Sunday, April 3, 2011

Thus Spake The Maestro

On a European train I caught up with the newspapers I had been carrying from New York. This was in the Financial Times of March 23:
Alan Greenspan, former chairman of the Federal Reserve, argues that the decline in the share of liquid cash flow that US companies choose to allocate to illiquid capital investment stems from uncertainty in business arising from the surge in government activism since the collapse of Lehman Brothers.
“The decline in the share of liquid cash flow the US companies choose to allocate to illiquid capital investment” means that the US companies are not investing the cash they earn from their operations. The statement is accurate, its circumlocutional form notwithstanding. When companies do not invest the money they earn, the cash balance on their bank accounts grows. The growth is reported in accounting statements, specifically in the balance sheet under cash (assets).

The 500 largest U.S. corporations that comprise S&P 500 index hold over a trillion dollars in cash, an off-the-chart sum compared with the historical average. The accumulation began right after the financial crisis and has continued to day. The well-known “development” has been the subject of extensive commentary. I mentioned it a few times on this blog. The point of concern is that the corporations make money by investing: converting money to capital. Cash, whether in a bank vault or under a mattress, does not increase by a cent. For that, it has to be thrown into production or circulation circuit. So a large cash balance – above and beyond what is needed for the operations – is a misuse of capital, a particularly egregious sin in the age of efficient markets.

The question is why has this been happening?

Greenspan is saying that “government activism” has created an uncertain business environment; the big businesses in the U.S. are not investing because they are scared stiff of what government might do to them through regulation. That’s why, he implies, the economy is not improving and the unemployment rate remains near an all-time high.

What is the evidence for that assertion – that the corporations are not investing because they are afraid of the government?

There is no evidence. Nothing. Zilch. John Plender who reported the quote felt compelled to ask:
But if you think the Obama administration is likely to impair the value of any capital investment they make, why are business people bidding up the value of their stock through buy-backs which increases their exposure to their own existing illiquid assets that would presumably be vulnerable to the same uncertainty?

As Brad DeLong of the University of California at Berkley argues – more plausibly in my view – business is reluctant to invest because capacity utilization is low and demand for its products is weak.
That is the he-said-something-that-I-might-have-disagreed-with kind of disagreement that T.S. Eliot mocked for the intellectual vacuity that it is; those dead on the London Bridge, and you know they were so many! Brad DeLong of Berkeley is also being timidly wordy with “capacity utilization” and “weak demand”. What he means is that businesses do not invest because they cannot generate profits.

That’s all. Period. Everyone knows that. Dogs probably know that; you need not be a Berkeley professor. Here is from the same paper a week earlier, under the heading “Companies face difficult calls on returning cash” (I said that it is a subject of concern):
So widespread has been the move towards returning extra cash to investors that examples of three different ways of doing so were on display just last week .. Even so, shareholders typically do not want payouts today to come at the expense of investment that will sustain business growth tomorrow.
You got that about the shareholders? They do not want to get cash back at the expense of investing in business opportunities. Of course. They have invested capital in the companies and want it to work as capital so their wealth will increase. They have no use for cash else they would not have invested it in the first place. So they take back cash only when companies assure them that there is no use for it because there are no investment opportunities.

Later in the same article:
Richard Pennycook, the finance director of WmMorrison which last week announced a £1bn ($1.6bn) share buy-back programme over two years … having consulted shareholders over the course of the past six months, he says: “They were certainly keen to get reassurance that we were making all the investment we wanted to make in the business.”

Yet Alan Greenspan “argues” that the U.S. companies are accumulating cash because they are afraid of the government. And he is saying that about an administration that continually bends backward and forward to accommodate business interests.

And no one challenges him, except in the politest, most indirect way somewhere in the back pages in the middle of a paragraph.

Why is Greenspan saying that?

The word “why” could have two contexts. Let me answer both.

He is saying that because in his new capacity as consultant to businesses, he wants to score brownie points with his bosses. Verbally attacking the government costs nothing and if echoed from enough corners, could dampen the already dampened regulatory efforts.

And he is saying that because he is a shameless, unprincipled buffoon. As the chairman of the Federal Reserve, as an economist – as someone who ran an economic consulting firm – it is impossible for him not to know why companies pile up cash. But because he is an opportunist, in addition to being a shameless, unprincipled buffoon, he comes out and says something totally, absolutely, utterly drivel – say, that the earth revolves around the sun because WalMart has a sale on old astronomy textbooks – because it suits his personal interests.

This character was put in charge of the Federal Reserve, was made into a worship-worthy Maestro by a sycophant press – boy, how deep were his thoughts, his statements! – and was given a free hand to have his way with the U.S. economy for 18 years.

And he did. Oh, boy, how he did.