Conservatives Can Save Capitalism

The unique form of American capitalism which has propelled the United States economic juggernaut is under assault. Corporate mismanagement and outright swindling just recently demonstrated by Bernard Madoff’s guilty plea, but unfortunately not limited to just his nefarious endeavors is giving ammunition for the progressives now in power to destroy what took generations to build.

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If they are to save capitalism Conservatives must advocate for a return of the owner rather than management oriented corporation, return to microeconomic banking, and just as importantly focus our attention on the deterioration of our values which are an essential element to our success. Carl Icahn, President of the holding company, Icahn Enterprises, honestly described the situation in the Wall Street Journal that so infuriates the American public when he said “The real problem is that many corporate managements operate with impunity — with little oversight by, or accountability to, shareholders. Instead of operating as aggressive watchdogs over management and corporate assets, many boards act more like lapdogs.”   America’s economic system traces it’s foundation to Adam Smith who believed that in pursuing self-interest an individual promotes the good of society, This idea was predicated on the concept that man’s interaction with his neighbors usually resulted in his tending to make favorable moral judgments rather than pure greedy ones. Yet today we hear about CEO’s building million dollar personal bathrooms in companies that were losing millions or giving themselves bonuses larger than the GNP of some nation’s while firing hundreds of workers from a failing corporation. How did this happen?   John C. Bogle, the founder of Vanguard Group, gave a speech at the University of Virginia in 2006 where he quoted the International Tribune columnist, William Pfaff, that capitalism suffered a “pathological mutation” in the late twentieth century. Up to that time capitalism could be defined as “owners capitalism” where management was dedicated to serving the interests of the corporation’s stockholders. In this classic period, stockholders directly owned the company and participated significantly in choosing the board of directors as well as management.   Corporation ownership began to change from “direct ownership” to “agency ownership”. Eventually there were more mutual and pension funds then there were actual stocks. Profits began to be diverted to fund managers and management rather than stockholders. Corporate executives began to manage corporations for their own short interest rather then for stockholders or long term gain. According to Mr. Bogle. CEO pay raise from 42 times the average pay of a worker to 340 times that pay by 2006.   A new skill developed during this period called “financial engineering”. Finance used to be a simple matter of assessing value of assets offered for collateral, determining costs and interests to be paid, and was an instrument to help the main engines of commerce in America which are manufacturing and the service industry. Financial services were never seen as a primary way to build wealth themselves but a necessary accoutrement.   Banks stopped looking outward at society and instead began to look at themselves as drivers of the economy. “ New accounting” juggled the value of their assets and investment decisions. After the fiasco of faulty real estate investment in the 1980s the banking establishment began to believe in strong central banks rather than local state chartered banks. Being larger it was assumed they would be more secure against failure. Local banks began to disappear and were replaced by national corporate banks that no longer took the pulse of the local community.   This new accounting lead to the failure of Enron and the Sarbanes-Oxley Act to police corporate accounting. Instead of learning from its mistakes the financial world decided to create new non-bank lending institutions for credit cards and mortgages that would escape the accounting rules and margin coverage required of either a formal bank or a Wall Street investment firm. However all these institutions saw the potential to be made in real estate because it was after all a sure thing.   Again corporate executives thought of only greed and short term gain. They devised artificial profits by creating the illusion of new product, the derivative, which was basically putting many mortgage contracts into a blender and calling it a great deal. In so doing they also broke the most cardinal rule that for every beginning investor is liturgy, they avoided diversity and concentrated their capital in these financial instruments.

Success of our society both culturally and economically was rooted in the strength of our faith and values

  Conservative thought and action are needed now more than ever if we are to save capitalism from its destruction. We must find our way back to “owners capitalism”. The number of pension funds, hedge funds, and mutual funds needs to be reduced so that there is again more stocks which should once again be the only real way to invest in corporations. These unnecessary middle men are parasites sucking out the potential profits of the average investor. Conservatives need to become advocates of stockholders over management and demand through legislation and regulation their return to control of companies. Ideologically this is the same as saying you are for private property rights.   Currently investments in the stock market are based too much on short term capital gains and minimally on the long term. We must return the consideration of dividends to stockholders as a major driving force in determining the value of stocks.   Bigger does not always mean better when it comes to banking. In many areas of the world, including the booming economy of India, there is an explosion of microlending from local banks. This has been the key to unlock new entrepreneurial spirit and growth in the developing world. Capitalism is not served by having a few large banks for the United States that are clones of one another. We need to promote the return of the community bank.   Former Governor Mitt Romney at the recent CPAC meeting suggested that the current stimulus program is “stimulating the government not the economy”. The investment capital needs to be rebuilt by cutting taxes on interest and capital gains. He agreed that “up to date regulations” are appropriate. However, if we do not make these changes to affect corporate governance and stockholder’s rights this plan will not work.   Another speaker at CPAC, former Congressman Mark Santorum made an important point that goes to the key issue of how we relate to one another. He stated “economic conservatives can’t have a free economy when moral disarray exists.”and further declared “that we must have a culture based on personal responsibility, truth, and family”. Conservatives must not be focused solely on politics but must look at the American way of life and how it has been damaged by popular culture like Hollywood, music, progressively bent educators, and others. The Founding Fathers clearly believed as did Adam Smith that the success of our society both culturally and economically was rooted in the strength of our faith and values.