#62 More about Creating Wealth. What’s Fair and What’s Game.

(Readers: Please note the blog about the 5th revolution in the US is constructed as a story. While not all chapters are linked, you might want to start at the beginning. There are also some sections of interest — #41-60. More about the blog and about the author. )

Scene: Italian restaurant. Jordan with long-time friend, aka “Ms” and daughter, Maggie, whom Jordan knows but has not seen in years. Conversation is continuation of Entry #61 and resumes after dinner is served.

Ms: “I’m anxious to hear your definition of ‘fair-and-square’, especially since the youngster here is married to a mutual fund manager.”
Maggie: “Yes, Jordan, please define ‘fair-and-square.’”
Jordan: “Alright. Let’s take mutual funds. Maybe the entire finance industry.”
Ms: “This should be good. You might manage to alienate both of us. Or have you forgotten I worked at a bank for a while.”
Jordan: “Well, here goes. Banking is very important to commerce. The securities market is also very important. Both functions can help the country’s economy grow.”
Maggie: “He’s OK so far…but really hasn’t said much.”
Ms: “Foot not in mouth yet so please continue.”
Jordan: “What I view as the problem is when the bank and the securities traders…”
Maggie: “Spell that please.”
Jordan: “T-r-a-d-e-r-s.”
Maggie: “I thought you might have said traitors.”
Jordan: “The problem is when banks and securities traders start moving money back and forth with no benefit to the populous.”
Ms: “What do you mean?”
Jordan: “Banks and securities firms should be focused on creating wealth for the country. When wealth is created everyone benefits.”
Maggie: “What’s wrong with just trading securities?”
Jordan: “Without wealth creation, then trading becomes a zero-sum game. In a zero-sum game, there is a winner…and a loser.”
Ms: “I’m still not sure what you mean. Define wealth creation.”
Jordan: “Simply put, taking raw materials and making something of more value that the individual parts.”
Maggie: “You’re talking about like making a car.”
Jordan: “Yes. There are lots of examples of manufacturing. At the end of the day, the value of the product is worth more than the raw materials used to make it…including any cost for labor.”
Ms: “What about medicine? Is that manufacturing. Certainly expensive and the cost is a whole lot more than the individual parts. What about banking? Hotels?”
Jordan: “All your examples are considered services. No new wealth is created for the country.”
Ms: “But some doctors make lots of money…”
Maggie: “…especially plastic surgeons in Southern California.”
Jordan: “Individuals performing a service – plastic surgeons to use your example – can get rich. But the surgeon got rich because money was transferred from one person’s pocket to another. No new wealth was created, merely a transfer of money between people.”
Maggie: “”Ok, what about securities traders. They way you’re talking, you probably consider them traitors with a ‘t’.”
Jordan: “If we are talking about trading stocks, I have no problem. Because stocks are linked to an organization that is supposed to make a profit.”
Maggie: “Pardon me for my ignorance, but what else gets traded besides stocks?”
Jordan: “There are trades where one person essentially bets interest rates will go up and other person bets interest rates will go down.”
Ms: “Sounds like gambling to me.”
Jordan: “Gambling is exactly what it is. Other than a few instances, such trades are no different than rolling dice in Las Vegas.”
Maggie: “Are you opposed to gambling?”
Jordan: “Not at all as long as…repeat as long as one gambles with his or her own money.”
Ms: “Whose money is being gambled?”
Jordan: “Yours.”
Ms: “Mine? How?”
Jordan: “Banks, mutual funds, securities brokers all use your money to gamble in a part of the market that has little, if any, regulation. And when the gamble goes bad…as it did in 2008…the firms beg for a bailout from Washington. Your money.”
Ms: “Why should they get a bailout?”
Jordan: “Because you and Maggie and many other people would get the royal shaft when the firm went bankrupt.”
Maggie: “That does not seem fair.”
Jordan: “For much of the securities trading, if you are the little guy, the game is the proverbial ‘Heads I win. Tails you lose.’ And if I lose really big, you lose even more.”
Ms: “So when things go really bad on Wall Street, they ask for some type of taxpayer bailout.”
Jordan: “You got it.”
Maggie: “Has it always been like this?”
Jordan: “No, not to this degree. Securities trading on Wall Street has always been subject to some insider trading and favoring the larger players. For many years most of the money these guys traded was their own. When it’s your own money, most people take less risk. That all changed in the 1990’s.”
Ms: “You talking about the repeal of the Glass-Steagall Act?”
Jordan: “Ms, sometimes you amaze me. Yes, Glass-Steagall was passed in the early 1930’s to prevent securities firms from trading with client’s money. It was repealed in the late 1990’s. Lots of shenanigans since.”
Maggie: “Why can’t congress reinstate Glass-Steagall?”
Jordan: “There was an effort after 2008-2009 crash but no real progress. Banks and investment houses basically bought off congress…pardon me…encouraged members of Congress to take the teeth out of the proposed reinstatement.”
Maggie: “Any chance now. We have a new Congress.”
Jordan: “Maybe. The revolution resulted in a new Congress. What the new Congress considers fair remains to be seen.”
Ms: “Jordan, you talk a good game. What are you doing to address the problems in this country?”
Jordan: “Haven’t lost your touch with the harpoon, have you?”
Maggie: “Yes, Jordan, what are you doing besides yapping?”
Jordan: “And just like your mother. Well, guys, the last few months I’ve been working on a project to help rebuild manufacturing in the US.”
Ms: “Doing this on your own?”
Jordan: “Project for POTUS.”
Maggie: “POTUS? What’s that or who’s that?”
Ms: “I forget how much knowledge one acquires with age. POTUS stands for President of the United States.”
Maggie: “Wow. That’s impressive. You’re a big dog.”
Jordan: “Part of a team working on the project.”
Ms: “When does it go public?”
Jordan: “Don’t know exactly but soon. I’ll let you know.”