THE MORNING RANT: “Financialization of All the Things” is Parasitism, not Capitalism

Friend-of-the-blog Alexandria Brown offered up a recent X/tweet addressing the financialization of, well, everything in business and commerce, and how it should be viewed in relation to the ideal of capitalism. Specifically, Alex wrote: ”Here's a fun question to which I have not made up my mind even a little bit: is the financialization of All The Things a form of capitalism which is at least tolerable or is it so reductive of human life and endeavors as to be past a limitation on acceptable commercial behavior?”

Those of us who advocate for free markets understand that capitalism also presents an opportunity for bad actors to misbehave within the system. Be it 20th century snake oil salesmen peddling patent medicines, or 21st century Wall Street investment bankers selling pools of subprime mortgages as high-quality securities, there have always been bad actors exploiting the opportunities within a free market.

But just because we conservatives endorse capitalism doesn’t mean we must endorse – or even tolerate - the worst practices that occur therein.

In my opinion, the “financialization-of-all-the-things” is a form of parasitism that does not create wealth, rather it serves to extract the accumulated wealth from entities where wealth has previously been created. Those engaging in “financialism” are the corporate world’s version of tapeworms and ticks.

If you have been reading my essays on corporations treating employees as a pestilence and customers as prey, I am unambiguous in my revulsion at the management strategy of using financial manipulations to provide short-term gains, irrespective of long-term damage to the enterprise.

In one recent piece I discussed the mess MGM Resorts and Panera Bread have found themselves in, with both having to apologize for bad corporate behavior. They are now trying to win back disaffected customers after employing the modern management gimmicks of:

• Revenue-mining customers with new and outrageous charges that produced a short-term boost in sales.
• Slashing headcount and customer service to reduce labor expense, giving a short-term boost to operating profit.
• Cheapening their product with reductions in quality and/or size, producing a short-term boost in gross profit.

But in every case, these actions tell customers that rather than being valued, the corporation sees customers as marks to be exploited. A great many customers may get hoodwinked once, providing the short-term profit boost that was being sought, but then never come back, thus destroying the company’s long-term prospects. A downward spiral of alienated customers, declining revenue, deteriorating facilities, and degraded reputation ensues.

These business practices were parasitic. The future cash flow of the loyal customers of MGM and Panera were represented in how those businesses were valued, be it the goodwill asset on the balance sheet or the market capitalization of the stock. But the fallout from those practices devalued the worth of MGM and Panera. When the dust settled from all the financial gimmickry and lost customers, the end result was little different than if those companies’ executives had simply pulled equity out of their companies.

Another recent essay of mine, “Sherwin Williams Eliminates 401k Match Amidst Stock Buybacks and Increased CEO Compensation,” discussed an even more stark example of how financialization is a form of parasitism. To conserve $165 million in cash, Sherwin Williams suspended its 401(k) match for employees, but this was right as it was also flushing away about $900 million in cash for stock buybacks, for the purpose of propping up the stock price. Coincidentally, much of the compensation of Sherwin executives is based on stock price and in the form of stock bonuses.

A stock repurchase is a very simple act of distributing the existing wealth of a corporation. Cash is depleted to buy back stock, and the company’s capitalization decreases accordingly. The money might otherwise be used for capital improvements, debt reduction, etc., but Sherwin executives decided to use the company’s capital to try to enrich themselves.

[Disclaimer - there are valid circumstances when it makes good sense for a cash-flush corporation to engage in stock buybacks, but a company that is eliminating its employees’ 401(k) match to conserve cash is not one of them.]

Sadly, the financial practices of executives at Sherwin Williams, Panera Bread, and MGM Resorts are not isolated. They are emblematic of a prevailing management philosophy that is being learned at elite business schools.

The world of private equity has even more abuses, with takeover targets such as Joann Fabrics getting loaded with debt to enrich their acquirers, with all the above-mentioned financial gimmickry then applied. This often leads to bankruptcy and dissolution of the company, as happened to Joann.

Companies will necessarily fail in the “creative destruction” of capitalism. But strip mining a company of its assets and loading it up with debt isn’t creative destruction, it’s parasitic destruction.

Those of us who support free market capitalism must not be afraid to condemn those who harm its reputation. Just as I can advocate for hunting while simultaneously condemning poachers, I can also advocate for capitalism while condemning those who enrich themselves by engaging in parasitic “financialism.”

[buck.throckmorton at protonmail dot com]

posted by Buck Throckmorton at 11:00 AM

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