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The Great Stock Scam

Stock sales are supposed to finance new or expanded productive activity. The numbers tell a different story.

This is the twenty-third of a series of blogs based on excerpts adapted from the 2nd edition of Agenda for a New Economy: From Phantom Wealth to Real Wealth. I wrote Agenda to spur a national conversation on economic policy issues and options that are otherwise largely ignored. This blog series is intended to contribute to that conversation. —DK


Dollar Bills, photo by Daniel Borman

Photo by Daniel Borman

We think of stock sales as ways for households to invest and for corporations to raise capital. But if you dig into the numbers, something very different is going on.

In 1999, according to corporate-ethics guru Marjorie Kelly in The Divine Right of Capital, the public sale of newly issued corporate common stock netted $106 billion—in other words, less than 1 percent of the $20.4 trillion in corporate shares traded in that year went to the corporations that issued them.

Even more surprising, Federal Reserve data reveal that from 1981 to 2000, the overall net flow of money to corporations from stock sales was a negative $540 billion, meaning that corporations spent more money from their treasuries to buy back their own shares than they raised by selling new shares.

One might wonder why corporate management would use company money to buy back its own shares, rather than use it either to pay dividends to their shareholders or to invest in new productive capacity.

One effect of such purchases is to inflate the price of the stock, which defenders of the practice argue serves shareholder interests. Another answer is offered by the independent market observer and author Thornton Parker. Using Federal Reserve statistics, Parker found that from 1982 to 2008, the largest net sellers of corporate stocks weren’t corporations, but households—to the tune more than $5 trillion. Corporations during this same period were net buyers by $737 billion.

At first blush, this makes no sense. The presumed function of share markets is to facilitate the purchase of corporate shares by households in order to raise money for productive corporate investments. Corporations should be net sellers and households should be net buyers.

The data thus suggest that since the 1980s, the function of the public share markets has not been to fund productive investment.

Parker provides a telling explanation of why the reality doesn’t match up. When corporate executives sell the shares they receive as part of their compensation packages, the proceeds go to them, not to the corporation, and therefore count as household sales. The data thus suggest that since the 1980s, the function of the public share markets has not been to fund productive investment. Rather it is to build the financial assets of corporate executives who took a major portion of their compensation in newly issued shares.

So much for the claims of politicians and pundits shilling for Wall Street that tax breaks for the wealthy will translate into investments that create good jobs. Most Wall Street players are interested in only one job: their own.

Monopoly money photo by JohnBut What About My 401(k)?
Credit cards, mortgages, insurance, retirement: How to fulfill our basic financial needs (and find real security) without Wall Street.

Ownership should be in the hands of people who have a stake in the long-term health of the enterprise and the community and ecosystem in which it is located. Rather than turn our retirement savings over to Wall Street con artists, we will do much better as individuals and as a society to favor direct, long-term investments by individuals in companies of which they have personal knowledge. An owner who needs to cash out his or her shares can sell them to another owner, a new stakeholder, or even the company itself in a private transaction.

Wall Street operates a sophisticated con game that leaves us dependent on a series of scams that it presents to us as financial services essential to our well-being. By pushing down wages relative to the cost of living, Wall Street makes us ever more dependent on consumer credit and borrowing against our home equity. The greater our desperation, the higher it pushes fees and interest rates. It collects our insurance premiums in return for promises of payment in the event of a personal disaster—a promise that it has no intention of keeping if it can wiggle out on a technicality.

It entices us to put our savings in the care of professionally managed phantom-wealth funds with fantasies of a luxurious twenty- to thirty-year work-free vacation at the end of our lives that would place an impossible burden on the working population. It would have us believe that when we buy shares of stock on Wall Street exchanges we are providing investment funds for companies to expand productive output, when in fact we are mostly converting our personal financial assets to the personal financial assets of Wall Street privateers.

Daily expenditures should be covered by living family wages. Insurance is best provided by nonprofit insurance pools managed for the benefit of their participants. Old-age security depends on an intergenerational contract. Savings should flow to real investment in real productive enterprises and infrastructure.

The leadership for change will not come from within the Wall Street-Washington axis. It must come from a powerful citizen movement that reframes the public debate and creates a political force that official office holders cannot ignore.

[Next: Mapping Uncharted Economic Waters]


David Korten author picDavid Korten (livingeconomiesforum.org) is the author of Agenda for a New Economy, The Great Turning: From Empire to Earth Community, and the international best seller When Corporations Rule the World. He is board chair of YES! Magazine and co-chair of the New Economy Working Group. This Agenda for a New Economy blog series is co-sponsored by CSRwire.com and yesmagazine.org based on excerpts from Agenda for a New Economy, 2nd edition.

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