A Reformed Capitalism
The source of capital in the American economy is democratized through ownership including retirement savings. The work culture is democratized to release the cognitive power of Information Age knowledge workers. The rewards from capitalism, however, are not yet democratized because Wall Street has learned to exploit the wage earners’ capital. This intolerable contradiction can be corrected through tax-free dividends to low- and middle-income wage earners.
The timing is right: The people are angry over the unnecessary economic disaster, and the system is awash in cash, including the $2.3 trillion of 401(k) funds waiting to see whether new investments will be made to benefit the wage-earner capitalists or recycled into Wall Street speculation. Also available is $1 trillion over required reserves sitting in banks waiting to be borrowed for growth investment or directed towards ESOP opportunities. Finally, another $1 trillion in surplus is waiting on corporate balance sheets to see whether it will be invested in growth, paid in special tax-free dividends to wage earners, or wasted again on the Wall Street priorities of stock buy backs and deals.
Reformed capitalism will include:
- Motivation to maximize performance through ownership opportunities such as ESOPs, stock purchase plans, and 401(k) savings plans
- A capital wage in tax-free dividends to rebuild retirement accounts and prompt stronger domestic and worldwide economic growth
- The opportunity for full development in an environment of trust and cooperation
- Managers who have the character and education to build such a work culture
- Retirement funds to be invested in index funds at an annual cost of .15%
- Retirement funds to be invested in tax-free infrastructure-repair bonds
- Corporate performance to be measured by a long-term metric of three-year sales growth, profits, and cash flow against management’s predictions
- Corporate taxes to be reduced for companies investing in long-term growth, and raised for companies that sacrifice growth for the short-term
This reformed capitalism will make a fair return to wage earners and will then be ready to spread on its innate economic and social logic. The rapidity of this spread will depend on the quality of support from education and changes to supportive tax laws.
Neutralizing the following abuses will move hundreds of billions of dollars a year out of Wall Street speculation into the economy through the retirement accounts of wage earners:
- Regulate shadow banking, that is, all sources of credit.
- Charge managers and auditors with violations of “Sarbox” (Sarbanes Oxley) law for failure to verify both the integrity of their numbers and the process.
- Prevent managers and auditors from avoiding regulation of excessive borrowing by accounting tricks that move obligations off the balance sheet.
- Treat as criminal investment banks that promote companies in order to create an opportunity for short sellers to bet that the stock will go down.
- Increase various taxes and reserve requirements and add a risk premium to the cost of money to limit speculation and asset inflation.
- Make investment-bank executives fully liable as they were before liability was limited by changing from partnerships to public companies.
- Prevent banks from destroying banks with a liquidity crisis through collateral demands, suspension of short-term loans, and short selling.
- Require the up-tick rule on short selling: an up price must precede a down.
- Make tax policies on distribution of corporate surplus favor investment in growth and dividends, and penalize stock buy backs and deals.
- Eliminate perverse incentives, such as mortgage brokers and stock brokers on commission, and bonuses without a claw-back provision.
- Bankers keep skin in the game, holding 20% of the loans they originate.
- Prohibit renting of wage earners’ stock to short sellers and hedge funds.
- Prohibit public investment banks from speculating in their own accounts.
- Prohibit floating-rate loans for sub-prime mortgage borrowers.
- Add Co-Co (convertible contingency) bonds to the banking structure that convert to equity and total loss potential on signs of decline.
- Require credit ratings paid by user, not issuer, from an approved source
- Prevent acquirers from loading the company with excessive debt to pay special dividends before going public again.
- Tax hedge- funds executives on ordinary income, not capital gains.
- Eliminate subsidies for oil and agriculture.
- Require traders to own the bonds they trade to prevent “fantasy-football” type bets on bets.
Citizens need to do their homework on these matters to prevent more damage by Wall Street. Democratic capitalism can then maximize wealth through the motivation from ownership, and distribute it broadly to those whose purchases have the greatest multiplier effect.