The Obama-Geithner banking plan to buy "toxic" domestic real estate asset derivatives will perpetuate the current vicissitude of financial services leading us into a deeper and darker hole. The deprivation of wealth in the current crisis means that our country now has a very limited reserve of capital to inject into the production of wealth. Misdirecting the largest portion of that remaining capital into domestic real estate instead of industry will not bring more jobs except for Wall Street.
Financial services developed in capitalism to act as an agent connecting those who wanted to put idle wealth (savings) to use and those who had a productive use for that wealth to form a relationship that benefited all three entities: the lender, the borrower, and the agent. To facilitate this interaction they must be able to make wealth "liquid" which simply means to make it traceable and transferable in portions at a low cost to the borrower. The second basic function they must do is transform risk, in other words, they have to put a price on the potential for risk against potential profit.
The transformation of risk function of financial services has been the source of their growth and power in the modern economy. Years ago the financial services was the classic accountant who was an expert in record keeping but avoided giving advice to seller or buyer and never offered himself as an expert commentator on the investment proper.
Today the Chief Financial Officer (CF0) is often as powerful if not more so than a company's Chief Executive Officer (CEO) or President of the Board. Young business school graduates know the way up is through financial services not research and development, productivity, or human resources.
The most powerful voices leading commerce and consulting the government are the financiers. Whether one is talking about solar power, corn futures, or home construction we have come to rely upon the financier as the expert. Their ability to crunch the numbers offers a false sense of tangibility by quantifying decisions of commerce that used to be less accounting and more trying to develop good products. Financial products were once a necessary part of manufacturing and servicing but now they have unfortunately become to much the focus of gaining wealth rather than a tool to make wealth.
Manipulation of financial assets into financial products cannot by itself create wealth. Wealth is created by the development of natural resources, the production of goods from those resources, and the continued improvement in the delivery of services that makes that production more efficient. Financial services should be profitable when they are a successful ingredient to the recipe but not the meal.
Americans need to have a stable investments in their home but should not think of their home as the major source of investment. Counting on unrealistic property appreciation was more than a significant cause to the speculative behavior that set off the financial crisis.
Yet corporate reform must take place before we can again feel confident in the stock market. Corporations need to return to owner based rather than management based models of reward. Profits need to be directed primarily to the stockholders . The tax laws need to reward corporations for dividends to stockholders and the long term holding of stocks by their owners. As former Governor, Mitt Romney, advised that the the government bailout plan is investing in government not the economy.
The current banking proposal from the administration will only recycle us again into domestic real estate at a time when we really need diversity. If the President is serious about developing alternative fuels and better cars where will the investment funds come from if they are in domestic real estate instruments. Many have noted that the guaranteed return on investment that the government will offer private investors as well as the low interest rate using tax payer funds will hard to turn down.
America needs to rebuild her means of production urgently and Obama's folly is not the way.
Dr. Tony Magana was raised in McAllen Texas, attended Texas A&M;University, and holds a doctorate from Harvard University. He has served in the United States Army Reserve. He is a member of the National Association of Hispanic Journalists.
