Peter Morici, Professor at Smith School of Business at the University of Maryland and former Chief Economist of the US International Trade Commission, writes the following on the FoxNews web site. Note: Investing is not accurately described as “about creating jobs,” but nonetheless Morici makes valid points about the way private equity operates.
Banking and capital markets have become a rigged game, making private equity executives and investment bankers rich and denying ordinary Americans jobs and a decent retirement.
In the wake of Dodd-Frank, more than 60 percent of all U.S. bank deposits are controlled by a handful of Wall Street financial houses; hence, depositors get less than one percent interest, while banks charge 4 percent or more for low risk loans—if you can get one.
Most Americans are watching their retirement accounts wither, even as corporate profits and executive bonuses soar.
In February 1998, the S&P 500 first closed above 1,000. Since then, corporate profits are up more than 240 percent, while stocks have risen 31 percent—less than required to keep pace with inflation.
Simply, most of the value created by higher profits has been captured by private equity, hedge funds, and aggressive M&A shops at investment banks, or paid out to corporate executives through lavish stock options.
Private equity and their brethren do shape up troubled companies, but also load them with excessive debt to pay lavish bonuses and big returns to investors. Like executives at publicly traded companies, private equity partners print lots of new stock to reward themselves. In the end, the companies, or their pieces, get sold to new investors, overburdened with debt, and often fail or don’t make a decent return.
That’s how private equity and corporate leaders get rich, while most Americans’ retirement savings stagnate or shrink. IRAs and similar vehicles are usually invested in mutual funds that include the companies Wall Street and corporate executives pillage.
Ordinary Americans, every month, put their retirement savings into the market, and buccaneer capitalists like Mitt Romney, overpaid CEOs and close lieutenants take it out.
In the bargain, businesses are compelled to slash workers pay, jack up health insurance premiums and co-pays, and sack their pensions.
Americans don’t need a mea culpa from Mr. Romney—at Bain & Company he responded to the incentives created by the Clinton-Bush-Obama financial sector policies. Rather, Americans need to know how he intends to fix capital markets so that investing in America is about creating jobs, not pirating profits.