Beyond casino capitalism

A new social alliance can only stop an orgy of speculation.

The figures are staggering. Unscrupulous speculators use untold billions of dollars to generate big gains in stock markets and commodities like food and oil. I used to refer to it as “casino capitalism,” but then I learned that gambling is more tightly regulated than this type of speculation. Nothing will be done to stem the rot if nothing is done. Capitalism as a whole will be jeopardized. We need to work together – trade unions, governments, conscience-driven employers, and political leaders from all parties to turn things around. That’s quite a statement coming from a former class warrior.

When I was growing up, collective bargaining was viewed as a compromise between communist trade unions and capitalist employers. Agreements were merely a pause in the class conflict, not the start of a nice and fruitful partnership. Anyone who mentioned collaboration ran the risk of being labeled a class collaborator. In practice, relationships between consenting adults were frequently close and trusting. The rhetoric, on the other hand, was often harsh and hostile.

This was never my favorite view. The company’s paternalistic yet progressive stance impressed me as a child and the unions’ mainly cooperative spirit. Workers were given stock options, financial incentives to send their children to university, help for occupational health, and various other advantages. I also admired West Germany’s great postwar prosperity and Sweden’s long-term success, both of which were built on collective bargaining and “social” collaboration. I saw that Continental social democracy was better than the divisive “them and us” mindsets that harmed many industries and businesses in the UK.

As a result, throughout my decade as general secretary of the British Trades Union Congress, I made a point of promoting the benefits of European-style workplace partnerships. Negotiating with successful corporations, I argued, was far more fruitful than dealing with unsuccessful ones. I also warned my fellow trade unionists that class warfare was obsolete since societal changes had resulted in a massive increase in the middle class. If the UK was to keep up with its neighbors, it required far better work relationships.

Over the last 25 years, the entire thrust of modern capitalism has been to align firms with the interests of shareholders. However, global changes in contemporary capitalism are wreaking havoc on those who still believe that collaboration is the best path ahead. These investors are frequently aiming for a quick profit. “A long-term transaction is a short-term deal gone awry,” one prominent investor told me.

As a result, corporations’ accountability to shareholders has been significantly tightened, with senior executives frequently being compensated in stock and stock options based on shareholder returns. This has had a significant impact on the psychology and motivation of large-company executives. They used to have a variety of goals. Of course, they wanted the company to succeed, but they also recognized its importance in the community and valued the opportunity to work with labor unions and the government. Managers in certain situations also understood their responsibility to their staff.

Managers’ pay was determined by various factors, including increasing market share rather than exclusively by shareholder value. In short, they had to answer to multiple stakeholders in the company, not just the shareholders.

The first, second, and final goals of management are to maximize shareholder value. Otherwise, the company’s reputation as a good investment site may quickly deteriorate. In the English-speaking world, this is no longer the case.

After some poor company results from a few years back, I recall what happened at Unilever. Other stakeholders, not simply shareholders — or, at least, not just their short-term needs — were of interest to the company. The financial institutions moved in once the bad results were announced, thereby removing Unilever’s unique Anglo-Dutch protections against takeover and staff changes. Shell, like other well-known companies, has been through a similar ordeal. These types of examples please the financial community because they demonstrate who is truly in power.

Of course, the financial industry isn’t just for the super-rich. It’s also a group of people who manage pension funds and life insurance funds for many regular people. Even when inflation is only 2% to 3% a year, they demand large returns, looking for investments with 20% or more yearly yields. Private equity firms frequently boast about their ability to generate such large profits. Since 1987, the private equity firm KKR claims to have made a 27 percent annual profit. Other investment vehicles, such as hedge funds boast equally impressive returns.

The provisional wing of the financial services world is a private equity and hedge funds, but they aren’t the only sharks in the sea. A complicated array of financial entities is on the lookout for unsuspecting corporate victims. To maximize profits, they take advantage of tax incentives, enormous leverage, and merciless dispositions. Prices rise as a result of speculation using derivative instruments and other financial items. It’s a speculator’s economy, where the market’s drive for fast economic profits trumps long-term mutual responsibilities. It isn’t just a concern for stock exchanges and financial derivatives. Speculators have turned their attention to commodities, such as oil and some foodstuffs, while property market yields have slowed.

Few individuals could have explained how a hedge fund functioned, what a derivative was, or how private equity “strips and flips” just a few years ago. Given that we now know they were naive about the risks of the sub-prime mortgage market in the United States, such ignorance appears to have spread into the senior echelons of several of the world’s major institutions.

Furthermore, until a few years ago, the business had a generally positive reputation. For many years, the mainstream political attitude in Europe has been that industry should be free of regulation and red tape. It was self-evident that corporate taxes should be reduced and that wealth inequality was unavoidable because any attempt to limit the wages of bright executives would merely lead to their migration to nations with the best pay and lowest taxes. These beliefs were not limited to political rights.

At the very least, there are signs of progress now. The sub-prime mortgage crisis and discoveries of major banks investing in bonds based on dubious mortgages have tarnished the image of financiers. Horst Koehler, Germany’s president, recently labeled global financial markets as a “monster.” Angela Merkel, Germany’s chancellor, favors the creation of a European credit rating agency to compete with those in the United States and stricter requirements forcing banks to have a greater capital reserve ratio.

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