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Another Victim Of Greed

Julie Creswell of The New York Times covers the autopsy: Buyout firms profit as Simmons sinks.

This is what Reagan and Rand are all about. This is why the US economic system is so screwed up.

In this case it was a stable, profitable manufacturing company, but they have done the same thing to newspapers, timber companies, food companies, … every type of industry in the US.

They look for companies that have very low debt and constant but unexciting profits. They borrow all the money they can, so their personal risk is minimal, and buy the company. They then sell off anything they think they can make a quick buck on, and mortgage everything else, using the proceeds to cover their initial investment, and leave the company unable to remain profitable because of the huge debt load.

This is all part of the same thinking that resulted in the ubiquitous HELOC [Home Equity Line Of Credit]. In this view of the world the only purpose of assets is to back debt, because you are stupid to own your home. You need to get that money out and gamble in the stock market or support an absurd lifestyle.

4 comments

1 Badtux { 10.07.09 at 3:48 pm }

The formal term for this behavior is “rent-seeking behavior” — i.e., behavior whose sole purpose is to extract money from transactions, rather than to create goods or services.

Krugman snarks on his blog today, Back when socialists like Eisenhower ran the country, and taxes on the rich were much higher, there was less temptation to run big risks with other peoples’ money in search of giant bonuses. Heh. Rent-seeking behavior of this sort also was less tempting, because you’d have to pay 90% of the profits to the government. Instead, you invested for the long term and waited to reap your profits once your income declined to below the maximum marginal rate number. This gave you incentive to keep the companies you owned healthy and operational for the long term, and the end result was the greatest increase in prosperity for America and Americans that ever happened in American history, all of which ended with the election of Ronald Reagan.

Since the election of Ronald Reagan and the changes in the tax code to encourage rent-seeking behavior rather than long-term investment, the average wage has gone down in real terms, and median family income increased only because more women entered the work force. Even that last is no longer happening — during the Lesser Bush Administration, median family income declined for the first time since WWII. These are facts, easily ascertainable by looking at the economic data. Yet you still have dunces who refuse to admit reality and insist that their particular ideology actually works. Maybe in the land of cotton candy trees and unicorns, but data says that here in this reality, they’re full of shit.

– Badtux the Economics Penguin
.-= last blog ..Quote of the day =-.

2 Bryan { 10.07.09 at 9:25 pm }

If we classify a short-term capital gain as anything held for less than 5 years and tax it at 95% a lot of this crap would come to a screeching halt. Actually there should be a sliding scale based on the number of years something is held, dropping down to a minimum of 10% for really long term investors.

These people are allowed to come in and trash the place and destroy viable companies. Something really needs to be done.

3 hipparchia { 10.07.09 at 11:42 pm }

The formal term for this behavior is “rent-seeking behavior”

i know that, but i’m still trying to convince people that the true term for it is theft.
.-= last blog ..Game on! =-.

4 Bryan { 10.08.09 at 12:07 am }

Theft seems more appropriate to me.