Month: July 2013

So let’s talk about insider trading

Posted on by j.giglio

So let’s talk about insider trading. A great American dream. Like having your own private copy of tomorrow’s Wall Street Journal delivered this afternoon, in time to place your trades before the markets close. Is it any wonder most people find the concept irresistible?

The Securities and Exchange Commission generally uses the term “insider” to identify those individuals – corporate officers, directors, employees, and other professional advisers -who have access to material information before it is available to the public. Insiders are permitted to trade as long as the trading does not take advantage of the confidential information and breach their fiduciary duty to the company. Such trades must also be disclosed to the SEC.

Illegal securities trading by an insider is a key Department of Justice and SEC enforcement priority. The SEC has initiated about one insider trading action a week since 2009 and the feds show no signs of slowing down. But what Congress should look at is changing the penalties for insider trading.

The government has won a number of high-profile cases, including one against the Galleon hedge fund manager Raj Rajaratnam, who was found guilty and given an 11-year prison term. Nearly two dozen people associated with Rajaratnam’ s insider trading scheme pleaded guilty or were convicted.

Rajat Gupta, the former chief of McKinsey and Co. who also served as a director for Goldman Sachs and Procter & Gamble, was the highest profile executive convicted of illegally passing confidential information to Rajaratnam. He was sentenced two years in Club Fed.

There has been extensive debate as to whether insider trading should be banned. The theory most often used by the SEC and the courts is that insider trading undermines investor confidence in the integrity of the markets. Shareholders and outside investors are at a disadvantage when they trade against insiders. If they aren’t protected, capital markets would be damaged as fear of trading with insiders might stop potential buyers from coming to the market.

On the other hand, some economists say insider trading benefits markets and improves the accuracy and efficiency of stock prices. Milton Friedman, for example, questioned whether insider trading is harmful and worthy of legal action. He was as decent a human being as you could find, regardless of whether  you agree with his support of unrestrained free-market capitalism.

Friedman believed that trading on material, non-public information benefits investors by more quickly introducing new information through prices into the securities market. And better information makes for more efficient markets.

Others argue the ethical questions raised by exploiting uninformed investors for personal gain are valid enough to justify prohibiting insider trading on material non-public information obtained in breach of a fiduciary duty.

For certain, these are difficult policy questions. But when it comes to meting out punishment for engaging in illegal insider trading for personal gain, the real punishment should be for the guilty to give up their lifestyle.

Instead of meting out prison terms that cost the American taxpayer $30,000 per person per year, guilty parties should be sentenced to live at the standard of the average American. That can be accomplished by imposing a fine equal to the perpetrator’s assets, then paying part of it back to them over their lifetime by giving them an amount equal to the median income.

Perpetrators could also spend the rest of their working lives performing community service. So bankers who profited from the housing crisis could work in homeless shelters. This would be a classic example of the punishment fitting the crime.

originally published: July 27, 2013

America’s so-called Golden Age

Posted on by j.giglio

Visit any bookstore and your eyes are assaulted by scores of books explaining the meltdown that plunged America into a major economic crisis, and prescribing what must be done to return to the glory days from the end of World War II through the early-1970s, when the United States enjoyed the greatest boom in modem history.

The economy grew at an annual rate of over 3 percent, and the median family income almost doubled. But the circumstances that produced that growth were an historical aberration.

World War II destroyed the industrial capacity of the main belligerents. It was not fought on American soil, however. Here, the war ended the Depression and put everyone back to work.

It also produced wartime savings that helped fuel the boom when those savings turned into post-war consumer spending. For example, the automobile industry exploded after years of producing military hardware, and new industries such as aviation and electronics grew by leaps and bounds. At the same time, the post-war “baby boom” increased the number of consumers, and more Americans joined the middle class.

A number of programs were enacted that also contributed to the economic boom and enabled American business to exploit the lack of global competition. These would include:

The GI Bill: This gave millions of veterans the opportunity to enjoy middle-class living standards thanks to things like free college educations, the ability to buy their own homes with low-cost mortgages, and capital to start businesses. This expanding American middle class created an ever-growing market for consumer products and provided businesses with trained managers and professionals.

The Marshall Plan: Over five years during the late 1940s, the federal government invested nearly $13 billion to rebuild the devastated economies of Europe and Asia. This was a deliberate Cold War strategy aimed at strengthening the economies of the non-communist world and binding them to the U.S. It is a form of vendor financing that the Chinese have successfully copied.

The Federal Government/Fortune 500 Compact: During the late 1940s and 1950s, the federal government effectively subsidized corporate America with tax benefits, lucrative defense contracts, and various kinds of market protection. In return, Fortune 500 companies diverted some profits from shareholders to employees by giving them steadily rising purchasing power, free medical coverage, generous pensions, and other welfare benefits that Europe depended on government to provide. In the immediate post-war era, the view was that corporations had responsibilities to employees and the local and national community as well as to shareholders.

Things began to change when the oil crises of the 1970s hit.

By the late 1960s, our allies’ economies had recovered from World War II. Initially, those countries’ exports only penetrated low-end industries, giving us foreign goods on the cheap while leaving our high­ value industrial sectors unharmed. But intensifying global competition brought excess capacity and reduced profit margins. Steadily rising real wages gave way to a business model focused on  “maximizing shareholder value ,”under which firms were run solely to serve their owners’ interests.

A confluence of circumstances allowed the United States economy to emerge from World War II with no real global competition. Those circumstances, which resulted in decades of prosperity, were not sustainable. As they fell away, so did assurances that each generation of Americans would enjoy a better standard of living than the one that preceded it.

originally published: July 20, 2013

America needs jobs

Posted on by j.giglio

America is stuck in the worst economic, political and social crisis since the Great Depression. Despite the unemployment rate dropping 2.5 percentage points from its peak in October 2009, the labor market remains bleak and it is becoming ever clearer that the federal government needs to act aggressively to fix the problem.

The drop in the official unemployment rate is partly due to people who have stopped searching for a job. If a person has not worked or looked for work in the past 12 months, he or she is no longer included in the official government statistics.

The recession officially ended in June 2009, but job growth has remained painfully slow. It took 15 months after the 1990-1991 recession and 39 months after the 2001 recession for employment to recover to precession levels. At the recent pace of job creation, it will take years for employment to recover from the Great Recession that started in 2007.

The President’s Council on Jobs and Competitiveness has estimated that we will need more than 20 million jobs by 2020. The American economy has never created jobs at that rate in peacetime.

The Commerce Department says the American economy grew at an annualized rate of only 1.8 percent in the first quarter of 2013. Gross Domestic Product needs to grow by 3 to 4 percent annually to reach its productive potential. The economy is failing to generate enough jobs to support sustainable growth.

About 150,000 new jobs have to be created each month just to absorb new entrants to the labor force. Left to current market forces, America faces a serious job deficit that will last for at least the rest of this decade.

Frustrated with the slow American recovery from the recession, the Federal Reserve has kept interest rates near zero since late 2008 and is currently buying $85 billion in Treasury and mortgage bonds each month. The efforts are meant to increase spending, investment, hiring and overall growth.

But the Fed has done almost all it can with monetary policy. The American economy needs fiscal stimulus to restore a satisfactory level of employment and income.

The first order of business is to pick the low-hanging fruit to jump-start job growth and compensate for the pressures to outsource American jobs that leave society to pick up the cost of unemployment.

For starters, offer private firms tax benefits for hiring new workers. Right now, those firms receive tax benefits for buying new plant and equipment – even if it replaces existing workers – but no tax benefits for hiring. So fiddle with the tax code to change these tax regulations 180 degrees.

Experts from all quarters agree on the importance of investing in America’s physical and communications infrastructure. This is about as controversial in economics as antibiotics are to doctors. Such investments in income-producing capital assets, not consumption spending projects, would yield positive economic returns and create jobs for years to come. Financing these investments by borrowing is no different than a business building a new plant or a family building a new house. If nothing else, such investments will remove constraints on infrastructure capacity that currently depress economic growth by making it more expensive to move goods and services.

Finally, the military can help solve the shortage of workers with technical skills that businesses often cite. The armed forces have infused technology into nearly every aspect of their operations, and they should train people- who would be paid as federal employees during training- for private sector jobs. The military has a distinguished record of preparing and certifying individuals across a full spectrum of occupational specialties that are in demand by the private sector. It should also be empowered to contract with community colleges for the additional space and instructor capability needed to accommodate the increase in trainees.

How do you detect a society in real trouble? One sure-fire sign is persistently high unemployment. America needs an aggressive, comprehensive strategy to bring employment back to pre-recession levels and prepare workers for 21st-century jobs.

originally published: July 16, 2013