Corporations Are Not Humans : Not Even Close : Episode 39

                                                  PREDATORY FINANCE  

   As mentioned earlier, one of the ideological premises of corporate libertarianism is that investment in by nature productive in the sense that it increases the size of the economic pie, adds to the net well-being of society, and therefore is of potential benefit to everyone. In a healthy economy, most investment is productive. The global economy is not, however, a healthy economy. In all too many instances, it rewards EXTRACTIVE investors who do not create wealth but simply extract and concentrate existing wealth. The extractive investor's gain is at the expense of other individuals or the society at large. 
   In the worst case, an extractive investment actually decreases the overall wealth of the society, even though it may yield a handsome return to an individual. This occurs when an investor acquires control of a productive asset or resource --- such as land, timber, or even a corporation --- from a group that is maintaining the asset's productive potential, then liquidates it for immediate profit. The investor is extracting value, not creating it. In some instances, such as an ancient forest, the asset may be irreplaceable. An investment that simply creates money or buying power, such as through the inflation of land or stock values, without creating anything of corresponding value, is also a form of extractive investment. The investor creates nothing, yet his or her share of a society's buying power is increased. 
   Speculation is another form of extractive investment. The financial speculator is engaged in little more than a sophisticated form of gambling --- betting on the rise and fall of selected prices. When a speculator wins, he or she is simply capturing claims to wealth created by others. When a large speculator funded with borrowed money loses, the survival of major financial institutions may be placed at risk, resulting in demands for a public bailout to save the financial system from collapse. In either instance, the public loses. Rarely does a speculator's activity contribute to the wealth or well-being of society.
   Although there may be some merit to speculators' claims that their activities increase market liquidity and stability, these claims have a hollow ring in increasingly volatile, globalized, financial markets in which speculative financial movements are a major source of instability and economic disruption. Furthermore, whatever contribution speculators may make to increasing the financial markets' efficiency, it comes at a substantial cost in terms of the profits and fees they extract. The additional risks and economic distortions created by a sophisticated class of financial instruments known as derivatives are an especially important source of concern. 
   The derivatives contracts that are currently a hot topic in the financial press involve bets on movements of stock prices, currency prices, interest rates, and even entire stock market indices. Futures contracts on interest rates didn't even exist until the late 1970s. Now outstanding contracts on interest rates total more than halfthe gross national product of the United States. The total value of outstanding derivatives contracts was estimated to be about $12 trillion in mid-1994, with growth projected to $18 trillion by 1999. In 1993, The Economist estimated the value of the world's total stock of productive fixed capital to be around $20 trillion.
   What makes derivatives particularly risky is that they are commonly purchased on margin, meaning that the buyer initially puts up only a small deposit against the potential financial exposure. The largest players may not be required to put up any money at all, even though their potential financial exposure may run into hundreds of millions of dollars.
  The more sophisticated derivatives are highly complex and are often not well understood, even by those who deal in them. In the words of Fortune :

     When they are employed wisely, derivatives make the world simpler, because they give their buyers an ability to manage and transfer risk. But in the hands of speculators, bumblers, and unscrupulous peddlers, they are a powerful leveraged mechanism for creating risk.