U.S. Shift from Production to Speculation Behind Today’s Crisis

In their Feb. 7 “Wall Street on Parade” column, Pam and Ross Martens argue that losses suffered last week by four Wall Street banks in intraday trading—Goldman Sachs, Citigroup, Bank of America and Morgan Stanley—is intimately related to the shift in the U.S. economy that occurred beginning in the late 1970s, from productive economic activity to financial speculation. Noteworthy, they point out, is the fact that these same banks, which were bailed out during the 2008 crash,  have been spending billions buying back their own stock.

That same buyback strategy has also been taking place in publicly traded companies in the S&P 500 Index, to the tune of $2.7 trillion over the past six years. Some of the buybacks, the Martens say, simply offset insider selling or stock awards to executives; nothing goes to growing or innovating the company.

The Martens quote from one William Lazonick who, in the September 2014 Harvard Business Review attacked the buyback policy, arguing that the money should have been put into job creation and innovation in the U.S. economy. Instead it was used to buy back shares “for what is effectively stock-price manipulation.” The U.S. has shifted, he says, from a “value creation to a value extraction” model.

From the end of World War II to the late 1970s, the U.S. practiced a “retain and reinvest” approach, in which earnings were reinvested in increasing a company’s capabilities and those of its employees, providing workers with higher incomes and job security. In the late 1970s, Lazonick explains, the “downsize and distribute” regime took hold, focused on reducing costs, and distributing freed-up cash “to financial interests, particularly shareholders,” leading to employment instability and income inequality.

On Monday, the Martens point out, bank shares’ value has shrunk enormously, but executives have walked away with multimillion-dollar payouts from selling stock. Note the case of Citigroup’s Robert Rubin, a former Treasury Secretary who sat on Citigroup’s Board “after helping push through the repeal of Glass-Steagall.” That repeal, Martens says, allowed Citigroup to become a “Frankenbank, and require the largest taxpayer bailout in U.S. history.”