Transcript Working America, Financial Markets and the power of

WORKING AMERICA, FINANCIAL
MARKETS AND THE POWER OF
ORGANIZED INTERESTS
SLWK 710
OVERVIEW OF THIS WEEK’S SESSION
• The focus of this session is on the market economy,
investments and taxes…and how this impacts the poor.
• Wheelan articulates the basic laws of economics,
markets and investment in his hallmark down-to-earth
way.
• I’d recommend reading these chapters first and then
begin to review the npr podcasts and articles next to
bring it to life.
FINANCIAL MARKETS
• Financial instruments must create value.
• Both the buyer and seller must feel they are
maximizing their utility (or..are better off as a result
of entering their end of the deal).
• The financial tools had became so complex that
even Wall Street executives were unclear what
exactly they were buying a selling.
• The consequences of this were evident in the great
recession of 2008
WHY ARE WE LEARNING ABOUT THIS
AS SOCIAL WORK PRACTITIONERS?
• Understanding the big picture, provides us access to a
way to advocate for our clients – Those most vulnerable,
subject to injustice, like impoverished Americans.
• Poverty is a social condition, but it is also a product of
the “unintended” consequences of economics and the
way market functions.
• Knowledge is power. Understand this, you will
understand how to advocate for your clients in a more
impactful way.
FINANCIAL INSTRUMENTS
Financial instruments are based on 4 simple needs:
• Raising Capital
• Storing, protecting, making profitable use of excess
capital
• Insuring against risk
• Speculation
RAISING CAPITAL
• Americans spend large sums of money without
actually having it – through credit.
• Credit makes the world go around in the US.
• This is true for individuals, firms, through selling shares
of businesses to the public, etc.
• Wheelan notes “modern economies cannot survive
without credit”
What are the consequences of this?
Who gets access to these loans/investment and who
is taken advantage of? Think Kiva.org vs. Payday
loans
STORING, PROTECTING, MAKING
PROFITABLE USE OF EXCESS CAPITAL
• Impact of inflation for those who invest vs. those that
cannot (or do not) “the ruthless and most efficient thief”
is inflation.
• Need to make productive use of capital or the thief of
inflation will swallow it.
• Financial markets allow us to “consume” our money over
time in a way that accounts for the ups and downs of
our economic state and inflation. True for individuals and
true for firms.
And…what if you have no excess capital????
INSURING AGAINST RISK
• Protecting ourselves against the unpredictable.
• Pay a predictable amount over time, so that you
don’t get hit hard when the unpredictable occurs.
• Financial markets provide an array of products that
function essentially as an insurance policy.
• A key role of financial markets is for individuals and
firms to spread their nest egg over time?
RELATE THIS BACK TO SERVING
IMPOVERISHED CLIENTS
Again – relate to those who are poor.
• Some are poor because of inadequate income; but
some are poor as a result of a catastrophic event (e.g.
health crisis) without the insurance of savings or
investments that address the thieves of inflation and
market fluctuations.
• Think about the importance of the Affordable Health
Care Act (HR 3962), auto insurance, homeowner
insurance in these circumstances.
SPECULATION
• The urge to speculate – to try to predict what will
happen with a financial product can: help us to
mitigate risk OR throw us into financial ruin when we
are wrong and aggressive (think – credit default
swaps)
• What teachable moments were there as the crosssection of speculation AND people trying to
maximize their gains without high accountability for
the negative unintended consequences?
What do you think government’s role should be in
this?
INVESTMENT RULE IN BASIC
ECONOMICS
• Basic economics provides us with a basic set of rules
to which decent investment advice must conform:
•
•
•
•
Save. Invest. Repeat
Take Risk, earn reward
Diversify
Invest for the long run
SAVE, INVEST AND REPEAT
Capital is scarce. This is the only reason that
any kind of investing yields returns.
The more you save and the sooner, the
more rent you can command from the
financial markets.
Albert Einstein is said to have called
compound interest the greatest invention of
all time.
TAKE RISK, EARN REWARD
• Simply put:
• Riskier investments must offer a higher expected
return in order to attract capital.
• You are rewarded financially for investing your money in
more risky propositions -- on average…
• It’s the “on average” part that is the complicating
factor. Bad things can happen financially, in addition to
all those good things. Dishonesty in this world (think
Madoff)
Who takes these risks?
DIVERSIFY
• So how does one deal with these risks?
• Diversify
A well-diversified portfolio will significantly lower the
risk of serious losses without lowering your expected
return.
INVEST FOR THE LONG RUN
• May the odds be ever in your favor..
• The odds are stacked in your favor if you are patient and
willing to endure the occasional setback.
• A diverse, reasonable investment portfolio will survive the
bumps in the road and expect a positive expected return.
• Think 401K in jobs where money is taken from one’s paycheck
over time and perhaps includes a company match.
• What are the consequences of those who do not or cannot
invest for the long run? Poor now, more poor later….is this
acceptable?
ORGANIZED INTERESTS
• Even when smart people, including well respected
economists have “the answer” about how to benefit all
economically – it doesn’t mean the issue is fixed.
Politics enter into the equation and interests of individuals
and/or groups can stop, thwart, or change the trajectory
of a beneficial economic policy issue. (think pork barrel
legislation)
Organized interest groups with good and harmful
intentions for a wider group of citizens form and act to
influence policy.
ORGANIZED INTERESTS
• When it comes to interest group politics, it pays to
be small. (Wheelan’s example of Mohair farmers)
• Small, well-organized groups are most successful in
the political process because the costs of favors
they get from the system are spread over a large,
unorganized segment of the population.
• It doesn’t really get noticed.
DEATH BY A THOUSAND SUBSIDIES
• The benefits of a $7 billion tax subsidy are bestowed
on a small group of farmers, making it quite
lucrative for each one of them. The costs are
spread over the remaining 98 percent of us. (and
they don’t notice)
• Two percent who care deeply about something are
a more potent political force than the 98 percent
who feel the opposite but aren’t motivated enough
to do anything about it.
PROTECTION OF WEAK SYSTEMS..WHY?
• Sometimes policies protect weak or ineffective
systems…
• If policies aimed at protecting weak outdated
technologies prevail, they slow the economy and
have painful consequences for our society. (Think
Wheelan’s example of teacher certification)
SOCIETAL PROGRESS
• Most of you have in some way indicated you
wanted societal progress on behalf of the most
vulnerable. Most thought it highly beneficial for the
gov’t to redistribute wealth in some way.
• What holds us back from achieving this??
• “Creative destruction” is needed for societal
progress – but many firms have a vested interest in
keeping the status quo because it means they keep
their money flowing to them.
• They may not be invested in societal progress for
those most vulnerable.
THE MORE YOU KNOW…
• The more you are aware of the factors that impact
our economy, the more you will become effective
advocates as Social Workers for victims of “our GDP
economic success” as Americans
• As you review the 6 links to readings and podcasts,
think about how this relates to what Wheelan tells us
about how our market economy benefits some,
and not others. Think about what the government’s
role should be and where it should remain out of it.
THE MORE YOU KNOW
• Private equity firms – someone took the risk – so
he/she/they should reap the rewards, right?
• Does it matter who suffers as a result?
• Everyone should have an equal chance at taking
those risks…the American ideal is that anyone –
regardless of where they came from can make it
big. Barack Obama used this as part of his platform
in this initial election campaign.
• What are the factors that level the playing field…
think about the impact of education in wealth and
poverty?
DISCUSSION BOARD QUESTIONS
• Critically examine how the availability of credit
could support impoverished citizens to gain wealth.
When can available credit hurt those who are
poor?
• In American society our “insurance policy” for the
unexpected events in life is often investment in the
market. Describe the effective aspects of this vs.
entitlements. Describe why (and for whom) this is
ineffective.