October 10, 2003

A Fool and Your Money ...

BEFORE WE EXAMINE the latest angry screed from Michael Moore on economics, the business of business, and supposed corporate malfeasance, we would present some historic examples of how commercial operations have worked throughout human history. They are lengthy examples, but we hope you find them both interesting and meaningful to the topic at hand.

"And you see that fellow in the freedman's seat? He's already made a pile and lost it. What a life! But I don't envy him. After the first million the going got sticky. Right now I'll bet he's mortgaged every hair on his head. But it wasn't his fault. He's too honest, that's his trouble, and his crooked friends stripped him to feather their own nests. One thing's sure: once your little kettle stops cooking and the business starts to slide, you get the brushoff from your friends. And, you know, he had a fine, respectable business too. Undertaking. Ate like a king: boars roasted whole, pastry as tall as buildings, pheasants, chefs, pastrycooks, the whole works. Why, he's had more wine spilled under his table than most men have in their cellars. Life? Hell, it was a dream! Then, when things started sliding, he got scared his creditors would think he was broke. So he advertised an auction:


-- Petronius, The Satyricon, circa A.D. 60

"The greatest danger to Medieval banking was in granting loans to European monarchs to finance wars. The use of mercenary armies and field artillery increased the costs of mounting military operations. To finance these activities, rulers were often willing to repay loans at extremely high rates of interest sometimes as high as 45 to 60 percent. Yet if they were unable to repay the loans, they simply did not. Most of the bank failures of the late Middle Ages and Renaissance were the result of large loans to rulers who refused to pay their debts. The Bardi and Peruzzi banks suffered greatly when England's monarchs refused to pay for loans acquired to finance the Hundred Years' War."

-- "Banking in the Middle Ages," University of Calgary.

"By 1634, the rage for owning tulips had spread to the middle classes of Dutch society. Merchants and shopkeepers began to vie with one and another for single tulip bulbs. How bad did it get? Well, at the height of tulip mania in 1635, a single tulip bulb was sold for the following items:

• four tons of wheat
• eight tons of rye
• one bed
• four oxen
• eight pigs
• 12 sheep
• one suit of clothes
• two casks of wine
• four tons of beer
• two tons of butter
• 1,000 pounds of cheese
• one silver drinking cup.

The present day value of all these items? Nearly $35,000! Can you imagine spending $35,000 for a single tulip bulb? This was happening in Holland in the mid-17th century. It was getting so bizarre that people were selling everything they owned – their homes, their livestock, everything – for the privilege of owning tulips, on the expectation that the bulbs would continue to grow in value."

-- Ric Edelman, "Tulip Bulbs and the Stock Market."

"It was not so much the little trader or speculator who was struck by yesterday's cyclone; it was the rich men of the country, the institutions which have purchased common stocks, the investment trusts and investors of all kinds. The little speculators were mostly blown out of their accounts by the long decline from early September. Thousands of them went headlong out of the market on Thursday. It was the big man, however, whose holdings were endangered yesterday and who threw his holdings into the Stock Exchange for just what they would bring, when hysteria finally seized him."

-- The New York Times, Oct. 29, 1929 (emphasis added)

"What a difference a year makes. Last December, Time magazine anointed Amazon.com founder Jeff Bezos as its "Person of the Year." In prose bordering on the erotic, the magazine gushed, "Jeff Bezos loves being on the move. He sits in the back of a white van, beaming as usual, surrounded by an entourage of lanky young lieutenants from Amazon.com, the Web's biggest retail store and, someday, if Bezos gets it right, Earth's Biggest Store."

Fast-forward to December 21, 2000, at approximately 9:30 p.m. Amazon's stock had closed at $15.19 per share -- down more than $86 from its 52-week high of $102, a nearly seven-fold drop from the glory days. And there was Bezos on MSNBC, looking slightly punch-drunk, a loopy grin on his face, offering variations on the theme of What Happened?

As the media have proclaimed endlessly this year, and especially during the stock-market slide of the past few weeks, 2000 will end as the Year of the Dot-Com Meltdown. E- commerce Web sites have gone down left and right. Pets.com. Living.com. DrKoop.com. Furniture.com. Toysmart.com. One of the early pioneers, eToys.com, may run out of cash and close its doors as early as March. Locally, Internet incubator CMGI's stock has crashed so sickeningly that shareholders are calling for chairman David Wetherell's head.

-- "Reality Bursts Dot-Com Bubble," Dan Kennedy, The Boston Phoenix, Dec. 28, 2000.

Potential customers were greeted by a uniformed Houston police officer as they entered the door Tuesday and then by Lay family spokeswoman Kelly Kimberly.

The store hasn't officially opened but is doing business with those who show up. Kimberly told people that if they found an item without a price to just ask and one could quickly be found.

Kimberly said (Linda) Lay's decision to open the store has nothing to do with the family's perils since the downfall of the energy trading company her husband once headed.

"This is just a practical way to utilize all of their furniture and to utilize this building, which is one of her real estate investments," the family's spokeswoman said. "She realized it was just stuff and other people might have a use for it."

-- "Linda Lay Dumps Baubles," CBS News, May 22, 2002


THINGS SURE HAVEN'T CHANGED -- not even in twenty centuries. Actually, one can go back even farther to find instances of people getting screwed out of their hard-earned capital due to fraud, speculative mania, or general stupidity. The historian Lionel Casson notes that documents exist even from the year 2000 B.C. documenting this constant of human existence. Witness this letter he cites in one of his books, from two businessmen in the ancient Mesopotamian city of Assur to their trading partners in what is now eastern Turkey:

"Thirty years ago, you left the city of Assur. You have never made a deposit since, and we have not recovered one shekel of silver from you, but we have never made you feel bad about this. Our tablets have been going to you with caravan after caravan, but no report from you has ever come here."

In short, it's not as if malfeasance or mania or speculation is new, or out of the ordinary. So then, the question is: why is it that today, so many folks seem to think they can simply ignore their responsibility to protect themselves from bad advice, bad decision-making, and bad investments?

Personally, we are not all that sympathetic to people who lost a great percentage of their wealth in dot-com, telecom, or energy-trading stocks. That's not to say we don't think it bit the wax tadpole something fierce, but Gad.

With the first sector, anyone who took time to research the companies would have seen they were built on sand; with the second, they would have seen supply-and-demand were way out of whack; and with the third, they wouldn't have been able to understand what the hell the folks at Enron were doing. Since the IRS and savvy business people also had no idea what the hell they were doing, that should have set off warning bells. And while we certainly feel bad for the Enron rank-and-file who had invested all their retirement money in company stock, one of the key rules of retirement planning is that people ought not invest all their money in company stock anyway.

Yet, Michael Moore seems to think that not only should people be able to make bad decisions with abandon, people should also take none of the blame for their own bad decisions. Instead, he charges, we should blame greedy corporate executives, whom he says all have it in for us and want to turn us into a nation of modern-day serfs. So let's look at his words in The Guardian, shall we?

Mr Moore writes:

Perhaps the biggest success in the war on terror has been its ability to distract the nation from the corporate war on us. In the two years since the attacks of 9/11, American businesses have been on a punch-drunk rampage that has left millions of average Americans with their savings gone and their pensions looted, their hopes for a comfortable future for their families diminished or extinguished. The business bandits (and their government accomplices) who have wrecked our economy have tried to blame it on the terrorists, they have tried to blame it on Clinton, and they have tried to blame it on us.

Well, there's no denying that the terror attacks on Sept. 11 did cause a temporary economic setback. Unfortunately for Mr Moore, all the broader indices are up sharply this year. Indeed, here at The Rant, we've done pretty well for ourselves with a nice diversified mix of investments. We suspect that many others are also doing gangbusters.

Of course, if one was highly invested in the Internet sector, and lost 90 percent of their nest egg, a gain of 15 or 20 percent this year will bring their remaining $0.10 per dollar to a mere $0.12 or so. On the other hand, unlike Mr Moore, we don't see why people should be excused from having made the bad decisions in the first place. It is not as if Corporate America put guns to people's heads, and ordered them to buy shares in NoBusinessPlan.com.

But, in fact, the wholesale destruction of our economic future is based solely on the greed of the corporate mojahedin.

The takeover has happened right under our noses. We've been force-fed some mighty powerful "drugs" to keep us quiet while we're being mugged by this lawless gang of CEOs. One of these drugs is called fear and the other is called Horatio Alger.

The fear drug works like this: you are repeatedly told that bad, scary people are going to kill you, so place all your trust in us, your corporate leaders, and we will protect you. But since we know what's best, don't question us if we want you to foot the bill for our tax cut, or if we decide to slash your health benefits or jack up the cost of buying a home. And if you don't shut up and toe the line and work your ass off, we will sack you - and then just try to find a new job in this economy, punk!

We don't know about you, but we certainly don't look to General Electric to protect us from al-Qaida. We also don't see how corporate America is responsible for increased housing costs. We can see environment regulations which hinder development as one factor in that. A societal change that has led to an increasing emphasis on real-estate investment would be another.

In terms of health care, we think that if people took better care of themselves -- take note, Mr Moore -- health costs might decrease. Cutting down on frivolous lawsuits, which impact malpractice-insurance costs, might also help; so would opening markets to competition. Besides, both the Government and health-insurers realize the cost-increases aren't sustainable, and they'll basically force doctors and hospitals to take less. In the end, it will all balance out.

It will especially do so in terms of the labor market. Five years ago, there was an intense labor shortage; and demography will ensure there is a labor shortage again, perhaps in five or ten years' time. It will be sparked when folks like Mr Moore begin to retire.

The other drug is nicer. It is first prescribed to us as children in the form of a fairy tale - but a fairy tale that can actually come true! It is the Horatio Alger myth. Alger was one of the most popular American writers of the late 1800s. His stories featured characters from impoverished backgrounds who, through pluck and determination and hard work, were able to make huge successes of themselves in this land of boundless opportunity. The message was that anyone can make it in America, and make it big.

Oh, God forbid people should actually work hard in this day and age. God forbid they should actually act responsibly and prudently and look towards the future. God forbid folks should actually try to do well for themselves. Since when did these things become bad?

We are addicted to this happy rags-to-riches myth in this country. People in other industrialised democracies are content to make a good enough living to pay their bills and raise their families. Few have a cutthroat desire to strike it rich. They live in reality, where there are only going to be a few rich people, and you are not going to be one of them. So get used to it.

Actually, this is a semi-decent point. The vast majority of people aren't going to be rich; after all, wealth is relative and the economics of it does have an odd, sort of pyramid-like structure to it. Still, the reason people in other industrialized democracies don't do as well is not simply because they're not ambitious; it's because their Governments don't give them the tools to do as well. They are taxed to the hilt, or they're prevented from working as much as they could; or they're over-regulated, and so on. And the reason Americans aren't as rich as they could be is because they spend too much and save too little.

Of course, Mr Moore seems to think that it's wrong to want to do well in life. That's unfortunate.

Of course, rich people in those countries are very careful not to upset the balance. Even though there are greedy bastards among them, they do have some limits placed on them. In the manufacturing sector, for example, British CEOs make 24 times as much as their average workers - the widest gap in Europe. German CEOs only make 15 times more than their employees, while Swedish CEOs get 13 times as much. But here in the US, the average CEO makes 411 times the salaries of their blue-collar workers. Wealthy Europeans pay up to 65% in taxes, and they know better than to bitch too loud about it or the people will make them fork over even more.

We don't disagree with one of Mr Moore's points -- that executive compensation in the United States is seriously and fundamentally out of whack. That said, his argument is a bit much. It's not just rich people in Europe who get hit up at tax time. This graph from the OECD puts it all in perspective. In America, only 26.3 percent of GDP is eaten up by taxes at all levels of Government -- and that was in 2002, so it should be a little lower now. In Britain, it is about 37 percent; in France, about 45 percent; and in Sweden, it is over 50 percent.

Besides, the wealthy don't need to "bitch" about high taxes -- they can just move their money across borders. It happens all the time. There is nothing stopping, for instance, a national of the United Kingdom moving to Monaco for the sole purpose of becoming a tax exile. Here in the United States, it's a bit more tricky -- our Government confiscates a good portion of one's wealth if one decides to permanently emigrate.

Oh, and at one time the rich in America did have a marginal tax rate of 70 percent. That was during the boom years of the Seventies. You remember those, right, Mr Moore? Yep, folks today get all teary-eyed thinking about how great the stagflation and unemployment and fuel shocks and disco music were back then.

But that's unfair, really -- we can't believe that even Michael Moore would want to take us back to the glory days of the Seventies. No one could possibly be that crazy.

In the US, we are afraid to sock it to them. We hate to put our CEOs in prison when they break the law...

Why all the perp walks then?

... We are more than happy to cut their taxes even as ours go up!

Since when is an across-the-board tax cut a tax increase? There's no getting around this.

... We don't want to do anything that could harm us on that day we end up millionaires. It's so believable because we have seen it come true. In every community there's at least one person prancing around as the rags-to-riches poster child, conveying the not-so-subtle message: "SEE! I MADE IT! YOU CAN, TOO!!"

Yes, and Mr Moore, your neighbors are tired of it.

Actually, can you imagine having this guy as a neighbor? Gad. You'd invite him over for a barbecue and not only would he eat all the hamburgers and the shish-kabobs and corn-on-the-cob, he'd be one of those snarky know-it-all types who likes nothing more to do than corner you at a party. Then he'd insult you because your grill was made in Japan and your wine of choice wasn't from France. By the end of the night, you'd be about ready to put arsenic in the mustard just to shut him up.

But we digress.

It is this seductive myth that led so many millions of working people to become investors in the stock market during the 90s. They saw how rich the rich got in the 80s and thought, "Hey, this could happen to me!"

The wealthy did everything they could to encourage this attitude. Understand that in 1980 only 20% of Americans owned a share of stock. Wall Street was the rich man's game and it was off-limits to the average Joe and Jane. Near the end of the 1980s, though, the rich were pretty much tapped out with their excess profits and could not figure out how to make the market keep growing. I don't know if it was the brainstorm of one genius at a brokerage firm or the smooth conspiracy of all the well-heeled, but the game became, "Hey, let's convince the middle class to give us their money and we can get even richer!"

We now have proof that Mr Moore lives in Bizarro World, for this has to be the stupidest rationale we have ever seen to explain the dot-com bubble. Maybe, just maybe, the middle-class were doing so well that they needed a place to put their money where they could earn a reasonable return. After all, the CD paying 4 percent interest per year and the savings bonds just weren't cutting it. So they turned to the equity markets.

Suddenly, it seemed like everyone I knew jumped on the stock market bandwagon. They let their unions invest all their pension money in stocks. Story after story ran in the media about how everyday working people were going to be able to retire as near-millionaires! It was like a fever that infected everyone. Workers immediately cashed their pay cheques and called their broker to buy more stocks. Their broker!

We find it very hard to believe that Mr Moore was not among the "everyone I knew" crowd. Oh, and we love the whole bit about folks "letting" their unions invest the pension money in stock.

For one, we are union members ourselves here at The Rant. While we are not yet vested in our pension and know little about its workings, we are pretty sure that we have absolutely no power when it comes to our union pension funds. We mean none. Our pension plan could put all the money into cattle futures and alpaca farms, and we'd have absolutely no say about it. For another, we damn well don't want our pension money sitting in some vault someplace when it could be potentially earning a decent return.

But it was a sham. It was all a ruse concocted by the corporate powers-that-be who never had any intention of letting you into their club. They just needed your money to take them to that next level, the one that insulates them from ever having to actually work for a living. They knew the big boom of the 90s couldn't last, so they needed your money to artificially inflate the value of their companies so their stocks would reach such a phantasmal price that, when it was time to cash out, they would be set for life, no matter how bad the economy got.

Well, let's face it, a lot of those high-flying wheelers-and-dealers went broke and got thrown out on their asses too when the bubble burst. But hey.

And that's what happened. While the average sucker was listening to all the blowhards on CNBC tell him that he should buy even more stock, the ultra-rich were quietly getting out of the market, selling off the stocks of their own company first. In September 2002, Fortune magazine released a staggering list of these corporate crooks who made off like bandits while their company's stock prices had dropped 75% or more between 1999 and 2002.

What! my God! INSIDERS have been SELLING STOCK in their OWN COMPANIES! Oh wait. That has to be disclosed, doesn't it? There are rules and regulations surrounding that, right? That information is all out in the open at sites like this, isn't it? Which means that anyone with an on-line connection could actually, we don't know, check themselves to see which way the wind was blowing?

At the top of the list of these evildoers was Qwest Communications. At its peak, Qwest shares traded at nearly $40. Three years later the same shares were worth $1. Over that period, Qwest's director, Phil Anschutz, and its former CEO, Joe Nacchio, and the other officers made off with $2.26bn simply by selling out before the price hit rock bottom.

We want to know if Mr Moore was a stockholder in Qwest, and if so, how much money he lost. We also want to know if he would be at the top of the suckers list.

Meanwhile, the average investor stayed in, listening to all the rotten advice. And the market kept going down, down, down. More than four trillion dollars was lost in the stock market. Another trillion dollars in pension funds and university endowments is now no longer there.

In Michael Moore's world, you don't have to do research or read the prospectus before sending money! Besides, why should anyone have to read that pamphlet with all those big words, anyway? Who knew there'd be "risk" involved, and the potential for "losing" cash?

So, here's my question: after fleecing the American public and destroying the American dream for most working people, how is it that, instead of being drawn and quartered and hung at dawn at the city gates, the rich got a big wet kiss from Congress in the form of a record tax break, and no one says a word? How can that be?

What is Mr Moore talking about? We've had people complaining about the tax cut since it was an idea on a napkin. It's one thing not to like the tax cut; that we can argue about another time. But it's another to just pull facts out of thin air and pass them off as truth.

I think it's because we're still addicted to the Horatio Alger fantasy drug. Despite all the damage and all the evidence to the contrary, the average American still wants to hang on to this belief that maybe, just maybe, he or she (mostly he) just might make it big after all. So don't attack the rich man, because one day that rich man may be me!

Listen, friends, you have to face the truth: you are never going to be rich. The chance of that happening is about one in a million. Not only are you never going to be rich, but you are going to have to live the rest of your life busting your butt just to pay the cable bill and the music and art classes for your kid at the public school where they used to be free.

We'll be honest. We think this is crap. As Tim Blair has pointed out, there are over 2 million American millionaires; but the reality is even better than that. There are 2,219,000 households which have a net worth of over $1 million. Mr Blair writes that one's chances of becoming a millionaire are now down to one in 140; although it is really about 1 in 49. Furthermore, since 8.1 percent of U.S. households have a net worth greater than $500,000, it should be pretty clear that folks can do well if they're just smart about things. If they just plan for the long term, and they're wise about their spending, and they don't buy the fanciest new car on the market, they should be all right.

And it is only going to get worse. Forget about a pension, forget about social security, forget about your kids taking care of you when you get old because they are barely going to have the money to take care of themselves.

We don't know about you, but we have never thought a pension or Social Security would "be there for us" when it was our time to retire. We're a bit cautious here at The Rant and as such have never ruled out the prospect of having to hoard gold, ammunition and whisky as a hedge against roving bands of hyper-survivalists in our golden years.

Oh, and as for our kids taking care of us when we get old, that's the last thing we want to happen. That's not to say we wouldn't appreciate their help when the time came for us to enter into the winter of our life; but expecting them to take care of us? Gosh. Maybe that's why so many folks get so worked up at youth sporting events: their retirement plans involve banking on Junior to sign an endorsement deal.

Anyway, Mr Moore goes on to complain about the supposed injustice of companies taking out life-insurance policies on their lower-level employees. Personally, we think this is a bit macabre, but nothing to get all worked up about.

Still, we find it amazing that Mr Moore hasn't grasped a fundamental truth about how the economy and business and life itself works: that when all is said and done, you simply have to do your homework, be long on caution and short on trust. Andrew Tobias, the noted financial writer, summed it up well when he wrote about insurance sold through television (and pitched by folks like Dick Van Dyke and Gavin MacLeod) and so-called hometown investment clubs:

"Trust no one. It kills me to say that, and I'll admit there are exceptions -- but the list is shorter than you think. I mean, my God: if you can't trust Murray! If you can't trust the Beardstown Ladies!"

Yep. It's a cruel world out there. My God: if you can't trust Michael Moore! ...

Posted by Benjamin Kepple at October 10, 2003 10:19 PM | TrackBack

Oh, this is... classic. Bravo!

Posted by: John at October 11, 2003 02:13 AM

Horatio Alger's characters didn't make "huge successes of themselves". They weren't rags to riches stories, they were rags to working middle class stories. Just like the "(p)eople in other industrialised democracies (who) are content to make a good enough living to pay their bills and raise their families."

Posted by: marybeth at October 11, 2003 02:20 AM

Really! We'll have to page Marshall McLuhan. It would seem Mr Moore's whole fallacy is wrong.

Posted by: Benjamin Kepple at October 11, 2003 09:41 AM

"You mean my whole fallacy’s wrong?" - quotation from McLuhan that just seemed appropriate. (Btw, McLuhan died in 1980.)

Did you read the article where Moore blamed his Oscar speech on the fact that he went to church that morning? And the booing you heard was people booing those who were disagreeing with him. http://www.deepcovebc.com/MichaelMoore.html

The article is from last March but I hadn't read it until I saw him on the Late Show a few days ago and got irritated at him all over again. Or rather, my general low level constant irritation with him was cranked up a few more notches.

Posted by: marybeth at October 11, 2003 03:35 PM

A wonderful Fisking, of a most deserving target.

If you can, though, it would make it easier to read if either his text or yours was indented.

Thanks, good job.

Posted by: Richard R at October 12, 2003 02:51 PM

(*use the {blockquote}{/blockquote} tags for indentations*)

I had a chance a year and a half ago to see Mr. Moore speak. He came to my campus, University of North Texas. My friend was extremely excited about the speech. Fortunately, I passed.

I truly think Mr. Moore has become irrelevant. This crybaby rant could have been written by my little brother, railing against "the man" and "the system."

Posted by: Kevin White at October 12, 2003 10:15 PM

"(*use the {blockquote}{/blockquote} tags for indentations*)"

No, use <blockquote> for block quotes; they just happen to be indented by browsers.

To indent something that browsers DON'T indent by default, use CSS.

-Anonymous web-geek Coward

Posted by: Anonymous Coward at October 13, 2003 12:30 AM

Err, that's what I meant, but I assumed MT would "sanitize" the html if I used the . So just replace the bracket-type things with arrows and you're set.

I use CSS anyway, though, to give my blockquotes a border and different font.

Posted by: Kevin White at October 13, 2003 06:01 PM

I think we can solve the problem in future by having either an identifier tag in front of the outsourced quote or by having such quotations in bold.

Posted by: Benjamin Kepple at October 13, 2003 06:41 PM

Oh, and also -- thanks, everyone, for your kind words re: the posts.

Posted by: Benjamin Kepple at October 13, 2003 06:41 PM