders get their money back? Or does that business still have to pay back those loans? How does bankruptcy work?

R: When a firm files for bankruptcy, the courts will make a ruling as to which of the creditors will get how much of the value of the assets of the firm. The courts may decide that it is best to accept the offer of a third party to buy the firm, pay off the creditors and continue operating (i.e., a so-called re-organization). In any case, the courts may rule that some creditors get paid in full and others get 10 cents on the dollar of their investment. The riskier the investment, the less secure it is when a bankruptcy occurs. Banks and bond-holders tend to be first in line (they are lenders whose loans are secured by the property of the firm) and stockholders bring up the rear (they'll get what is left over). A recent ruling by a bankruptcy court held that the company could be freed from its contract with the unionized workers as a way of ridding itself of a cost burden that would allow it to continue to operate (supposedly under new management). The union is fighting this ruling.

Q: Instead of taking money out of the economy, why can't you add more money to the public sector to create a closer balance? Also are banks the only institution benefiting from money taken from the economy? If so, why is it important?

R: I think you're speaking of the discussion we had about the financial sector as opposed to the "real sector" where things are actually produced. In some sense, you're right. By taxing stock transactions (the Tobin Tax, for example) and placing tax disincentives to rapidly turning over securities, you will be removing money from speculative transactions, which will be made available to the public sector for vitally needed health, education and environmental programs. There is a sense that the financial tail is wagging the production sector dog. Ralph Nader had a watered-down version of this plan in his presidential platform, but then how far did Nader go in garnering the support of the electorate? 

Q: How come there were no checks and balances with Orange County? Should there have been, if that much money [lost on investments in unsecured derivatives] could make a county go bankrupt?

R: Remember, we are in an era in which the de-regulatory mania dominates the thinking of those in a position to supervise such investment decisions (with other peoples' money -- in this case, the taxpayers and pensioners). In some sense, the public allowed it to happen, because the taxpayers appeared to benefit by the extraordinary rates of return the Orange County treasurer was realizing from this investment strategy (in essence, betting on low interest rates). You can read more about it in this article from a British author (pp 19-32): http://www.ggy.bris.ac.uk/staff/information/ggatt/local_fiscal_crisis.pdf. 

Q: When Reagan deregulated, did he have support from the public? I know it was somewhat during the revolution[ary] movement.

R: I'm not an expert in the field of public opinion. A paper by an author at a conference at the JFK School of Government in 2001 addresses this question of public support for what he (or maybe she -- the first name is Pippa) calls "marketization", which simply is another way of saying deregulation. Her view is mixed -- the public's mood swings back and forth depending on how happy they are with public services. If they think government services are horribly inefficient then they'll swing toward deregulation. If they think that not enough money is spent on educating their kids and that the roads are in awful shape, then they'll support greater government budgets. Here is the article: http://ksghome.harvard.edu/~pnorris/acrobat/BRETTO~1.PDF.

Q: Do companies have to answer to SEC complaints, other than the annual reports?

R: You bet. But like everything else, political power can forestall investigations into securities fraud. It took Eliot Spitzer, the Attorney General of New York State, to aggressively go after lawbreakers in the investment sector. But this author of a paper delivered recently claims that the U.S. is better than Great Britain when it comes to supervising the activities of those who play with other peoples' money: http://mpsa.indiana.edu/conf2003papers/1032125724.pdf. I'm not sure I agree with his assessment.