Wednesday, 18 May 2016

REVIEW: "Makers and Takers: The Rise of Finance and the Fall of American Business" by Rana Foroohar

Book Review by Sapphire Ng

Makers and Takers: The Rise of Finance and the Fall of American Business
by Rana Foroohar
Crown Business
ISBN: 978-0553447231
Copyright May 2016
Hardcover, 400 Pages

Makers and Takers is a magnificently intellectual book. The book is packed with highly compelling arguments illustrating the “complex phenomenon” of financialization colonizing American business, complete with plentiful pertinent examples, solid research, and concrete statistics. The author fairly successfully achieves her goal of writing a book that “will speak to average Americans,” as she satisfactorily expound and dissect highly complicated matters into digestible forms, starting by elucidating the terms Makers and Takers—Makers which describe the “people, companies, and ideas that create real economic growth” who are “servants to Takers, those that use our dysfunctional market system mainly to enrich themselves rather than society at large.”

Foroohar aptly defined the concept of American financialization at the start of the book to avoid confusion“The growth in size and scope of finance and financial activity in our economy;” “the rise of debt-fueled speculation over productive lending;” “the ascendancy of shareholder value as a model for corporate governance;” “the proliferation of risky, selfish thinking in both our private and public sectors;” “the increasing political power of financiers and the CEOs they enrich;” and the way a markets know best ideology remains the status quo. The concept is further conveyed in a manner highly accessible to the American public—“It seems that we are all bankers now;” “our biggest and brightest companies have started to act like banks;and “financial thinking has become so ingrained in” American business.

The author's stance is clearly enunciated and strongly supported throughout the book, further reinforced with usage of partisan phrases including “corporate financial wizardry,” and “buyback wizardry.” Companies are said to misguidedly engage in “financial engineering rather than the real kind,” to imprudently switch from a “retain-and-reinvest” to a “downsize-and-distribute” corporate model, and to injudiciously shift toward balance-sheet-driven management.

Foroohar refers to the American community as a “burgeoning portfolio society,” and financiers as the “masters of our capitalist universe.” She quoted sentiments expressing that “today's stock market itself is not unlike a Ponzi scheme,” proclaimed that financialization “produces bad finance,” noted the transformation of asset management from “a profession with elements of a business” into “a business with fewer and fewer elements of a profession,” and indicated derivatives as the “financial weapons of mass destruction.”

The author very persuasively furnished readers with an abundance of company anecdotes in Corporate America that illustrate “disasters resulting from the linear thinking that financially driven management encourages.” Most prominently spotlighted was Apple under the tenure of Tim Cook falling prey to activist investors' demands—most notably by Carl Icahn, one of the “original barbarians at the gate”—engaging increasingly in stock buybacks and dividend payments, paying greater attention to “increasingly sophisticated manipulations of money,” and making “more money via financial engineering;” General Electric under its previous CEO, Jack Welch, qualified as “the country's largest nonbank financial firm, a Too Big to Fail entity,” its GE Capital division ballooned, and the company mirrored finance not only in corporate strategy, but also lower service tenures for employees.

Other excellent examples of failures resulting from financial engineering include that of the “Whiz Kidding of the American auto-industry;” the streamlining of Ford “orchestrated by a team of number-crunching analysts;”and the leadership of General Motors of “car guys” taken over by “bean counters,” and its resulting deplorable “product-safety crisis.” Foroohar also covered the decline of Xerox, the “once-great technology firm” Hewlett-Packard, “once-competitive firms” such as Kodak, and the breakup of Timken, a 114-year-old Ohio steel and bearings maker. She recounted the role of Wall Street in leading to the biggest municipal bankruptcy in American history of Detroit by “selling the city on $1.4 billion of complex and risky securities deals in 2005 and 2006,” of the Goldman Sachs aluminium-hoarding scandal, Too Big to Fail banks like Citigroup, Pfizer which behaves “more like a taker than a maker,” the “private equity tragedy” of Mervyn's, and the real human tragedy” that plagued Walmart's outsourcing efforts.

Foroohar continues. She cogently justifies the role of finance and Wall Street in hijacking commodities markets, our retirement system, and swooping in for benefits from the housing recovery. She interestingly cited an article titled “How Goldman Sachs Created the Food Crisis” as written by journalist Frederick Kaufman for Foreign Policy magazine, and highlighted the complexity and opacity of the commodities-linked derivatives markets and trading, and the effects on price volatility.

She noted the devastating consequences of private equity firms, designated as “nonbanks” or “shadow banks,” such as Blackstone Group on the real estate market—higher prices, “lower rate of home ownership,” and “swelling ranks of renters,” “high levels of property neglect, overcharging, and unfair evictions,” resulting in “new Pottersvilles,” and more importantly the enriching of Wall Street at the expense of Main Street. Foroohar also convincingly substantiates the contention that our dysfunctional retirement system is “hugely bifurcated along economic and social lines,” and one of the highly misleading tricks of finance—the advancing of “the cult of the expert.”

Foroohar superbly dealt with legislations and laws that facilitated the expansion of financialization; from the landmark 1919 Michigan Supreme Court case Dodge v. Ford Motor Co. that set a legal precedent establishing stockholders as the prime beneficiaries of the functions of a business corporation, the watering down of the Dodd-Frank Act and changing of the Volcker Rule to allow for “portfolio hedging,” and deregulation led by the abolishment of the Glass-Steagall Act and Regulation Q, to the Gramm-Leach-Bliley Act of 1999—that lowered barriers financial institutions faced in getting into real businesses, along with the provisions' linguistic loophole, the word “complementary”—the passage of the Commodity Futures Modernization Act (CFMA) in 2000 that boosted commodities speculation, and the legal shift from unlimited liability to limited liability banking. Additional rulings include the “relaxing of antitrust enforcement,” the legalization of large amounts of share buybacks, and the deregulation of interest rates. The role of the American tax code in the growth of the financial sector, and thus financial engineering, was also explored, along with “the politically sanctioned shift toward easy money and increased credit.”

The book is transcendent in its comprehensiveness. Intriguing and “rather complex financial strategies” such as the Double Irish and the Dutch sandwich are introduced. Historical perspectives regarding financialization are inserted, most notably the antithetical viewpoints of founding father Thomas Jefferson versus Alexander Hamilton. Taylorism, or the “efficiency theory,”—a quantitative approach to business, and “philosophy of completely separating labor and management”—and associations such as the Securities Industry and Financial Markets Association (SIFMA), an asset management trade group, are discussed.

A chapter was even dedicated to the premise that American business education is largely a “study of finance rather than industry,” that was yet again very adeptly substantiated and argued. Of one of the most fascinating points made was the “academic inferiority complex” originally suffered by business education, the way it came to develop “a notion of itself as a hard science,” and later became “prisoner to the received wisdom of efficient-market theory and neoliberal thought;” and the University of Chicago being at the epicenter of the “free-market, mathematical, model-oriented thinking.”

The assembling of expert opinions for the book is incredibly admirable. Most notably cited are Senator Elizabeth Warren, and Nobel Prize-winning economist Joseph Stiglitz. The journey, discoveries, and opinions of Andrew Lo, a professor at the Massachusetts Institute of Technology's Sloan School of Management, are also particularly interesting. Certainly most memorable is the opinion expressed by Karl Marx, that “the deep political economy of financialization” is considered to be “the last stage of capitalism, one in which a system based primarily on greed would eventually collapse.”

The author decently presented action plans throughout the book to tackle financialization, not only in chapter 11 as she promised to do so. She suggested to “simplify, simplify, simplify” and to increase transparency in our financial system to eliminate the prospect of financial institutions being “Too Complex to Manage.” Of other more noteworthy proposals include models for more participatory management, such as the co-operatives or the co-determination model; legislations that “encourage savings and the building of equity rather than debt;” to reregulate the financial sector, to induce “real” changes in Wall Street's business model, and to recreate “a tax code that stops rewarding taking over making;” and for the average Americans “who currently save via 401(k)s or IRAs,” “they should simply move their savings into programs that are dominated by low- or no-fee index funds.”

The book contains its share of metaphors that enlivens the text. Apart from the use of “casino” versus “restaurant” to refer to activities of the banking business that the author acknowledged was quoted from Warren Buffet, a particularly beautiful and effective use of analogy is found in the following sentence, “the financial industry is the world's ultimate power and information hub, the tiny middle portion of an hourglass that represents the larger global economy.”

Disclaimer: I received a complimentary copy of this book from Blogging for Books for this review. 

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