In the Arena

Killing Capital

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Kathleen Parker, sadly abused by our partners in television (CNN), has a good column today about the new documentary, Inside Job, which chronicles the 30-year sleaze tide that produced the 2008 financial crisis. I haven’t seen the film, but Parker will send me hurtling to the theater. Meanwhile, I hope you’ll go hurtling to the bookstore to buy The Death of Capital by Michael Lewitt, which is a passionate and detailed account of the investment bankers’ disgrace that also proposes some plausible correctives.

One should note that the title is not The Death of Capitalism. Lewitt is a capitalist, a fund manager, but a sane and moral one. He sees “capital” as a process–the making and lending of money, and its equivalents. Capital died in 2008 because the lending part, and the trust that is inherent for capital to function, seized up and would have collapsed but for some fast work by the financial priesthood (whose arrogant lassitude, he makes clear, did an awful lot to cause the crisis in the first place).

Lewitt’s theory is that the farther capital gets from direct, productive investments, the greater the likelihood that chicanery will occur. Over the past 30 years, the focus of investment banking has shifted from loans to actual manufacturers and service-provicers–although the best and most moral bankers still perform this essential function–to casino games involving momentary shifts in the value of commodities. By the 2000s, the “products” used to play those games had become completely alienated from the actual products that were being bet on. Lewitt also performs the valuable function of showing how the very same people who brought you conglomerate mergers in the 1970s and 1980s, and private-equity leveraged-buyouts in the 1980s and 1990s, brought you subprime mortgages and financial derivatives over the past 15 years. The full roster of their crimes is recounted here, the worst of which–in my opinion–was stripping out research and development divisions of the companies bought in leveraged buyouts because they didn’t produce immediate profits…which meant that American companies were constrained when it came to producing new products. The American way of business was upended: instead of buying for the long-term, the bankers were angling for short-term sales and profits. Lewitt, clearly no socialist, is a generous and supple enough thinker to credit Karl Marx with predicting this development.

For the past year, I’ve been arguing that the best way to control this sort of casino gambling is to tax it–and Lewitt proposes a graduated tax on financial transactions, a sophisticated mechanism that would impose a larger tariff on those transactions, like collatoralized debt obligations (CDO) and credit-default swapas (CDS), that are farthest removed from the most productive use of capital: lending money to companies for a new product line or the expansion of an old one.

The financial community will yowl that if we tax their gaming, the game will simply move elsewhere–to London, to Dubai. To which I say, good riddance! I’d rather see the next generation of young American financial geniuses concentrating on how to build a productive economy here–concentrating on making things rather than making bets.