Pundits have been speculating for months that the United States is undergoing a “capital strike” of the sort that occurred during the Great Depression — that is, frightened and confused by government policies and the (often contradictory) directions in which they tug the economy, investors are sitting on their money rather than putting it into new and existing ventures that might generate jobs and prosperity. That speculation appears to be firming up into reality, as new reports indicate both disenchantment with the Big O among his well-heeled backers and (likely related) widespread unwillingness to invest in the U.S. economy.
Amity Shlaes, author of The Forgotten Man, described the earlier version of the phenomenon in a 2009 column:
“Fat cats” is what President Barack Obama just called bankers. He also invited them to the White House this past week.
The reason for the mixed message is that the president is cross with banks: They have refused to heed his orders to lend. The dynamic of preachy executive and elusive lenders recalls the mid-1930s, when a petulant Franklin Roosevelt gave a label to banks’ puzzling behavior: “capital strike.” …
Observing that banks maintained what had once been considered ample reserves, 1930s monetary authorities reasoned that increasing reserve requirements on paper would have little effect: Their increase was merely a de facto recognition of an accumulation that had already occurred.
The authorities forgot these bankers had been burned. The wary banks reacted by stashing away yet more cash. The result was an unforeseen tightening and less cash in the economy.
Election cycles also contribute to capital strikes. Banks today know that whatever the White House says, it has to stop pouring out the cash eventually, probably after midterms. Banks in the 1930s held on to cash because they knew Roosevelt would stop spending after the 1936 election, and he did.
High taxes, or the prospect of tax increases, do damage as well. In 1937, a tire company executive explained the effect of Roosevelt’s confiscatory rates upon the investor: “He will not risk financing new ventures if the government take is greater than that of the average gambling house.”
Infantilizing the private sector also makes it shut down. In the 1930s, Roosevelt, like Obama, alternated between coddling banks and companies and giving them the equivalent of a good spanking. Both can be counterproductive. The editors of Time magazine formally recognized that by printing a regular rubric over its weekly reports: “Last week the U.S. Government did the following for and to U.S. Business …”
Writing in The Freeman, historian Burton Folsom, Jr. further draws out some of the parallels between then and now:
The sequence of massive federal spending followed by a lack of recovery plus tax hikes is poison for a politician. Therefore Roosevelt sought scapegoats to explain his failure. Wall Street bankers were his favorites. He called them “economic royalists” and blamed them for causing the Great Depression. He also blamed America’s top businessmen for instigating a “capital strike”—they were refusing to invest in order to make him look bad. FDR then launched IRS investigations of key Republicans and used the newspapers to encourage hostility toward these targets.
Obama has followed FDR’s playbook of attacking Wall Street bankers and various corporate leaders. He condemns the raises these bankers sometimes receive and the profits earned by some large oil companies and health insurance companies.
In June, on ABC News, George Will raised the possibility that Obama is reaping the same results as FDR, saying:
The Bush tax cuts are going to expire. Interest rates have to go up sooner or later. The House, just before going on recess, passed a so-called jobs bill with $80 billion more dollars of taxes in it. There may be climate change regulation. No one knows quite how Obama Care is going to effect the private sector. In pandemic uncertainty, capital goes on strike.
But, so far, this has largely been speculation. Have the Wall Street types who heavily supported Barack Obama’s presidential run turned against him? And are investors really stashing their cash rather than risk it in an environment of anti-business hostility and economic uncertainty?
The Magic Eight Ball now seems to suggest the answer is: You better believe it!
The New York Times reports on the u-turn a major Wall Street backer of Obama has made in his opinion of the president and his policies:
Daniel S. Loeb, the hedge fund manager, was one of Barack Obama’s biggest backers in the 2008 presidential campaign.
A registered Democrat, Mr. Loeb has given and raised hundreds of thousands of dollars for Democrats. Less than a year ago, he was considered to be among the Wall Street elite still close enough to the White House to be invited to a speech in Lower Manhattan, where President Obama outlined the need for a financial regulatory overhaul.
So it came as quite a surprise on Friday, when Mr. Loeb sent a letter to his investors that sounded as if he were preparing to join Glenn Beck in Washington over the weekend.
“As every student of American history knows, this country’s core founding principles included nonpunitive taxation, constitutionally guaranteed protections against persecution of the minority and an inexorable right of self-determination,” he wrote. “Washington has taken actions over the past months, like the Goldman suit that seem designed to fracture the populace by pulling capital and power from the hands of some and putting it in the hands of others.”
This is important, even the Times concedes, because:
Mr. Loeb’s views, irrespective of their validity, point to a bigger problem for the economy: If business leaders have a such a distrust of government, they won’t invest in the country. And perception is becoming reality.
Just last week, Paul S. Otellini, chief executive of Intel, said at a dinner at the Aspen Forum of the Technology Policy Institute that “the next big thing will not be invented here. Jobs will not be created here.”
Mr. Otellini has overseen two big acquisitions in the last two weeks — the $7.7 billion takeover of the security software maker McAfee and the $1.4 billion deal for the wireless chip unit of Infineon Technologies. If he is true to his word, those deals will most likely lead to job cuts in the United States, not job creation.
And it’s not just one ticked-off hedge-fund manager and a disgruntled tech executive — it seems to be oodles of investors preferring to keep cash under the mattress rather than throw it into whatever the economy and the unpredictable folks tinkering with its controls may bring their way. Business Week interviewed Professor John Paglia of the Pepperdine Private Capital Markets Project about his latest semi-annual report. Paglia tole the magazine that, despite high demand for investment among small businesses, and increased credit-worthiness, “there’s a dearth of capital opportunities for the upstart businesses that potentially—down the road—could lead us to economic prosperity.” Banks, venture capitalists and angel investors are declining to make loans to such an extent that “[t]he No. 1 concern for private companies is access to capital. Nearly 31 percent cited that, even more than the 27 percent that said the economy is their top concern.”
Earlier this year, the Pepperdine Private Capital Markets Project reported that almost half of venture capitalist plan to sit on their cash, despite growing demand for investment, at least over the next year. Said Paglia: “The long-road out of the current recession and tepid marketplace has made it easier to simply keep money locked up.”
The Pepperdine data suggests that the “capital strike,” such as it is, is a reaction to economic uncertainty, rather than a refusal to make money and generate prosperity just to spite the administration (as FDR used to charge). Of course, the Times piece makes it clear that much of that uncertainty can be laid at the feet of the government, so the end result is the same.