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You Can't Become Rich In Your Pocket Until You Become Rich In Your Mind | ||||
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They depend on a social order in which some people have money to spare and others don'tFinancial populists often propose to democratize the Fed, opening up its proceedings to public scrutiny, and making membership on the Board of Governors into an elective office. Fundamentally, this is a fine idea. But, in the spirit of this chapter, its limitations have to be acknowledged. Congress is an elective office, too, and its proceedings are televised in narcotic detail on C-SPAN, but the body still produces innumerable insults to democracy. The moneyed and powerful enjoy an access to Congress that mere citizens lack, a disparity that is well known; why should applying similar standards to the Fed produce any better results especially when it comes to the central bank, whose issues are dear to the hearts of rentiers? The spectacles of Congressional tax-writing and budget-making dont offer an inspiring precedent. Procedure aside, the nature of the central bank may be less important than the broader institutions in which it is embedded. A comparison with other countries demonstrates the point. The most independent of the major central banks is the German Bundesbank (known as Buba to its friends); it does what it pleases with an insouciance that even Alan Greenspan must envy. The least independent of the European central banks is the Bank of England; though it began its life in the seventeenth century as a private institution that served as banker to the state, it was nationalized in 1946 by the Labour government and still takes policy direction from the Chancellor of the Exchequer. Now it must be admitted that Buba has kept interest rates very high over the past several years, out of fear of the inflationary consequences of Bonns takeover of the former East Germany. Yet over the long term, by any standard whether by hardheaded ones like growth rates and investment levels, or squishy-humanist ones like poverty rates and income distribution the German economy has performed far better than the British one for decades. It would be tempting to conclude from that comparison that maybe an independent central bank is a pretty good thing after all. But the Bank of Japan is largely subordinate to the Japanese Finance Ministry, and by the same standards, tough or soft, Japans economy has done far better than even Germanys over the long term. So maybe an independent central bank isnt such a good thing after all. Or maybe the importance of the central bank is exaggerated. Unlike Britain and the United States, which suffer from loosely regulated financial systems and a shoot-from-the-hip stock market mentality, Japan and Germany have rather tightly regulated systems in which stock markets play a relatively unimportant role in both investment finance and corporate governance. Compared with these broader financial structures, the central banks (in)dependence isnt quite so important. Populist critiques of the Fed tend to concentrate excessively on its autonomous powers while overlooking the influence of the financial markets on the central bankers: the Fed follows interest rate trends as well as leading them. The 1994 tightening offers a good example. Creditors began selling their bonds, driving up long-term interest rates, several months before the Fed jacked up the short-term rates in February. They reinforced the message with repeated cries urging the Fed to tighten. Even after the Fed began tightening, Wall Street bayed for more. Similarly, Greenspans urging of deficit-cutting on Clinton was done in the name of pleasing the bond market, a task the new President took to with great public fervor, despite the private reservations reported by Woodward. Were some reconstructed Fed to shift policy into a permanently stimulative mode, it would have to face the prospect of a capital strike on the part of creditors; it might be able to force short-term rates down, but long-term rates could rise toward 20%. Any democratization of the Fed that didnt simultaneously take on the financial elite would quickly face such a disaster. Sure, the Fed should be opened up its secrecy ended; its own finances brought into the general federal budget; its personnel made more broadly representative in terms of gender, race, and class; and its narrow, austere criterion of economic management put on permanent furlough. But that kind of transformation could succeed only as part of a broader transformation of financial relations. investing socially Over the last decade essentially since the campaign to purge stock portfolios of companies doing business in South Africa started in the early 1980s weve seen an explosion in investment funds devoted to goals beyond mere profit-maximization. One can trace the movements history back further to the early 1970s, when some Methodist clergy founded the Pax World Fund, and two portfolio managers, Robert Schwartz in New York and Robert Zevin in Boston, started managing money for a few individuals and institutions concerned about where their profits came from (Kinder, Lyndenberg, and Domini 1992). Besides South Africa, the principal concerns motivating social investors in the early days were nuclear power and weapons-making. That is, the founding impulses were to avoid the noxious. In more recent years, theres been a growth in the desire to do active good with ones investments to foster development in poor communities, for example, or fund environmentally friendly technologies. The unifying feature of social investing (SI) is the desire to accomplish some social goals along with making a return on ones money. As might be expected, the field is populated by a full range of people, from cynics looking for a market niche to some fine people looking to transform the world. The mainstream of the SI industry is characterized by some form of social screening. The flavor of that screening can be sampled in an ad in the May-June 1995 issue of the Utne Reader for Working Assets, the SI mutual fund giant. Working Assets touted its No-Load Citizens Index Fund thus: Unlike the S&P 500, however, we have a low concentration in dirty, dying industries like heavy equipment, oil and chemicals, weapons, utilities, alcohol and tobacco. Instead, weve concentrated on clean industries of the future, such as communications, consumer products and services, business equipment, high-tech, finance, healthcare and food production. While every individual company is socially screened, the economic analysis underlying this portfolio selection remains happily unexamined. Forget that the dying industries are generally high-wage, and the clean industries often less so. And where would communications, business equipment, and other high-tech industries be without the chemicals used in the manufacture of computer hardware, and the lowwage labor exploited in the process? Dont the products of the high-tech industries contribute to the constant cheapening of labor and the muchlamented globalization of the assembly line? Where would any of these glistening industries be without the electricity produced by the nasty oilpowered utilities, or the earth moved and the concrete poured by the products of the heavy equipment industry? Would upper-middle-class Americans, Working Assets target population, have incomes 50 times the Third World average if it werent for all those nasty weapons? Doesnt food production profit nicely from the constant cheapening of raw agricultural commodities, a trend that has savaged Third World exporting nations and indigenous producers?3 Isnt it the cheapest sort of moral bombast to get exercised by tobacco production, one that induces a warm glow in the weed-o-phobe, but involves no significant challenge to the social order? And what service does finance offer except the multiplication of riches for those already blessed with plenty? But the social investors are, in large measure, part of that financial industry one that skims the cream, from both the moral and niche marketing points of view, but one that nonetheless never troubles itself with the larger questions of why some have financial assets while most dont, or, more radically, how that translates into the power of creditor over debtor, and why some should profit from the disguised labor of others. In an interview broadcast on May 9, 1995 on CNBC, the cable TV business news channel, Sophia Collier, the big cheese at Working Assets, said that 40% of the S&P 500 stocks are socially responsible. That assumes that you have no problem with the giant multinational corporation itself, just some individual malefactors. The leading index of socially responsible stocks, that published by Kinder, Lyndenberg, and Domini, includes about half the S&P 500, presumably the same firms Collier had in mind. The political thinking of mainstream SI is underdeveloped. In its pragmatic faith in individual action, its classically American. Social investors also make some odd alliances. An issue of The Greenmoney Journal (1995) approvingly quoted mutual fund kingpin (Sir) John Templeton reflecting on ethics, unaware of or indifferent to the fact that his Templeton Prize for Progress in Religion in 1994 went to Michael Novak, famous for his various theological apologias for Reaganomics, nuclear weapons, and Argentinas dirty war against dissidents (Henwood 1994b) a prize awarded by a board that included distinguished ethicist Margaret Thatcher. A contradiction no social screen can address is that investment profits originate ultimately, no matter how you dress them up, in the uncompensated labor of workers, and that they depend on a social order in which some people have money to spare and others dont. When asked to comment on this, the former radical academic turned social broker Michael Moffitt conceded, Its a problem. Moffitts past makes him aware of the problem, but most social investors dont even think about it. With South Africa no longer an issue, the most popular social screens reflect the concerns of upscale liberals: tobacco, women in the boardroom, animal testing, and the grosser environmental crimes. Concerns like women on the assembly line, unionization, and workplace injuries rarely appear. One of the favorite stocks of mainstream SI has been that of the Washington Post Co., a fiercely anti-union firm that publishes the daily journal of record for the DC branch of the status quo. But the SI universe is not all so conventional, and some aspects are experimenting with the actual transformation of property relations. Lets start with the conventional and move gradually away from it. Along with the growth in SI has come an increasing interest in alternative financial institutions, like community development banks (CDBs) and loan funds. The most prominent of the CDBs is the South Shore Bank of Chicago, whose promoters say it has revived a declining urban neighborhood while turning in a sterling financial performance. It is touted by some as a model for the free-market era, a private-sector alternative to discredited old social programs, though Lyndon Comstock, founder of Brooklyns Community Capital Bank, quickly conceded in an interview that a bank, even one with social goals, is still no substitute for public sector spending. South Shore, founded in 1973, is the oldest and richest of its kind. It has attracted talented bankers and lots of outside depositors. If you read its press, its done wonderfully well. In what appears to be the first outside effort to audit its claims, Benjamin Esty (1995) of the Harvard Business School found that South Shores actual record is less impressive than its PR. When measured against nearby banks of comparable size, its financial performance has been fairly underwhelming. That would be fine if it were accomplishing its social goals, but it appears not to be. When Esty compared social indicators for the South Shore neighborhood with contiguous communities using Census data from 1970, 1980, and 1990, he found the results to be decidedly mixed at best. While unemployment in the South Shore neighborhood was lower, incomes have fallen more rapidly than in the neighboring communities; overall, concluded Esty, South Shores relative performance has been worse than the contiguous neighborhoods. Now there may be all kinds of problems, methodological and conceptual, with this comparison, Esty admits, but these results are nonetheless very damaging to the CDB cause. Closely related to the South Shore model are various nonbank forms of local lending like community development funds. Though not strictly commercial banks, they too accept money from socially minded investors and then make loans to fund housing rehabilitation, nonprofit housing development, and small businesses. The industry is still quite small. According to the National Association of Community Development Loan Funds (1996), as of the end of 1995, the industry had $108 million in loans outstanding, and $204 million in capital, a third of the capital permanent and the rest borrowed. In the nine years after their 1986 birth, NACDLF member funds financed 56,243 housing units, 73% of them permanently affordable for low-income residents, and created or preserved 11,313 jobs, 59% of them for low-income people, 51% for women, and 37% for minorities. Their loan loss experience was an impressive 0.92%. Of course all these numbers are better than nothing. But so far they barely register on the national screen. The total number of jobs created or preserved over the entire 10-year history represents less than two days of normal U.S. employment growth; of houses financed, about 10 days of normal U.S. housing production.4 And some loans extended under the name of community development look rather odd indeed. In its 1995 annual report, the Northern California Community Loan Fund bragged about a $25,000 loan to establish a Ben & Jerrys ice cream store in San Francisco that will train and provide employment for low income youth from San Franciscos Tenderloin neighborhood. A sidebar, illustrated with a picture of smiling, freshly employed teens, claims that the business supports youth programs in several ways: job training takes place in the ice cream parlor, while the profits go towards creating new business enterprises to benefit homeless youth. |
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