Philip Greenspun’s Weblog

The S&P 500 crashed another 7.5 percent today, bringing U.S. stocks, adjusted for inflation, back to where they were in mid-1996. Investors are apparently not sold on the idea that managers of U.S. corporations are going to pay them a healthy share of profits. What would it take to restore investor confidence in the U.S. market? How about governance reform?

Right now the shareholders of a public company are at the mercy of management. Without an expensive proxy fight, the shareholders cannot nominate or vote for their own representatives on the Board of Directors. The CEO nominates a slate of golfing buddies to serve on the Board, while he or she will in turn serve on their boards. Lately it seems that the typical CEO’s golfing buddies have decided on very generous compensation for the CEO, often amount to a substantial share of the company’s profits. The golfing buddies have also decided that the public shareholders should be diluted by stock options granted to top executives and that the price on those options should be reset every time the company’s stock takes a dive (probably there is a lot of option price resetting going on right now! Wouldn’t want your CEO to lose incentive).

If current trends continue, the CEO and the rest of the executive team will eventually have salaries that consume 100 percent of a public company’s profits and they will collect half ownership of the company via stock options every few years. Who would want to invest in that? Not sophisticated investors, it turns out. Big universities such as Harvard and Yale have reduced their exposure to U.S. public companies down to about 15 percent. Instead of buying a forestry company and watching the managers steal the trees, they’ve chosen to own forests directly. Given the laziness of university administrators, it should have been a wake-up call to the SEC that something needed to change when Harvard preferred to run its own forests.

Corporations are supposed to operate for the benefit of shareholders. The only way that this can happen is if a majority of Directors are nominated by and selected by shareholders. It may have been the case that social mores in the 1950s constrained CEO-nominated Boards from paying their friend $50 million per year, but those mores are apparently gone and the present structure in which management regulates itself serves only to facilitate large-scale looting by management.

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Three of us got together this evening to watch the Obama versus McCain debate. Each candidate seemed skilled at criticizing his opponent. Barack Obama had the additional skill of criticizing George W. Bush. Neither opponent seemed to have many ideas for improving the economy or American competitiveness. This was rather disheartening on yet another day when the stock market crashed a full 5 percent. We (the American people) may be on our own…

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Last week the U.S. Congress decided to give trickle-down economics its biggest test ever. They appropriated $700 billion in taxpayer funds so that we could give every mansion owner in Greenwich, Connecticut $1 billion each, with enough money left over to give every Park Avenue townhouse owner $100 million. The result was supposed to be renewed economic vibrancy across the whole U.S. What did we get instead? Another stock market crash, with the S&P 500 losing almost 4 percent of its value. To put this into perspective, this is roughly one year’s return on U.S. stocks, evaporated in a single day. The S&P 500 is now back to where it was in early 1998.

[Had you put money into the U.S. stock market in early 1998 you would have realized approximately 1 percent annual income in the form of dividends and a 0 percent capital gain. In other words, a gal who had diligently saved up $100,000 would have added $1,000 per year to her income by placing her faith in America’s largest companies.]

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I’m finally getting around to cleaning up some old personal photo essays and so forth, moving them from photo.net to philip.greenspun.com. An example is my personal guide to New York City. Almost every page in this little museum piece of how the Web worked back in 1995 and 1996 contained a link to the Yahoo directory, e.g., http://dir.yahoo.com/Arts/design_arts/fashion/. Despite having thousands of employees, Yahoo was apparently unable to maintain a set of redirects and all of these links are now dead. That’s a great way to lose readers and lose Google Rank.

It is tough to understand why Microsoft would pay billions of dollars for a company that can’t manage this fundamental part of Web publishing. I admit to being rather lame and sloppy, but links that I published back in the early 1990s are still functioning, albeit sometimes through one or two redirects (transparent to the user).

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We apparently have an extra $700 billion of taxpayer money to spend in an effort to improve our economy. How are we planning to spend it? We are going to give it to investment banks and other financial services firms. What could we expect the result to be? America’s investment banks and financial services firms will be in great shape; the rest of the U.S. will lag behind.

What do you call a country with a thriving financial services sector and everything else rusting and obsolete? England. The City of London has been a leading provider of financial services worldwide for the last couple of centuries. During this period the rest of the country has lost its empire, lost its military power, lost its leadership position in scientific and engineering research, lost its leadership in manufacturing, and suffered from slow economic growth compared to its European neighbors.

By some accounts, the 1.22-square-mile City of London contributes roughly 20 percent of the UK’s GDP, employing only 300,000 people. (This compares to the U.S. financial services industry, which has grown from about 6 percent of the economy in the 1970s to roughly 10 percent today.)

Seven hundred billion dollars is enough money to reshape the American landscape. New York City real estate will become even more desirable. The rest of the country will decline gradually.

Do we have to spend our money this way? Why not put the $700 billion into tax credits for businesses that make capital investments? Or reduce the corporate tax, which would increase the value of American stocks? Or give tax breaks to foreign companies that open factories or R&D facilities here in the U.S.?

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After a helicopter flight this afternoon, I ran into a friend in the hangar. He works for the biggest air taxi (airplane charter) company in Massachusetts. “We just laid off two thirds of our staff,” he noted. “We’ve returned most of the airplanes to the lessors.” Driving home, I passed by Mattress Discounters. They had a “going out of business” sign out front. I stopped in to ask why. “They’re closing all of our New England stores,” said the manager.

We have cold weather, per-capita tax expense roughly double New Hampshire’s (compared to other states), and extremely high housing costs. Young people keep leaving to build careers in the more rapidly growing regions of the U.S. Still, I would have thought enough of us oldsters were still here to need a comfortable mattress…

[I did my share for the Massachusetts GDP this week. A crack appeared in my car’s windshield and the whole windshield needed to be replaced. This expanded GDP by at least $500. Maybe if we all smash each others’ windshields we can make the GDP numbers for Q3 look good…]

[Correction: The air taxi company has slimmed down on turboprops, from 6 to 3, partly due to the seasonality of business up here. They’re keeping their 4 Eclipse jets, but not counting on them for any revenue due to the fact that service and support for the Eclipse is almost non-existent. One serious problem with the Eclipse is that, although the plane in theory can be approved for flight into known icing conditions, in practice it is impossible to schedule an existing plane for the required retrofits. The Eclipse remains a jet that can flown only in clear and/or very warm weather.]

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The HVAC guys who have been maintaining the central air conditioning in my apartment here in Cambridge came over today. I had called them on Friday to see when they could show up. For the last ten years the answer has been “we’re flat out; maybe in three weeks.” This year it turned out to be “next business day”. Business is very slow, according to the technician. People aren’t installing new systems and are deferring maintenance. An air conditioner that broke in August, and would formerly have been fixed immediately, won’t be fixed until May.

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The Wall Street meltdown continues and people are asking themselves “How come we have to pay $700 billion to bail out firms that collectively spend more than $700 billion every year paying their employees?” In recent decades Wall Street has grown from 6 percent of the U.S. economy to something like 10 percent, while providing the same basic menu of services: taking companies public, selling bonds, managing investments. The bailout angers taxpayers because anyone who can do arithmetic can see that more than $700 billion was taken out of Wall Street in the form of employee bonuses during the years of the real estate/mortgage bubble. The people who created the bubble, in many cases engaging in frauds of various kinds, were rewarded handsomely and are now relaxing in their Greenwich, Connecticut mansions deciding whether to take out the yacht or the private jet. Wall Street firms did not retain their exceptional profits during the years of fraud, but rather paid out almost all of it to the executives and rank-and-file employees who engineered the fraud. (Actually if they had retained some of these profits they wouldn’t be needing a bailout!)

The anger is easy to understand, but what is tough to understand is why the middleman’s share of the U.S. economy has grown so much. When houses were cheap and people lived in them for 20 years, the realtor’s 6 percent commission wasn’t a huge slice of the economy. Houses became very expensive and people flipped them quickly, which has raised realtor commissions to roughly $60 billion per year. We have a huge sector of the economy mostly doing stuff that wouldn’t need to be done if Americans would get a little more organized in their use of Google Maps and other Web sites (see this New York Times article on Madison, Wisconsin, where “for sale by owner” houses sold for about the same price as realtor-sold houses). The realtor commission was only the beginning of the feast for middlemen during the real estate bubble. Somehow Americans weren’t able to find mortgages on their own, so every town was filled with mortgage brokers making $100,000 to $150,000 per year. Local banks weren’t able to sell mortgages upstream without, apparently, giving tens of billions of dollars in fees every year to Wall Street firms.

The Internet was supposed to make markets more efficient, yet since the early 1990s, when Web access became universal, the American people have devoted an ever-larger share of their paychecks to middlemen.

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Today’s New York Times carries an article on federal and state tax dollars paying for pensions and disability to retired Long Island Rail Road workers. Some interesting stats from the article: 97 percent of retired LIRR workers in a recent year applied for and received disability payments; one married coupled is sucking down $280,000 per year in taxpayer funds; workers who start relatively young with the railroad can retire at age 50.

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