The Rise of Finance and The Fall of American Business

Companies don’t innovate when they can make more money from financialization

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By John Battelle

cover.makersandtakersEvery so often a book comes along that works its way into a majority of the interesting conversations you have with both friends and colleagues. Such is the case with Rana Foroohar’s Makers and Takers: The Rise of Finance and The Fall of American Business. Foroohar was kind enough to send me an early draft to read several months ago, and I found myself quoting from it in nearly everything I subsequently wrote, in every talk I gave, and even in various Slack channels at work. Makers and Takers is that rare work of journalism that both appears at a fortuitous moment in history, and captures the essence of that moment’s core narrative.

ranaForoohar chronicles the rise of the financial industry and its destructive impact on the global economy. And she has the credibility and the chops to pull it off — over the past 15 years she’s covered the financial industry for Newsweek and Time. She’s been the global economic analyst for CNN for the past three years as well. Foroohar is not only passionate and opinionated about her field of work, she’s a lucid and compelling spokesperson for change in not only finance, but also in the purpose-driving business, and the social compact that binds us all as citizens in a global economy.

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When people at a cocktail party hear you have a new book coming out and ask “What’s it about?” — what’s your answer?

My elevator pitch? We all know something is deeply broken in our economy. It’s been eight years since the financial crisis. The Fed has pumped $4 trillion of money into the markets, but we are still in the longest, slowest recovery of the post‑war era.

I believe that the reason for that is that our system of market capitalism is broken. The capital markets and Wall Street are no longer serving business or the Main Street economy that you and I live in.

If you think about it, capitalism as defined by Adam Smith was a system by which the capital markets would take the deposits that you and I put in the bank, and invest it in real businesses that create real jobs and growth.

But only 15 percent of all the money flowing through financial institutions today ends up in businesses. The rest of it is staying within the closed loop of the market itself. It’s being traded.

What is the rest of the money — that 85 percent — actually doing?

A lot of that money is going into the real estate market. Some of it is going to average people like you and me for mortgage loans, but the real money is in securitizing those loans.

We heard about that during the financial crisis, the splice‑and‑dice CDOs that blew up. That’s still happening. The mortgage market essentially funds the purchase of old assets, houses. It doesn’t grow the economy. That’s one part of it.

The other part of it is the securities market. The securities market is stocks, bonds, collateralized debt obligations and so on. They’re all the things on paper that the financial system trades in a closed loop.

Again, those are assets that are not creating real growth. In the last few years, you’ve seen this disconnect with the stock market at record highs, and yet income growth being flat, and overall GDP growth being flat.

Markets now create these asset bubbles, but the money going into new businesses — the hairdresser down the street, my dad starting a small manufacturing company in Indiana — that’s 15 percent of what comes out of financial institutions right now. That is totally a broken system.

When I ask people at large banks why they don’t lend more to business, they say it’s too risky. But isn’t securitizing assets, trading them up, and creating asset bubbles risky, too?

You’ve just hit at the existential problem in the financial sector, which has been brewing for 40 years. Yes, it’s really risky to start new businesses, and it’s risky to invest in them.

That’s what the financial system was set up to do, and one of the ways that it’s supposed to do it is by being rooted locally — the It’s a Wonderful Lifemodel of banking, where the banker actually knows you. They live in the same community. They take a few risky bets, and then they balance that out with less risky bets, and they also hold a lot more cash on their balance sheets than big banks do today.

One of the reasons that no big New York City banks went under during the Great Depression is that they were holding about 25 percent of their assets in cash. Banks today hold less than five percent in something called Cash or Cash Equivalents. That’s point number one.

Point number two is, yes, trading is really risky, but it’s also a lot more profitable than lending, and that’s why the securities industry has taken off exponentially, the amount of lending has decreased, and also bank deposits have decreased, as a percentage of what’s on the balance sheet.

The entire model has switched. Finance, as envisioned by Adam Smith, as it existed for the most part until the 1970s, was a helpmeet to business. It was not the main event. We have since gotten this idea that finance is somehow the natural highest point on Maslow’s hierarchy of the economy.

You’ve gotten 40 years of policy decisions that have encouraged that, that have protected this industry, and that’s one reason why this industry creates 4 percent of jobs and takes 25 percent of the corporate profit pie. That is just breathtaking. If you need one number to sum up where the problem is, it’s that.

You open your book with a story about Apple. Can you give us a sense of what’s surprising about how Apple runs its business?

Apple is certainly not unique, but it is one of the most successful companies in history. It exemplifies just how Kafka-esque the capital markets have become. Apple is holding more than $200 billion worth of cash, a lot of it in offshore tax havens.

It’s obviously cheaper to keep it there than to bring it back and pay US taxes. That’s the reason — even as they have all this cash — that Apple has been raising billions of debt at very low interest rates — rates that are also the result of the financial crisis. That’s a lot cheaper than bringing cash back abroad.

Why are they issuing this debt? Because they want to do stock buybacks, and pay out dividends to investors. Why do they want to do that? Because it artificially raises the price of its stock.

That’s one of the reasons that you’ve seen people like Carl Icahn tweeting that Apple should give back more and more money, do more and more share buybacks. Investors love that because it always jacks the share price up. Every time Icahn tweets, Apple’s share price goes up.

Why does Apple need to keep their share price up? I would argue that they haven’t really had a game‑changing, underlying technological innovation since Steve Jobs died. Ultimately, in the long run, a company’s success is tied to its real innovations.

In lieu of innovation and real engineering, Tim Cook has been executing financial engineering. We have a market system that is really serving investors, rather than anybody else — consumers, workers, the real economy. It’s a bizarro world.

Share buybacks were actually illegal in the early ’80s.

Yes, that’s right. Until 1982, it was considered market manipulation. It’s amazing that something that used to be illegal is now basically the status quo for corporate behavior. Share options — which push CEOs to think short term — make up somewhere between 30 and 80 percent of how the C‑Suite in America gets paid. It creates a cycle where they have every incentive to jack up share price in the short term.

Later in the book, you describe what happened to companies like GE and GM. It strikes me that Apple is potentially on the same cycle as those two companies.

Definitely. Once a company enters the public markets, things get a lot harder. There’s Stanford research showing that underlying innovation, tech development, R&D, tails off by about 40 percent once a company goes public.

That’s because, boom, you suddenly have pressure from the markets. Those can manifest in different ways. I got interested in GM when they were having their ignition switch crisis. It came to light that there had been a longstanding problem, where literally one division of the company wasn’t talking to the other, in terms of how the product was being engineered.

I spoke to Bob Lutz, who’s the former Vice Chairman of GM. He told me something really interesting. His book Car Guys Versus Bean Counters was basically about the culture of engineering versus the culture of finance. Lutz said, “This is a problem that goes all the way back to the Whiz Kids, to Robert McNamara, to what happened at Ford Motors.”

I started digging into this. What I found was fascinating. Indeed there was a period in time exemplified by Robert McNamara, who unsuccessfully led the Vietnam War effort, in which the Pentagon decided that they could come up with a metric for everything to win the war, and lost sight of how screwed up the overall mission was.

He brought that same sort of checking the box, CFO‑type thinking to Ford, and later to a number of other companies, including GM. His disciples went out into much of corporate America.

That led to people looking at organizations within silos, rather than looking at underlying mission, the technology, the innovations that are really driving our economy. It’s the opposite of Steve Jobs.

The bean counters made a number of decisions at GM that led to the ignition switch crisis. They stopped thinking about “How do we create the best products, and how do we serve our consumers?” That ended in tragedy. It’s something Mary Barra, the new CEO of GM, who happens to be an engineer, is trying very hard to rectify.

GE is in some ways America’s original innovator. Thomas Edison founded the company. It brought us an incredible number of innovations in the first half of the 20th century. Later on, Jack Welch — Neutron Jack, who laid off about 200,000 people — decided that finance was the business to be in.

In some ways, if you’re looking only at a balance sheet, it makes sense. Finance has incredible profit margins, relative to any other industry. He started switching GE from being a maker of new products and ideas into being a financier.

If the purpose of a company is to maximize shareholder return, the true north of the Friedman Chicago School, it strikes me that only a crisis like the ignition switch fiasco will drive a company to realize that it has to change its core purpose.

I think that’s right. I would say the contrast between Exxon and BP is an interesting one in that respect. Early in the financialization era, in 1989, Exxon had a huge crisis — the Exxon Valdez — and it really shifted its culture of risk.

BP didn’t have that crisis. It kept taking on a lot of risks, including in the financial sphere, which ended with trading disasters, and then it had the Deepwater Horizon disaster. Crisis sometimes is what’s required to change to things.

It seems amply evident that the right thing to do is to focus your company on the business of business, and not the business of financialization. However, all of the incentives, and all of the policy, seem to be pushing companies in the opposite direction. It’s almost as if you can’t blame them for doing what they do, because that’s how they’re being incented.

Right. One of the things I wanted to do in this book was get away from a culture of blaming the bankers, blaming the CEOs, blaming the one percent. I cover these people on a daily basis. Nobody’s venal here. They really are doing what they’re incentivized to do. It’s just that over the long haul, it doesn’t happen to work.

One of the most telling statistics that I came across in researching the book was a difference in how much investment a company made in CapEx, R&D, factories, and in worker training when you compared private companies with similar public ones. The private companies made twice the investments into the real economy as public companies did.

To me, that blows out of the water all of these arguments that large corporations and business lobbyists make about taxation and regulation. “Oh, if only the tax rates were so much lower, we would invest,” or, “Oh, if only this or that red tape was different.”

Private companies are out there investing under the same tax and regulatory frameworks. They see plenty of opportunities. But the public markets make it impossible for CEOs to take these long-term decisions. It’s interesting to track the public companies who buck this trend. Like Howard Schultz at Starbucks, who says “I’m going to offer health care for every employee,” or “I’m going to pay for every employee to get a college degree.” He’s only able to do that because he’s got a cult of personality — coupled with being an owner/founder who still has a big stake in the company. Jack Ma from Alibaba has explicitly said his corporate mandate is “to serve our company and our workers first, our customers second, and shareholders third.”

Are there rigorous defenders of the status quo? There weren’t a lot of people arguing with you and your ideas in the book itself. Is that because the people don’t want to talk, or is it because there aren’t actual rigorous arguments?

For the last couple of decades, it’s been really hard to find evidence that trickle‑down economics is working. The Chicago School, free market, laissez‑faire way of thinking has taken a big hit.

You can see it with the implosion of the Republican Party. They’re struggling for a resonant economic message. The Democrats are struggling, too. The more centrist Democrats, like Bill Clinton, bought into trickle‑down. Hillary is still trying to square that circle. The next president is going to have to deal with it.

It’s a growth issue. I get calls from hedge funds saying, “This is really interesting. You’re making a really compelling case that financialization is actually going to cause long term slower growth.”

That hurts their business models, because ultimately, at the end of the day, everything does eventually come back to what happens on Main Street. In an advanced economy that is 70 percent consumer spending, you cannot have growth when the average American hasn’t gotten a raise in real terms since the early ‘90s.

The blue collar workers that are causing this crazy political cycle right now haven’t gotten them since 1968. No wonder they’re in favor of Donald Trump.

Yet the argument of smaller government, less regulation seems to still be winning the day. When you pull back, isn’t this really a question of how do we wish to govern ourselves?

Yes, and bringing those two points together, it’s really about acknowledging that the corporate social compact of the post‑war era is at an end. It’s been frayed for some time. I think we can say that it’s been totally Uber-ized.

The way in which we work, who pays for the social safety net, at a time when there’s more government debt than ever, and more corporate profit than ever, the effects of technology in disrupting jobs, all of that is in the mix here.

The old model is broken. We need a new one. There isn’t really a silver bullet. One of the things that we can certainly start with is the tax code, and what it is subsidizing and incentivizing, and what it isn’t.

You used the term “Uber-ized.” I’m curious about that analogy. Is there something about Uber that reminds you of the larger theme of your book?

Yes. Think about a pie chart that has government and the public sector as one portion, and the corporation as another, and labor as the third. That’s essentially the economy. The corporate slice of that pie has been growing and growing for some time. In some way, Uber represents the apex of this.

The privatization, and therefore the financialization, of our public sphere?

Yes. Uber employs very few people. They have a lot of outside contractors. But the company is owned by a very few. There’s a huge amount of wealth being concentrated in fewer and fewer hands.

I think this cycle of financialization has reached a tipping point, where the system starts to break. Uber is causing a lot of conversations in Washington, in the Valley, all over America — asking “What is the purpose of a company? What are companies here to do?”

I did a profile of Travis Kalanick for Time. I sat in a fascinating meeting where he spoke to drivers. They had obviously been hand‑picked. But they started asking uncomfortable questions, like, “Well, when you go public …will we get a piece of this wealth?” He didn’t have good answers for them.

At the heart of this is something important. Where does the wealth in a company go? Is it just for the C‑Suite? Is it just for the shareholders? What about the broader community? Can you have an economy that is fundamentally stable if you have that bifurcation of wealth and distribution?

A lot of people in the Valley are uncomfortable with Uber, not for the obvious reasons, but because you just don’t question the success of a company like Uber. The goal is to create a company that’s a world‑beater. Uber has hit that goal. It’s what Google was in early 2000 or Facebook in 2010. No one wants to question a company like that. Given the theme of your book, do you think Uber is a taker or a maker?

A taker. I’m not saying that there’s not some innovation here, but this is software that has enriched a very few number of people. I’m not saying that everybody at Uber is bad, but its model doesn’t support an economy that’s made up 70 percent of consumer spending.

This isn’t all Uber’s fault. If I were Travis Kalanick, and I was thinking, “Well, maybe I could give stock options to every driver in America and in the world,” then suddenly, you’ve probably got employees instead of contractors.

Then you’ve got lots of other responsibilities. That gets into how governments regulate companies. What is expected of companies and why?

It used to be tech companies went public early. Microsoft went public at a market cap of around $750 million. Lots of investors rode Microsoft all the way up. But when Uber goes public, it will probably be valued at over $100 billion, if not $150 billion, just like Facebook was.

A small number of shareholders are going to make a lot of money. The ones who buy after the IPO could become the equivalent of the greater fool. It also used to be that an obscenely profitable company would be taxed, and that money would be redistributed through the government. But now nearly all successful companies hide their profits overseas. And raising taxes isn’t a way to win over voters.

It seems we won’t trust the government to redistribute wealth. And we can’t trust the financiers. And surveys show we also don’t trust the corporate chiefs. Who do we trust?

Government’s not popular, and neither are corporations. Corporations can float 35,000 feet above all these problems, all these issues of inequality and slow growth we’re now grappling with.

But ultimately, there is pushback, and it happens in countries — at the national level. You’re seeing it in populism, not just in the US, but all over. Look at France. Look at Germany. Look at the possibility of the UK pulling out of the Eurozone and rising nationalism in China. This is all a part of having a system of market capitalism that works at a global level, but governments are still national. That’s where the action is. Countries still govern. They can make corporations do things.

You said there’s no silver bullets — but what are rational steps we can take?

Bringing more people into the conversation is crucial. Right now, the way that market capitalism is structured, the way that corporations get regulated, most of that is a conversation had amongst elites.

That’s a problem. There are surveys showing that elites trust each other more than ever before, but the mass populations in every single country trust the elites less than ever before. That reminds me of pre‑revolutionary France.

So let’s bring more people into this discussion at every level. Companies can do that — look at what Starbucks did with race, for example. Local governments are already doing that. The kind of public/private conversation about what the new social compact should be is already happening in a lot of cities. It’s just not happening at a federal level.

The next president is going to have to grapple with the fact that we are at a turning point similar to where we were in the 1970s, where the paradigm changed towards a more laissez‑faire, free market, Reaganesque model. We know that model is broken now. We need a new one. If we get another four years of the same, I can guarantee you that we will have the same kind of election cycle in 2020 that we’re getting right now.

The next Bernie is going to be sharper and more electable, and the next Trump, who knows, might be even scarier.

When you said how the elites trust each other more, and the mass population trusts the elites less and less, it strikes me that explains Donald Trump in nutshell. He is an elite that the masses can trust — because he’s an outsider to most elites. The elites actually rejected him.

That’s why everybody missed how far he was going to go, and they may still be missing how far he can go.

Maybe we just need to take our medicine and make this guy president.

He’s like the Exxon Valdez of politics.

Is there any hope of us getting out of this financialized mess?

Even though all these things we’ve discussed seem really big and weighty, and they make you a little tired, and a little depressed, I would just say market capitalism is not a system that was handed down in perfect form from the heavens on stone tablets.

We made up these rules, and we can change them. It won’t happen overnight, but we can start the process. There are lots of companies that are starting the process. There are lots of really smart politicians that want to have a real conversation about this stuff.

Increasingly, empowered by technology, there are citizens that are just sharper than ever and want to talk about these issues. I’m hopeful in that sense. In that way, this election cycle, and how disruptive it’s been, actually makes me hopeful that we’re at a change point.

Originally published by NewCo Shift. Join their newsletter today.

2016 June 15

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  • JeffMowatt

    “What is not guesswork is that the broken – again –
    capitalist system, be it traditional economics theories in the West or
    hybrid communism/capitalism in China, is sitting in a world where the
    existence of human beings is at grave risk, and it’s no longer alarmist
    to say so.

    The question at hand is what to do next, and how to do
    it. We all get to invent whatever new economics system that comes next,
    because we must.”

  • Rick Derris

    I think I’m going to give this book a chance. The author appeared on Evonomics a few days ago.

    I wouldn’t lump stock buybacks and dividends together. Dividends tend to reward longer-term shareholders while buyback reward traders. End the double taxation on dividends and perhaps companies would be more incentivized to pay them instead of doing buybacks. Prior to the 1990s nearly 50% of stock returns were attributable to dividends and now the dividend yield on the market is almost nothing. Companies should return cash to shareholders because it could prevent “empire building” and spending cash on not-so-great projects.


    This isn’t all Uber’s
    fault. If I were Travis Kalanick, and I was thinking, “Well, maybe I could give
    stock options to every driver in America and in the world,” then suddenly,
    you’ve probably got employees instead of contractors.”

    I have a quibble here. Uber could grant *nonqualified stock options* to independent contractors. Only incentive stock options require an employer/employee relationship. They could also do restricted stock grants (which, like NQSOs, don’t require an employer/employee relationship). The tax effects on NQSOs are bad but even so the drivers would feel “ownership” in Uber.

    • John M Legge

      Australian shareholders in Australian companies get a full rebate of any company tax paid (“dividend imputation”). Australian companies are still heavily into share buybacks. It will take more than fiddling the tax system to bring the financial markets under control.

      The broader point is more important: once a company goes public its guiding star changes from innovation-driven growth to capital efficiency. This wouldn’t hurt the economy if the potential for innovation had been exhausted, but the slowdown in growth over recent decades suggests that too much effort is going into short term profit (and share price) maximization and too little into innovation.

      Minor point: as Keynes noted, the financial markets are there to provide successful entrepreneurs with liquidity. They can sell shares in the profits rather than selling the entire undertaking when they need cash for expansion. They don’t directly fund start up companies.

      Second minor point: Smith loathed joint stock companies. He wrote:

      Such [joint stock] companies, therefore, commonly draw to themselves much greater stocks than any private copartnery can boast of . . . . The directors of such companies, however, being the managers rather of other people’s money than of their own, it cannot well be expected that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own. Like the stewards of a rich man, they are apt to consider attention to small matters as not for their master’s honor, and very easily give themselves a dispensation from having it. Negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such a company.

      Financialisation would have given Smith apoplexy.

  • Peter Shoobridge ن

    It’s unfair to single out Uber for too much criticism – it’s merely an opportunistic sector disruptor – but it is another symptom of something rather upside down in the corporate firmament – yet another company that doesn’t make anything that’s likely to receive an astronomical valuation on IPO. And why? Because we seem to have lost the capacity to determine the real value of things, and that applies financially and socially.

    If we seek to encourage growth in the real economy this will require changes to business regulation and to the tax system, and Americans are rightly suspicious of all governmental intervention. Our political class is so beholden to vested interests that one might rightly question whether it’s even capable of making the changes needed.

    Compensation and incentives dictate behaviors. If we want changed behaviors, we need to alter the incentives. It’s that simple. And that big a challenge.

  • RAP77

    “I would argue that they haven’t really had a game‑changing, underlying technological innovation since Steve Jobs died. Ultimately, in the long run, a company’s success is tied to its real innovations.

    In lieu of innovation and real engineering, Tim Cook has been executing financial engineering. We have a market system that is really serving investors, rather than anybody else…”

    This is often repeated in financial blogs, etc. I’m not an Apple fanboy but, does this author really know what Apple is working on? They’re famously secretive and I think it’s a mistake to assume they are unaware of saturation in the smart phone market and their dependence on the iPhone for most of the company’s income.

    From the relatively little research I’ve done (which is more than this author), I believe that Apple may well be on the verge of disrupting the auto industry in the same way they disrupted the wireless industry when the first iPhone was released.

    Overall, though, I agree with what this author is saying even if it is very similar to many other commentaries on the “over-financialization” of the economy, the origin of which dates to the Reagan era. In this case, repetition is good!

    • Duncan Cairncross

      I would say that Apple has NEVER had a
      “game‑changing, underlying technological innovation”

      What it has had is the marketing smarts to bring different pieces of technology
      (mostly developed on the public dollar)
      together in a massively successful product

      • Reed Schrichte

        Apple is now a fashion company.

      • RAP77

        Do you think you’re being original? Your comment is very ordinary, it’s been repeated ad nauseam, even more than points raised in this article. Plus you’re wrong. E.g. when the iPhone came out in 07, it was such a huge development over what was available, it completely changed what people expect. Why did no one else do it? That’s what innovation is.

        Do you know what they’re working on now? Maybe you should do more research.

        BTW, I don’t have an iPhone.

        • Duncan Cairncross

          The iPhone was a “great step forwards” – BUT it was NOT new technology developed by Apple
          It was an amalgam of technology mostly developed by the government

          Yes that was an innovation – but it was NOT a “game‑changing, underlying technological innovation”

          You could consider it to be a
          “game‑changing, marketing and use innovation”

          But underlying technological – no way!

          • RAP77

            Please name a company that has produced a “game-changing underlying technological innovation” according to your definition.

          • Duncan Cairncross

            That is a very interesting point
            I had a wee think, my background is in Diesel engine manufacture so I can see that Bosch have developed and introduced “game-changing underlying technological innovation” on a number of occasions,

            After that I start running out of companies

            Most “new things” actually come from publically funded research so almost everything thing else that I can think of the company that did produce a “game-changing underlying technological innovation” did not do the initial work
            Illumina would be a good example
            The initial work was done at Tufts University

            Advances in electronics are almost all from work done on the public dollar

            Now once the initial work has been done the further research to make it fully operational and cheap are done on the company dollar – and that is NOT cheap!

            But it is NOT (IMHO) “underlying technological innovation”

          • RAP77

            “Advances in electronics are almost all from work done on the public dollar”

            I think you’re exaggerating though many do, especially from military budget, e.g. DARPA, and also many early innovations in bio tech come from govt spending.

            “But it is NOT (IMHO) ‘underlying technological innovation'”

            Right, but you still haven’t made a strong case on what constitutes tech innovation, just an opinion.

          • Duncan Cairncross

            I will make it clearer
            An “underlying technological innovation” has got to involve a significant new technology
            Advances in the technology of the manufacturing process don’t cut it

            If somebody worked out a new process to make something we already use – but cheaper – that is NOT “underlying technological innovation”

          • RAP77

            Then there is very little innovation. That’s too restrictive.

            Anyway, here’s an interesting article from last year on Apple. If they can take this existing new tech and apply it to automobiles, that is innovative.


          • Duncan Cairncross

            Hi RAP77
            Hydrogen for cars is a scam – you need to store it under pressure or in some form of “solid solution” in order to get useful energy densities (volumetric – it’s OK mass wise)
            That takes energy which is effectively wasted so you are competing with BEV’s with a 20% (+) hit to your efficiency before you start

            yes I know that site is talking about a magic “powder” to hold the hydrogen but that still needs energy to “lock” the hydrogen into the matrix

            Some form of “designer” liquid hydrocarbon could be a good idea – Nissan is working on that

            But hydrogen is simply a scam – something to divert attention from ideas that could work

            It could work on cell phones where the energy cost is such a tiny percentage of the total cost

          • RAP77

            Maybe that’s so but the’ve been acquiring land in the Bay Area for production facilities since that article published and are hiring more people in Cupertino. That real estate is big bucks, so something must be happening. It takes energy to charge batteries (which is the big hurdle for EVs) and it’s questionable if there is enough lithium for large-scale electrification of transport.

            There must have been a very compelling reason for Apple to get into the car business. I don’t think one day Tim Cook woke up and said, “Hey, lets make cars.”

            I don’t think they’re stupid. I’m really interested in seeing how this turns out.

          • Duncan Cairncross

            Lithium is slightly MORE available on earth than Copper!

            The current Lithium supply is basically as a byproduct – I suspect that as we speak people are setting up Lithium extraction processes

            On the energy front – with Solar prices dropping and batteries getting cheaper that will NOT be the problem!

            I’m also interested in seeing what Apple are going to do – but I don’t think it will be cars – the margins are too small

          • RAP77

            Right, there is plenty of lithium but there will need to be a lot more extraction.

            This is from last year:

            “While the world has plenty of lithium reserves, it would be difficult to bring online enough supply in time for Tesla’s soon-to-be astronomical consumption in addition to sales growth from other automakers such as General Motors and Nissan. There could be new production plants brought online eventually that aren’t accounted for in the USGS estimates, even some rumored to be in Nevada (where the Gigafactory resides)…”


          • Duncan Cairncross

            “difficult’ = somebody needs to spend some money

            Wanna bet that there are several plants being constructed right now?

          • RAP77

            This discussion has been helpful for me. I wish I’d looked into lithium as an investment last year. It would have been profitable.

            Looking at charts, it could be very volatile after the big run up. According to GS, most lithium is difficult to extract and the price still doesn’t support it, but demand will continue to grow. So, there still aren’t enough miners willing to spend for more production.


            Also, the same author I mentioned earlier (Mark Hibben) wrote a column last year – only a fraction of the Giga Factory has been built, they halted further construction for the time being.

            I wonder if Tesla is waiting to see how new developments in battery tech proceed. They reported that the new models will have improved batteries, reducing total battery weight by 15% (I think that’s the figure they mentioned in the televised news article).

            Still, it seems odd that though several Giga Factories were planned, they haven’t fully built the first.

          • Duncan Cairncross

            Hi Rap
            Re the Giga factory
            I suspect that they are building a modular factory – effectively a number of different production units
            They will have started with space for say 10 units (wild assed guess) but will have built the first unit and would intend to operate it for as long as possible to learn as much as possible BEFORE building the next units
            It’s a LOT easier to change the drawings than the hardware!

            Lithium batteries are at the start of the optimising process – there is a bit of cookbook chemistry going on – will a drop of this help?
            One of the major problems has been that testing a change took a long time
            There have been some recent (2015) advances in testing that look like they have cut down the time to do an assessment by a factor of 100
            So I am expecting the improvement curve to continue – but I believe the current cost/Kwhr is a lot lower than people are saying

          • RAP77


          • Duncan Cairncross

            Hi Rap
            For some reason the official forecasting people seem to have completely lost the plot with anything to do with batteries
            I keep seeing forecasts of battery costs that are just nonsense – the sort of thing that says that batteries cost $400/kwhr and that when that goes down to $250/kwhr EV’s will become viable
            When I bought the batteries for my car (my icon) over three years ago as a single individual for $400/kwhr – If I had wanted “quamtity” that would have been halved!
            and Chevy are selling replacement packs for the Volt for $250/kwhr now
            (for at least the last year)

        • Tony Buontempo

          Duncan is original to those of us that do not have the privilege to spend out days at the academy. The evening news and the NY Times does not regularly discuss these type of topics.

          • RAP77

            I have no connection to “the academy” and don’t read NYT much anymore though good articles can be found.

            There are better sources for tech news. has occasional good articles. “Wired” magazine is a good, inexpensive source and once you start reading, more sources on areas of interest can be found in footnotes and bibliographies.

   is a site where writers post short articles on all aspects of investing, including tech. Some writers specialize in tech and you can learn a lot.

            “…those of us who do not have the privilege…”

            Dude, sounds like you’re sniveling.

      • Tony Buontempo

        Good point. I had not considered this line of thinking before.

  • Reed Schrichte

    One can hope, but I would not expect those who benefit wildly from the current setup to get excited about changing it. As a force, money has a physics to it that cannot be talked away, even without considering the psychological factors.

  • Hologrammar

    Sounds like a cool book, but it’s too bad the author doesn’t realize the root cause — and therefore realize that there is a silver bullet.

    The problem is not financialization, in itself. The problem is what incentivizes the financial system to do the stupid, risky, unproductive crap that it does.

    And that’s freehold land ownership, a.k.a. land privilege — a.k.a. feudalism. Collecting all land rent publicly, abolishing all wage taxation, and sharing the surplus rent (whatever isn’t used for gov’t expenditure) as a Citizens’ Dividend — this would end the land monopoly and most rent-seeking as we know it and usher in an era of prosperity most people today are incapable of fathoming.

    • Macrocompassion

      “Collecting all land rent publicly”; here is what it means:

      Socially Just Taxation and Its Effects (17 listed)

      Our present complicated system for taxation is unfair and has many faults. The biggest problem is to arrange it on a socially just basis. Many companies employ their workers in various ways and pay them diversely. Since these companies are registered in different countries for a number of categories, the determination the criterion for a just tax system becomes impossible, particularly if based on a fair measure of human work-activity. So why try when there is a better means available, which is really a true and socially just method?

      Adam Smith (“Wealth of Nations”, 1776) says that land is one of the 3 factors
      of production (the other 2 being labor and durable capital goods). The
      usefulness of land is in the price that tenants pay as rent, for access rights to
      the particular site in question. Land is often considered as being a form of
      capital, since it is traded similarly to other durable capital goods items. However
      it is not actually man-made, so rightly it does not fall within this category.
      The land was originally a gift of nature (if not of God) for which all people
      should be free to share in its use. But its site-value greatly depends on
      location and is related to the community density in that region, as well as the
      natural resources such as rivers, minerals, animals or plants of specific use
      or beauty, when or after it is possible to reach them. Consequently, most of the land value is created by man within his society and therefore its advantage should logically and ethically be returned to the community for its general use, as explained by Martin Adams (in “LAND”, 2015).

      However, due to our existing laws, land is owned and formally registered and its
      value is traded, even though it can’t be moved to another place, like other
      kinds of capital goods. This right of ownership gives the landlord a big
      advantage over the rest of the community because he determines how it may be
      used, or if it is to be held out of use, until the city grows and the site
      becomes more valuable. Thus speculation in land values is encouraged by the law,
      in treating a site of land as personal or private property—as if it were an
      item of capital goods, although it is not (Mason Gaffney and Fred Harrison:
      “The Corruption of Economics”, 2005).

      Regarding taxation and local community spending, the municipal taxes we pay are
      partly used for improving the infrastructure. This means that the land becomes
      more useful and valuable without the landlord doing anything—he/she will always
      benefit from our present tax regime. This also applies when the status of unused
      land is upgraded and it becomes fit for community development. Then when this
      news is leaked, after landlords and banks corruptly pay for this information,
      speculation in land values is rife. There are many advantages if the land
      values were taxed instead of the many different kinds of production-based
      activities such as earnings, purchases, capital gains, home and foreign company
      investments, etc., (with all their regulations, complications and loop-holes).
      The only people due to lose from this are those who exploit the growing values
      of the land over the past years, when “mere” land ownership confers a financial
      benefit, without the owner doing a scrap of work. Consequently, for a truly
      socially just kind of taxation to apply there can only be one
      method–Land-Value Taxation.

      Consider how land becomes valuable. New settlers in a region begin to specialize and this improves their efficiency in producing specific goods. The central land is the most valuable due to easy availability and least transport needed. This distribution in land
      values is created by the community and (after an initial start), not by the
      natural resources. As the city expands, speculators in land values will
      deliberately hold potentially useful sites out of use, until planning and
      development have permitted their values to grow. Meanwhile there is fierce
      competition for access to the most suitable sites for housing, agriculture and
      manufacturing industries. The limited availability of useful land means that the
      high rents paid by tenants make their residence more costly and the provision
      of goods and services more expensive. It also creates unemployment, causing
      wages to be lowered by the monopolists, who control the big producing
      organizations, and whose land was already obtained when it was cheap. Consequently
      this basic structure of our current macroeconomics system, works to limit
      opportunity and to create poverty, see above reference.

      The most basic cause of our continuing poverty is the lack of properly paid
      work and the reason for this is the lack of opportunity of access to the land
      on which the work must be done. The useful land is monopolized by a landlord
      who either holds it out of use (for speculation in its rising value), or
      charges the tenant heavily for its right of access. In the case when the
      landlord is also the producer, he/she has a monopolistic control of the land
      and of the produce too, and can charge more for this access right than what an
      entrepreneur, who seeks greater opportunity, normally would be able to afford.

      A wise and sensible government would recognize that this problem derives from
      lack of opportunity to work and earn. It can be solved by the use of a tax
      system which encourages the proper use of land and which stops penalizing
      everything and everybody else. Such a tax system was proposed 136 years ago by
      Henry George, a (North) American economist, but somehow most macro-economists
      seem never to have heard of him, in common with a whole lot of other experts.
      (I would guess that they don’t want to know, which is worse!) In “Progress and
      Poverty” 1879, Henry George proposed a single tax on land values without other
      kinds of tax on produce, services, capital gains etc. This regime of land value
      tax (LVT) has 17 features which benefit almost everyone in the economy, except
      for landlords and banks, who/which do nothing productive and find that land
      dominance has its own reward.

      17 Aspects of LVT Affecting Government, Land Owners, Communities and

      Four Aspects for Government:

      1. LVT, adds to the national
      income as do other taxation systems, but it replaces them.

      2. The cost of collecting the LVT is less than for all of the production-related
      taxes–tax avoidance becomes impossible because the sites are visible to all.

      3. Consumers pay less for their
      purchases due to lower production costs (see below). This creates greater
      satisfaction with the management of national affairs.

      4. The national economy
      stabilizes—it no longer experiences the 18 year business boom/bust cycle, due
      to periodic speculation in land values (see below).

      Six Aspects Affecting Land Owners:

      5. LVT is progressive–owners of
      the most potentially productive sites pay the most tax.

      6. The land owner pays his LVT regardless of how his site is used. A large
      proportion of the ground-rent from tenants becomes the LVT, with the result
      that land has less sales-value but a significant “rental”-value (even
      when it is not used).

      7. LVT stops speculation in land prices and
      the withholding of land from proper use is not worthwhile.

      8. The introduction of LVT initially reduces the sales price of sites, even
      though their rental value can still grow over a longer term. As more sites
      become available, the competition for them is less fierce.

      9. With LVT, land owners are unable to pass the tax on to their tenants as rent
      hikes, due to the reduced competition for access to the additional sites that
      come into use.

      10. With LVT, land prices will
      initially drop. Speculators in land values will want to foreclose on their
      mortgages and withdraw their money for reinvestment. Therefore LVT should be
      introduced gradually, to allow these speculators sufficient time to transfer
      their money to company-shares etc., and simultaneously to meet the increased
      demand for produce (see below).

      Three Aspects Regarding Communities:

      11. With LVT, there is an
      incentive to use land for production or residence, rather than it being unused.

      12. With LVT, greater working opportunities exist due to cheaper land and a
      greater number of available sites. Consumer goods become cheaper too, because
      entrepreneurs have less difficulty in starting-up their businesses and because
      they pay less ground-rent–demand grows, unemployment decreases.

      13. Investment money is withdrawn from land and placed in durable capital
      goods. This means more advances in technology and cheaper goods too.

      Four Aspects About Ethics:

      14. The collection of taxes from
      productive effort and commerce is socially unjust. LVT replaces this extortion
      by gathering the surplus rental income, which comes without any exertion from
      the land owner or by the banks–LVT is a natural system of national income-gathering.

      15. Bribery and corruption on information
      about land cease. Before, this was due
      to the leaking of news of municipal plans for housing and industrial
      development, causing shock-waves in local land prices (and municipal workers’ and
      lawyers’ bank balances).

      16. The improved use of the more
      central land reduces the environmental damage due to a) unused sites
      being dumping-grounds, and b) the smaller amount of fossil-fuel use, when
      traveling between home and workplace.

      17. Because the LVT eliminates
      the advantage that landlords currently hold over our society, LVT provides a
      greater equality of opportunity to earn a living. Entrepreneurs can operate in
      a natural way– to provide more jobs. Then earnings will correspond to the
      value that the labor puts into the product or service. Consequently, after LVT
      has been properly introduced it will eliminate poverty and improve business


  • This piece might be more persuasive if it was not filled with so many canards, although perhaps that is difficult to avoid in an interview.

    To take one, “only 15 percent of all the money flowing through financial institutions today ends up in businesses. The rest of it is staying within the closed loop of the market itself.”

    This conflates the velocity of transactions (“money flowing through financial institutions”) with investment (“ends up in businesses”). This should not be surprising. An even smaller quantity of money in the real estate market ends up financing construction, but this is not a problem. So to with respect to finance.

    It may be that there are problems with how our legal and regulatory structure is set up with respect to finance, but evaluating that proposition would require an different inquiry that never appears in this interview.

  • Carlos Jorge Martins

    Só posso dizer que fiz uma leitura sensacional.

  • Oswaldo Lairet

    Ms. Foroohar’s sharp observations and journalistic skills are right on target!

    What she describes is the end-stage of a 40 to 60 year cycle in human ecosystems, typified by rising asymmetry in the access to Relative Value and Financing. Upon monopolizing the price and time-dimension variables of ownership, the elite seizes the bulk of the system’s net present value, returning it to oligopoly, the prevalent resource-competition dynamics of pre-capitalist societies.

    The cycle is best described by a pair of ordinary differential equations, first used to model Predator-Prey dynamics in 1925, a modified version of which fits the paths traced by US Debt (predator) and GDP (prey) for the past 40 years (Chart on my 2015 post at

    At a global scale, the chart explains why servicing global debt has long since become “Central-Bank-Dependent” via persistent rate intervention, QE, LTRO, negative rates, etc: The ratio of growth of predator size (global debt) to prey size (global income*) grew exponentially unstable**

    * Measured in MZM-detrended GDP (p.3 in
    ** As predicted by Minsky’s Long Cycle

  • DJohn1

    “Can you have an economy that is fundamentally stable if you have that bifurcation of wealth and distribution?”

    Actually, sadly, yes you can. If the vast mass of the population are starvelings at subsistence wages, a two-class society can be very stable. Not much worth living in unless you are one of the filthy rich at the apex, and akin to every Third World kleptocracy on the planet. But yes, fundamentally stable.

  • stevelaudig

    “The Fed has pumped $4 trillion of money into the markets, but we are still in the longest, slowest recovery of the post‑war era.” Pumping money into financiers isn’t into the economy, if I understand the point. The money would’ve been better spent paying of homeowner mortgages. The financialistas would still get it but the burden would have been removed from the nation. or so I think.

    This struck me as “co-incidence” compare the time line ito the legalization of “gambling” [which also produces no-thing”.

    Share buybacks were actually illegal in the early ’80s.

    Yes, that’s right. Until
    1982, it was considered market manipulation. It’s amazing that something
    that used to be illegal is now basically the status quo for corporate
    behavior. Share options — which push CEOs to think short term — make up
    somewhere between 30 and 80 percent of how the C‑Suite in America gets
    paid. It creates a cycle where they have every incentive to jack up
    share price in the short term.