80% tax on short-term investment gains

I've got two : Management consulting and investment banking

However I think the point is that the finance industry is built on the fundamental concept of moving money around and moving money to those who need it / will use the money to produce tangible products and services. So I guess one could interpret short term trading as just a byproduct of inefficiencies in this industry which doesnt add any real value. However as a counter point, I could argue that short term traders provide liquidity to the market and in a way keep the markets a bit more stable. Hence they provide a value creating service.

General Motors

AIG

Lehman Brothers

Bear Stearns

Enron

LTCM

...

Haha!! More like value destroying businesses!!

However, I have to disagree with BSD about MC and IB not being value-creating businesses. If they didn't create any value, then how would they remain in business (ignoring LEH and BSC)? The answer would be that they wouldn't stay in business. Therefore, they are creating value for their clients through their specific domain expertise. I realize they may not be capital intensive industries like construction, manufacturing, and mining - and therefore do not create tangible, easy to see (and especially measurable) value. But, if a MC firm makes recommendations to a manufacturing company that streamlines their processes and saves them millions of dollars, did they not create some of the value? The same can be said for IBs, that they help transfer money from people that have it to people that need it. They facilitate trade, which is the greatest value creating activity of all. Trade redistributes scarce resources to those that demand them, leaving both parties better off than before - hence, creating value.

All industries create some kind of value, otherwise they would be (or will be) replaced in the cycle of creative destruction. Now, individual companies is another matter entirely...

You took the words right out my mouth.

Just because a business doesn't create a tangible asset with value, doesn't mean that it isn't providing something of value.

Take IB for example. If you're company is looking to issue new bonds, are you going to do it by yourself? Of course not, you hire an IB firm to do it for you. Their services have value.

To say IB doesn't produce value is that same as saying a realtor doesn't produce value, they just move an asset (a house) from one party to another.

RF

Fellas i was just kidding (hence the icon). Damn its tough to convey tone online.

Haha, my bad. I agree that they need a better sarcasm emoticon.

“They wouldn’t like it at all,” Gerstner said. “Wall Street is driven by transactions. That’s what they live by. They don’t live by long-term investment decisions.”

Right on !!! I even hate the existing 35% short term Captial gains tax. On the contrary they should impose these taxes on commodity and oil trading where in prices are artificially inflated/deflated based on some random speculation by a handful of traders, thereby affecting the daily lives of millions of people.

This all comes back to the concept of free markets and how strongly we believe in them and how American (or unamerican) is lazze faire capitalism. When the times are good, no one seems to complain. But when times are bad, everyone has an opinion on how to "fix" things. Any history book (e.g. Extraordinary delusions - https://en.wikipedia.org/wiki/Extraordin ... _of_Crowds) will tell you that this cycle has gone on forever (and will probably keep going forever).

Good discussion all.

At the risk of sounding like Yogi Berra, I agree that (mostly) businesses, which don't go bankrupt (or don't need to be rescued) are value creating (for someone). Otherwise, they wouldn't be in business.

What I really want to convey is that there are some operations and activities in the capitalist enterprise that are not truly value creating in terms of the benefit to greater society or to even the individual. Now, we could have a great debate arguing over what's truly value creating and what's not. There will be ones we on which we all agree, and then there will be ones on which we differ and offer (in most cases) valid arguments.

Take for instance, the drug trade. It's an illicit business, but it's still a business. While one may say that the value is in the high that the consumer gets, I can also say there is value destruction in terms of the health issues that individual may face from excessive drug abuse and/or the destruction of social relations with that person's family/friends. The value here is purely subjective, which was my main point in the OP. Now, if we want to go on the topic of drugs, I think it should be made legal, regulated (but much stricter) just like any other consumer business, and taxed at the highest levels. Many will disagree with me on that, and there's a fair case to be made why drugs should be kept illegal.

Now, where the heck am I going with this discussion?!?! On a tangent that's for sure...

I think that's the key. It's not hard to quantify economic benefit, but when you start to move into the social or "common good" arena thinks get hazy because political leanings come into play.

RF

I think that system of awarding managers and CEOs is fundamentaly wrong and that it will finally come to a dead end soon. Principal/agent problem has been present from the begining of the capitalism, but I think that current crisis just brought it on the "main stage".

The whole system of awarding managers solely on the increase in EPS seems awfully wrong to me. I mean, I am the shareholder, so it seems natural for me that I will give the highest bonus to the manager who increases my wealth, and the EPS seems the most appropriate measure. But... Am I doing the right thing?

If I am the shareholder who wants to stay in business in the long run and who is paying the bills from the income of that business, I should award the manager who is expanding my business, opening the new subsidiaries, bringing me new buyers, increasing my net income etc. I should pay the highest bonus to the visonary and the leader.

Instead, in the current system, I am awarding financial manipulator who increases the value of my stock by using financial gimmicks, or even some more drastic measures like chopping-off companies (5 smaller worth more than one big) or cutting the costs by closing the plants in US and moving them to China or Taiwan. Nothing strange if I am short term investor who cares only about "buying for 2 and selling for 3". That way, prevailing greed had turned the manager, leader and visionary in nothing more than inflation pump.

I know, there is nothing wrong in the individual strive for wealth, but we, as a society, should ask - at what price? What is the long term price of actual greed? How sustainable is the popular cost-cutting policy of closing plants from Chicago to New York and transfering the production lines to China? If we close them all, who is going to buy that same products if the entire US labor force is on wellfare and broke?

I find it funny that people claim capitalism or the American implementation of it is fundamentally flawed when it is that exact same system that has made the US what it is today, a nation of very wealthy people (at all levels compared to the rest of the world) and has produced some of the greatest technological advances (in medicine, engineering, science) the world has ever seen.

I'm not saying the current system couldn't be further refined, but to claim it is fundamentally broken is plain wrong.

RF

Not to be rude, but it's called efficient allocation of resources. If something can be made more efficiently in China, then it benefits all consumers worldwide (including the US) to have that product made there. Remember, the US is still the largest manufacturing country in the world by a long shot (double China's output). However, today we don't manufacture the same things we once did. Today we allow other countries to manufacture what I'll call simpler goods, and we have moved to manufacturing more advanced products like computer chips, aircraft, and pharmaceuticals.

While I understand people are afraid we are losing jobs to China, India, and other countries, in actuality it is a good thing that we outsource the manufacturing of these jobs because it allows American companies to focus on more advanced forms of production that many of these countries don't have the ability to do. Times have changed since the 1950's and the blue collar manufacturing job is not going to be a ticket to the middle class now or ever again. I personally think that's a good thing. If you compare a Ford line worker's skills to that of an accountant, it's obvious that becoming an accountant is a much more difficult job than working on an assembly line. While not as physically demanding, it takes a greater amount of brainpower and critical thinking skills. The middle class has evolved from blue collar to white/gray collar and now requires more skills to reach. Average is now at a higher standard than it once was. It shows America has evolved and gotten smarter and more efficient than at any point in its history. Unfortunately, many Americans don't understand that it is a sign of progress and instead listen to their politicians who seem to want everything to remain in a static state with no competition. Well, that is not the world we live in, and people better understand that we must compete to remain the richest, freest country on the planet.

I'm wondering where in my post have you found this claim? Please point me that spot. I said that system (so it could be in Australia, Norway, Russia or Angola) of awarding managers is fundamentaly wrong.

And I am just trying to put myself in the shoes of major shareholder and decide who I am going to pay the highest bonus to. To the manager who increases my wealth or to the manager who expands my business. Where did you find the critique of capitalism in that?

I'm not trying to be a jerk here, I just like a good ol' internet argument!

You said... "I know, there is nothing wrong in the individual strive for wealth, but we, as a society, should ask - at what price?".

That sounds like a pretty clear critique of a fundamental component of capitalism, doesn't it?

RF

Capitalism is comprised of a million components, few of them are wrong, or should I say - have gone wrong. One of them is the system of awarding managers. As you said, current system could be refined, and I pointed to a component that needs some urgent work. Awarding is the component that has gone through numerous changes during 20th century. In the beginning, insudtrials were paying the highest incentives to the manager who produces the most, 30 years later to one who sales the most because stocks were overloaded with goods produced earlier...


Social responsibility? Sustainable developement? Don't worry, I don't have the intention to get our civilisation back to feudalism

How do you define social responsibility? It probably depends on which part of the political spectrum you fall. Same with sustainable development.

RF