"Of the maxims of orthodox finance none, surely, is more anti-social than the fetish of liquidity. . . . Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes the bubble on a whirlpool of speculation. When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill done."
So said Keynes in his 1936 epic, "The General Theory of Employment, Interest and Money." At the time, his warning seemed quixotic: the sober mood of post-1929 Wall Street permitted little casino-like activity. Business tended to business, and speculators played their games in isolation. But we've now moved 180 degrees. Speculative pyrotechnics in Wall Street are producing fallout through corporate America and society. Unfortunately, the results fulfill Keynes' worst fears.
Corporate stickups have become common. The modus operandi is inelegant but effective. Typically, the raider-mugger confronts the management of the muggee with a threat: "Some money or your job." To that, the management usually responds, "Here, take the wallet of my employer" -- that is, all the shareholders except the mugger. Not surprisingly, the mugger and the management find this arrangement palatable. But its effect on the business is often substantial and permanent. Healthy balance sheets become heavily leveraged, and divisions frequently must be sold to fund the payoff. In other cases the muggee corporation runs hastily to a "white knight." Such instant mating frequently produces major surprises for both parties. And sometimes the muggee simply commits corporate suicide by dismembering itself.
An innocent might think that both mugger and management of the muggee would be the subjects of shame or ostracism by the aristocracy of Wall Street. To the contrary, the whole activity is aided by the services of Wall Street's finest -- or at least highest-paid -- investment bankers and lawyers. Although the muggee corporation may be maimed, its checks still clear. And those checks are huge. Both lawyers and investment bankers get paid for blessing the payoff procedures. Investment bankers often come to the well a second time, drawing pay for raising the ransom money either from external financing or from the sale of divisions.
The greenmailer also has no shortage of friends on Wall Street, since his prowlings on subsequent nights are sure to produce more fee-generating action. A few weeks of SirJames Goldsmith vs. Goodyear or Ronald Perelman vs. Gillette, during which these players permanently rearrange the corporate land-scape, provides piles of lucre to the Wall Street community. Contrast that to the modest amounts to be realized from years of faithful financial service to Potomac Electric or The Washington Post Co. as those companies operate successfully but quietly. Whom would you court?
It is not lost on the best and brightest of our youth that the big fast money of the 1980s is to be made by creating deals rather than by creating products. If a graduating MBA were to ask me, "How do I get rich in a hurry?", I would not respond with some quotations from Ben Franklin or Horatio Alger, but would instead hold my nose with one hand and point with the other toward Wall Street. Per point of IQ and per erg of work, the near-term payoff in Wall Street will vastly exceed that at GeneralMotors, General Electric or Sears. This pointis well understood today on university campuses: Wall Street has become Mecca for a far disproportionate number of the bright and ambitious.
Wall Street, unsatisfied by astronomical volume in garden-variety stocks and bonds, has invented new and enticing products for the casino. First came options. These were followed by futures contracts on real financial instruments, such as Treasury bonds. In turn came futures contracts on nonreal items such as market indices. Finally, in the search for an even more exciting and volatile game, Wall Street created options on future index numbers.
Predictably, these options are a great favorite. Turnover in stocks is normally calculated on an annual basis; in some of the new esoteric instruments, turnover ranges from 25 percent to 50 percent daily.
Brokers, understandably, love such client hyperactivity: the Street's income depends on how often prescriptions are changed, not upon the efficacy of the medicine. But what's good for the croupier, taking his bite out of each transaction, is poison for the patron. Turning from investor into speculator, he suffers the same kind of negative financial effects that befall the person who is converted from making a once-a-year bet on the Kentucky Derby to betting all races, every day.
Wall Street likes to characterize the proliferation of frenzied financial games as a sophisticated, pro-social activity, facilitating the fine-tuning of a complex economy. I have myself profited from a number of short-term transactions and can understand Wall Street's desire to associate these activities with some high-minded philosophy. The clear favorite is Adam Smith's "invisible hand." You'll remember how that benign hand was supposed to steer unfailingly all acts of capitalists -- even those initially prompted by individual greed -- toward a righteous social result. But the truth is otherwise: short-term transactions frequently act as an invisible foot kicking society in the shins.
It has always been a fantasy of mine that a boatload of 25 brokers would be shipwrecked and struggle to an island from which there could be no rescue. Faced with developing an economy that would maximize their consumption and pleasure, would they, I wonder, assign 20 of their number to produce food, clothing, shelter, etc., while setting five to endlessly trading options on the future output of the 20?
What can be done, now that the whirlpool of speculation has engulfed enterprise? A proposition that may initially sound outlandish could have substantial merit: let the government impose a 100 percent tax on any profits derived from the sale of stocks or derivative instruments that the holder has owned for less than a year. And apply the tax to everyone, including pension funds and other entities that normally are not taxed. It's one of Wall Street's many ironies that such funds, which should have the longest investment perspective, have been transformed by the competitive race on Wall Street into some of the most speculative players around.
The 100 percent tax would not confiscate capital when instant liquidity was required. You could get your money back if you sold at a price above your cost 10 minutes or 10 months after purchase. But there could be no profit to you from your capital-allocation decisions unless they had a time horizon of a least one year.
Much longer-term horizons than a year have traditionally prevailed in real estate, a fact that has not produced a shortage of office buildings or shopping centers. Similarly, longer horizons for stock purchases will not produce a shortage of cars or TV sets.
One result of a 100 percent tax would be certain: the substantial brain power and energy now applied to the making of investment decisions that will produce the greatest rewards in a few minutes, days or weeks would be instantly reoriented to decisions promising the greatest long-term rewards. While Wall Street may not like rules, it adjusts its thinking immediately to the question of what pays off under any new rules that are promulgated.
This reorientation from financial shuffling to farsighted asset allocation would produce desirable by-products. The most enticing category of inside information -- that relating to takeovers -- would become useless. Bust-up takeovers themselves, as well as greenmail, would lose much of their allure. Short-term speculators, whether pension funds or small-fry, would necessarily become, at the least, intermediate-term investors.
Congress has always recognized that the minds of financially ambitious people will focus on behavior that is rewarded through the tax code. Therefore, legislators have frequently linked what they believed to be pro-social goals with favored tax treatment. Why not reverse this process and use the stick as well as the carrot? If short-term speculative behavior makes a mess of the country's capital allocation process -- if, in Keynes's words, "the job is likely to be ill done" -- why not simply eliminate the rewards of such behavior?
There will, of course, be some negative by-products from this reform, just as healthy tissue is sometimes sacrificed when a tumor is removed. But the drawbacks seem minor compared with the gains that will be realized. They seem minor also in comparison with the weaknesses of other legislative measures that would attempt to tame the casino society by imposing straitjacket rules on both Wall Street and corporate America.
Investors, entrepreneurs and operating managers would be unaffected by such a tax and would still have available the full panoply of free-market business alternatives. MBAs could begin to focus on the values to be created by business-building rather than on the tolls to be extracted from business-shuffling. Corporate control could still change, as it often should. However, it would change far less often as a consequence of the kind of short-term speculative activity that now pushes companies into "play" -- a quaint term Wall Street has coined to describe businesses that are newly destined for an unknown, unplanned but inevitably major transformation.
Trading volume in securities and, more particularly, in security options and futures would diminish. Many people now kept busy in the casino could make the shift to pie-producing rather than pie-dividing. Greenmailers and quick-buck artists who have long proclaimed the shortcomings of incumbent corporate managers could try their hands at outproducing these objects of contempt.
We talk much about competing in a world economy against foreign decision-makers who operate with a business horizon of decades. Why not try pushing our own out to at least a year?
The writer is chairman of the board of Berkshire Hathaway, Inc.