Wall Street Afraid of the Wrong Ghost

Wall
Street still doesn’t seem to get it. The world beyond New York has been
moving in directions beyond the street’s recent notice. Have patience
with them, it’s tough to keep your focus in a bubble.

Jim Copland (director of the Center for Legal Policy at the Manhattan Institute) wrote a piece for the Washington Post’s Think Tank Town section. Copland deplores the flight of capital from Wall Street to other financial markets. He laments,

Since the days of America’s first Treasury
secretary, Alexander Hamilton, New York’s financial markets have driven
and sustained the nation’s economy. And for the last century, companies
worldwide that sought to raise capital overwhelmingly came to the
United States.

Well, Jim, it’s been a long time since
Hamilton was shot dead by Vice President Aaron Burr. The economy of
which you speak was pretty small and pretty insular in those days. Much
has changed,

Sadly, and distressingly, that era may be coming
to an end, as companies looking for money on the public markets are
increasingly going to Europe or Asia. In 2005, initial public offerings
of stock in Europe surpassed those in America — in both number and
dollar volume. Even as the American IPO market improved in 2006, that
trend accelerated: According to PricewaterhouseCoopers, there were 651
IPOs in Europe last year, versus 224 in the U.S., and the European
offerings raised almost $40 billion more dollars. China’s markets, with
fewer IPOs, raised 30 percent more capital than those in the United
States.

Wall
Street still doesn’t seem to get it. The world beyond New York has been
moving in directions beyond the street’s recent notice. Have patience
with them, it’s tough to keep your focus in a bubble.

Item: Would you invest with an uncle who had gone from being
the family’s main pillar of support to becoming a debt-ridden bum on
the street? While our investment bankers were busy taking each other to
lunch, Washington pursued a fiscal and tax policy that has turned us
into largest debtor in place of largest lender nation. Uncle Sam is
looking a bit the worse for wear.

Item: The dollar (in all places in the world that are not the
continental United States) has lost half its value in the past six
years. A buck is still a buck in Manhattan, but don’t count on spending
it abroad. Almost any currency is preferable and so it’s no surprise
that Europe and China are getting the buzz.

I
would like not to lay this on George Bush’s porch. He has enough coming
down around his ears at the moment, but this situation is inescapably
his and Wall Street is his co-conspirator. Everybody in the upper
reaches of American wealth was making so much dough, they all forgot to
watch the store. The bad rap the Democrats tried to pin on George for
stripping away the tax base and fighting the most expensive war America
has ever fought—without funding it—has come home to roost.

They are bound to be nervous chickens.

Item: We are broke. The world has chosen not to notice,
because it is terrified of the consequences of a truly broke America,
but things like IPOs opening elsewhere and the dollar going to hell are
inescapable evidence. No one wants Chrysler, General Motors or Ford, certainly not at twice the price they would have paid a few years back.

Item: We
are distracted. The damned war in Iraq sucks the oxygen out of all
conversation about tax structure, capital investment, job creation and
long-term research and development. Washington—never a straightforward
place, even in the best of times—has become downright inoperable.
Pharmaceutical companies have been allowed to run rampant, while
airlines go broke and shove their employee liability down the
disappearing taxpayers’ throat. Meanwhile, who’s investing in those
Euro-Asian IPOs? American investment trusts. Capital (the last of our
freedoms) is a bird on the wing.

What explains the reversal of fortune for
American capital markets? No fewer than three comprehensive studies in
the past sixth months have sought answers, drafted respectively by a
task force loosely formed by Treasury Secretary Hank Paulson; a
blue-ribbon panel sponsored by the U.S. Chamber of Commerce; and the
consulting firm McKinsey and Company (where I once worked), hired by
New York’s mayor and senior U.S. Senator, Mike Bloomberg and Chuck
Schumer.

Two common threads emerged from
these in-depth reviews. First, America’s securities regulations have
become overly burdensome, especially for smaller companies. The
Sarbanes-Oxley reforms of 2002 — well-intentioned to correct the
frauds that led to the collapse of Enron and WorldCom — have proved
far more expensive to implement than anticipated. And with increased
threats of criminal sanctions for corporate managers, directors, and
auditors, the leaders of publicly traded companies in America have had
to devote far more time to accounting and compliance issues than to
growing their businesses.

Hard
as it may be to believe, Wall Street thinks if we could only free our
corporate environment to get back to the accounting scandals and
executive malfeasance of the recent past, all would be well. Jim
Copland is shilling for those who are mostly in prison these days.

Thoughtful regulation is important to facilitate
share pricing and to prevent corporate managers from defrauding their
investors, but our anger over past corporate misconduct should not
blind us to the real risks to common shareholders if American companies
leave our markets.

That is such a prejudiced piece of in-house-manship that Copland hardly deserves a further audience, at least not in the guise of independent policymaking.
Manhattan Institute claims to flog a free-market based advocacy in all
aspects of society. What could possibly be more ‘free market’ than the
flight of capital to more attractive investment destinations?
Europe is not more
attractive because it is more innovative or market-capitalist. Indeed,
Europe is far from that business-wise, but its currency is more stable
than ours and will be until America grapples with some very serious
financial imbalances. Then the money will come back. Wake up, James.
China is hardly a more free market than ours, but its currency is
undervalued, mostly because it’s in the odd position of running counter
to, but tied to, the American dollar. Money doesn’t care about copyright infringement and human rights constraint. Money cares about return on investment.
America continually castigates China for undervaluing its own currency.
Our time would be better spent working to remove our balance of
payments deficit, finance our own wars, balance our federal budgets and
stop taking each other to lunch in the Hamptons when we’re broke.

The very events that James Copland decries are what, in a more
intellectually honest and less self-serving conversation, would be
called looking the truth in the eye.

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