Bypassing Wall Street


Proposals for Change


Several proposals for bypassing Wall Street are outlined in the previous section, “What Government Could Do.”  Some of us don’t believe that government can be an effective force for change—that it gets in the way.  Others are convinced that government intervention can only make things worse or, at best, bring even more harmful unintended consequences. 


What follows are proposals that have been put forward for changing our business structure and Wall Street.  Most of them also call upon government to act, even if it is to withdraw from centuries of the intertwining of Wall Street and all three branches of government.  The proposals are presented in seven groups:  “Business as Usual, with Some Tinkering;” “Expecting Technology to Replace Wall Street;” “Using the Government to Bypass Wall Street;" “Changing the Corporation;” ”Redistributing Income;” “Changing our Culture” and “Broadening the Ownership of Business.”


Business as Usual, with Some Tinkering


The proposal that most of Wall Street would like is that we get past this bump in the road, however we can, and then go back to business as usual.  Perhaps we need some tinkering here and fine-tuning there but, after all, “our capital markets are the envy of the world.” Or they may say that “no one outside of Wall Street can really understand what goes on here, how this works.  Any attempt to impose change could throw a wrench in the gears and cause the whole world economy to grind to a halt.”


As Eugene Robinson put it, “Wall Street's impatience is understandable; the geniuses of Lower Manhattan just want to get back to business as usual, having failed to notice that business as usual is no longer remotely acceptable. . . . Do we throw all that money into the apparently bottomless pit of Wall Street's irresponsibility and greed?”  [Eugene Robinson, “Multi-Front Mandate,” Washington Post, March 13, 2009, page A17,]


Part of the business as usual response is to commission further study, which then concludes that the existing system is OK—it just needs more rigorous application.  We’ve all been exposed to the therapeutic approach that tells us we just haven’t taken enough of the remedy that seems to be making us worse.  In higher doses, taken at different times and mixed with other potions, it will solve our problem.  When it comes to the problems Wall Street has caused, it seems as if the more extensive the study, the more flimsy will be the suggestions.  It also seems to follow that you can count on the recommendations never being acted upon. 


Any of us looking to the federal government for answers would be especially discouraged by history.  Over the last forty years, the response to financial market crises has been to appoint a “blue ribbon” commission to study the problem and issue a report.  Virtually nothing gets done.  Let’s look at a recent example: In March 2008, the U.S. Treasury Department, under Secretary Henry Paulson, released its Blueprint for an Improved Financial Regulatory Structure.   [] It proposes getting rid of federally chartered savings and loan associations, the “thrifts,” and making them commercial banks.  Paulson’s group found that they were no longer necessary because of lending by commercial banks and the government-sponsored entities, like Fannie Mae and Freddie Mac, which use Wall Street to sell their securities, “as well as the general development of the mortgage-backed securities market.”  Killing off the thrifts would effectively end the one source of home loans that raises capital directly from individuals, leaving housing finance entirely to Wall Street.  The group also recommended merging the Commodities Futures Trading Commission into the Securities and Exchange Commission, which has a longer, closer relationship with Wall Street.  The 183-page report, plus appendices, would add to the regulatory structure a Market Stability Regulator, a Prudential Financial Regulator and a Business Conduct Regulator.  (It’s reminiscent of  the federal income tax “reform,” “simplification” and “fairness” laws,  which add hundreds of pages to the Internal Revenue Code, and are nicknamed “The lawyers and accountants employment act.”  Another layer of complexity in securities regulation would only benefit the securities lawyers and accountants along with a few of their biggest clients.)  This 2008 report includes an appendix, “Review of Past Treasury and Administration Regulatory Reform Reports.”  It could have been subtitled:  “Don’t worry, we’ve been through this commission report process before and it doesn’t mean that anything will actually change.”  Here’s the repetitive story:


• In 1970, President Richard M. Nixon created the Commission on Financial Structure and Regulation (known as “the Hunt commission”) to “review and study the structure, operation, and regulation of the private financial institutions in the United States, for the purpose of formulating recommendations that should improve the functioning of the private financial system.”  The Commission recommended consolidation and renaming of federal supervisory and deposit insurance agencies.  No significant recommendations were ever adopted.


• In 1982, President Ronald Reagan created the Task Group on Regulation of Financial

Services, with Vice President George H. W. Bush as Chairman.  It was charged with making legislative recommendations to increase regulatory effectiveness, promote competition, and reduce unnecessary costs.  Its 1984 report was titled, Blueprint for Reform: The Report of the Task Group on Regulation of Financial Services, a name very similar to Secretary Paulson’s 2008 report.  It called for “functional regulation,” reorganizing and renaming agencies to regulate a common activity or product, rather than a type of institution.  Nothing material seems to have come from it.  Nevertheless, the 2008 report recommends replacing this “current system of functional regulation” with “an objectives-based regulatory approach.”  [page 4 of the 2008 report]


• After the October 1987 stock market panic, President Reagan created another task force.  Its Report of the Presidential Task Force on Market Mechanisms attributed the panic to the failure of markets for stocks, stock index futures, and stock options—“to act as one,” [page 201 of the 2008 report] and it recommended greater unity in various market mechanisms.  It wanted one agency, presumably the Federal Reserve, to coordinate regulation of all markets.  Nothing appears to have been done about the recommendations.


• When Congress passed the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, it directed the Treasury to recommend changes in the deposit insurance system.  The resulting 1991 report, Modernizing the Financial System: Recommendations for Safer, More Competitive Banks, was called the “Green Book.”  According to the 2008 report, “The ‘four fundamental reforms’ of the Green Book were lifting restrictions on banking activities and allowing nationwide banking and commercial ownership of banks; reining in the overextended deposit insurance and improving supervision with strengthened capital requirements; streamlining the regulatory structure with one federal regulator for a given banking entity; and recapitalizing the Bank Insurance Fund.” [page 203 of the 2008 report]  Taking away restrictions on banking activities was at the base of Congressional deregulation intent and that continued to happen.  The reforms in regulation and deposit insurance did not.


• In 1994, Congress again directed the Treasury “to review the strengths and weaknesses

of the financial services system, and, in particular, the adequacy of regulation to meet

market developments.  In November 1997, Treasury published American Finance for

the 21st Century.  [page 204 of the 2008 report.]  Again, nothing really changed.


Big studies by nongovernmental organizations have also come up with “we need more of the same.”  A 2007 foundation-supported study on the “savings crisis” suggests that the government induce Americans to turn more of their money over to financial intermediaries.  Called “Savings for Life:  A Pathway to Financial Security for All Americans,” it would even divert tax money to bring more of us into the habit of doing business with those intermediaries.  The Aspen Institute, a think tank, through its Initiative on Financial Security, sponsored this “ground-breaking partnership between the financial services industry and public policy experts to address the nation’s deepening savings crisis.”  The study was funded by grants from the Ford Foundation, other foundations and its 13 Advisory Board members, which included commercial banks, like Bank of America, investment banks, like Goldman Sachs, a credit union and money managers.  Only one member, The Urban Institute economic and social policy research foundation, is not a financial intermediary.


The factual findings of the Aspen Institute study focus on the U.S. personal savings rate having gone from 11 percent in 1984 to a negative one percent in 2006; that half of the baby boomer generation is unprepared for retirement.  But the study concludes that:  “What is needed is the right nexus to bring the financial services sector and low- and moderate-income Americans together.”  The proposal is to add four more retirement accounts to the IRAs and 401(k) plans.  “Child accounts” would have the government endow all newborns with an investment account.  “Home accounts” would have the government match amounts put into an account for a home down payment.  In “America’s IRA,” the government would pay for opening the account and also match amounts put in by lower income workers who did not have an employer-sponsored retirement plan.  The final plan, “Security ‘Plus‘ Annuities” would have Social Security contract with private companies to sell an annuity contract to recent retirees, with a monthly annuity added to their social security payments.  It would “use the federal government as an intermediary to market and distribute annuities, provide supportive administrative services and select annuity providers.”  [page 29]


All of these plans to solve the “savings crisis” would use the federal government and taxpayer funds to create business for financial intermediaries.  The profit potential for one plan is described in typical promoter’s language:  “Even if only 5% of eligible retirees purchase a Security ‘Plus’ annuity, assuming an average annuity purchase amount of $50,000, this $8 billion annual market would be larger than today’s annuities market, and would become a market of over $190 billion between 2008 and 2030.” [Page 40]


“More of the same, with tinkering” proposals also come from the writings of economic scholars.  One is Robert Shiller, an economics professor at Yale who co-developed and sold to Standard & Poor’s its Case-Shiller Home Price Indices, a major tool in the mortgage derivatives market.  He is author of Irrational Exuberance [Princeton University Press, 2nd edition, 2005] and The Subprime Solution: How Today’s Global Financial Crisis Happened, and What to Do about it.  [Princeton University Press, 2008]  Professor Shiller has a website which includes links to data bases on stock prices, earnings, dividends and interest rates since 1871 and on home prices, building costs, population and interest rates since 1890.  []    Rather than blaming Wall Street, Shiller claims “that the housing bubble that created the subprime crisis ultimately grew as big as it did because we as a society do not understand, or know how to deal with, speculative bubbles.”  [The Subprime Solution, page 3]  “This book is about dealing with the subprime crisis, and future crises like it, by developing a new financial infrastructure for the entire population, and doing so using the most advanced technology at our disposal.”  [page 26, emphasis in the original]  He argues for “democratizing finance,” by “extending the application of sound financial principles to a larger and larger segment of society, and using all the modern technology at our disposal to achieve that goal.”  [The Subprime Solution, page 115]  He would have the government “subsidize fee-only, comprehensive, independent financial advice for everyone,” with a co-pay like health insurance. [The Subprime Solution, page 125]


Shiller recommends several steps to “unleash the power of better information” by providing “the economic and governmental incentives for the development of a better information infrastructure.” [The Subprime Solution, page 148]  This would include more futures contracts and other derivatives for Wall Street to sell.  “Many substantial institutions see great potential in these futures markets.  These markets could allow them to launch important retail risk management products, and then hedge the risks they acquire in doing so.”  [The Subprime Solution, page 152]  (I read this as opening up the middle class individual market to Wall Street for the kinds of securities that they have been selling to hedge funds, pension funds and others with devastating losses in 2008.)  Some of Professor Shiller’s ideas are well beyond what most of us have ever imagined.  For instance, “Markets for occupational incomes—such as futures, forwards, swaps, and exchange-traded notes—will ultimately make it possible for people to hedge their lifetime income risks.”  [The Subprime Solution, page 154]  Some of us may feel that the solution is not in furnishing Wall Street with ever more complex financial instruments, with a direction to sell them to the middle class markets.  One thing that that these suggestions would do:  Protect Wall Street’s monopoly by making the investment/gambling process more and more complex, building an even greater barrier to entry by newcomers or alternative methods.  The most radical element of Shiller’s formula is to replace money with a unit of measurement derived from the daily price of selected goods and services.  Everything from taxes to credit card payment systems would be programmed to use these “baskets.”  Shiller would have a myriad of derivative instruments for hedging one’s ability to earn a lifetime income, for governments to sell debt that pays a share of their gross domestic product, rather than a rate of interest, and for mortgages that adjust monthly to reflect changes in the borrowers’ ability to pay and the price of housing.

Professor Shiller, as the entrepreneur, announced a new derivatives business in April 2009.  Called Macroshares, it will sell “Up” shares and “Down” shares tied to the Case-Shiller Composite 10 Home Price Index.  Macroshares will invest the amount it gets from selling shares into liquid U.S. government securities.  Income from those securities, and principal if necessary, will be used to pay management fees.  The liquid assets get shifted between “Up” and “Down” shares to reflect movement in the Index.  There would always be an equal number of both kinds of shares, so the offering price for each would have a premium or discount to asset value.  (It all sounds like a complicated board game to me.)  The offering, in May 2009, was underwritten by W.R. Hambrecht & Co., through its Open IPO auction process.  Hambrecht’s announcement of the proposed offering read:  “These securities are conceived and designed by Professor Robert Shiller, co-creator of the Case/Shiller Housing Indexes, and a founder of MacroMarkets, LLC. These exchange-traded securities are the only listed, fully collateralized securities tracking the housing market and allow investors to express either a bullish or bearish view on home prices in the U.S. They provide investors with diversification, and a tool to hedge their own exposure to the largest asset class in the U.S., the housing market.”  [The offering prospectus was made available at]

Martin Mayer has been writing books about financial intermediaries since The Bankers, in 1975.  His titles have included The Money Bazaars and Conflicts of Interest: The Broker/Dealer Nexus.   In 1980, he seemed to find scores of conflicts of interest on Wall Street, but concluded we’d just have to learn to live with them.  “Lawyers hunting out villainous behavior to attack and social critics seeking shoddy practice in capitalist institutions can look forward to finding the objects of all their respective quests in the years ahead.” [Chapter on “Broker-Dealer Firms” in the Twentieth Century Fund Report, Abuse on Wall Street: Conflicts of Interest in the Securities Markets, Quorum Books, 1980, page 494]  In his 1992 book, one section is his “Prescription for a Cure,” in which he calls upon the SEC to commit to “the American tradition of transparency.  Sunshine is the best disinfectant.” He would have the SEC require public reporting of every transfer of the ownership of securities of a U.S. corporation, including derivatives.  The name of the broker and commission paid would be included.  [Martin Mayer, Stealing the Market: How the Giant Brokerage Firms, with Help from the SEC, Stole the Stock Market from Investors, BasicBooks, 1992, page 182]


To get institutions out of speculative games, Mayer would tax their short-term trading gains.  “Surely the retirement income of American workers should be a function of the success of the American economy, not of the cleverness of rocket scientists exploiting ten-second ‘anomalies’ in the prices of futures, options, and cash stocks.” [Martin Mayer, Stealing the Market: How the Giant Brokerage Firms, with Help from the SEC, Stole the Stock Market from Investors, BasicBooks, 1992, page 185]  This proposal has been talked about since at least the time of John Maynard Keynes.  A bill proposed in Congress would levy a tax of 0.25 percent stock transactions over $100,000, and 0.02 percent on derivatives.  Sponsors of the bill say it is “backed by more than 200 economists, the AFL-CIO labor union federation and business leaders including Warren Buffett and Vanguard Group Inc. founder John C. Bogle.”  []  A recent think tank study says the tax would “curb excessive short-term speculation and encourage more long-term, productive investment,” and also “raise hundreds of billions of dollars in revenue from the high-risk, high-speed types of investment activities that led to the current crisis.”  [   “Taxing the Wall Street Casino: Small Change for the Speculators, Big Change for the United States and the Planet,” Institute for Policy Studies, 2010,]  Doug Henwood also endorses the securities transactions tax, as well as "wealth taxes," like those in several in European countries.  [Doug Henwood, Wall Street: How It Works and for Whom, Verso, 1997, page 316]  Senator Huey Long proposed a wealth tax in 1934.  Huey Long's popularity with voters is said to have led to higher estate taxes and the social security program.  [Jeff Gates, The Ownership Solution: Toward a Shared Capitalism for the Twenty-First Century, Addison -Wesley, 1998, pages 52-54]


Columbia University law professor Louis Lowenstein adopts a proposal by master investor Warren Buffett, that there should be a 100 percent tax on all gains from the sale of stocks or their derivatives held for less than a year.  “Until we stop this hyperactive trading, however, there is no possibility of a solution to the longer-term concerns of how best to encourage shareholders to act like those owners of a local factory rather than holders of a pari-mutuel ticket.”  [Louis Lowenstein, What’s Wrong With Wall Street: Short-term Gain and the Absentee Shareholder, Addison-Wesley Publishing Company, Inc., 1988, page 203]  Lowenstein would also have shareowners nominate “a significant but still minority number of additional directors, e.g., 20-25 percent of the board.”  The purpose would be “to create some such continuing, unconfrontational channels by which the owners of the business communicate with the managers. . . .  The two proposals—a nontax tax and shareholder nominated directors—are modest in their design, and yet it is not easy to feel confident that they will work.  They are intended, first, to force investors to think more like part-owners of a business in the sense of buying only those stocks they are prepared to hold for a year, and second, to encourage at least some of them to become better informed and more directly involved in corporate affairs than they have ever been.” [pages 209, 211 and 217-218] 


Author Charles R. Morris, a lawyer and former banker, believes “that the 1980s shift from a government-centric style of economic management toward a more markets-driven one was a critical factor in the American economic recovery of the 1980s and 1990s.  But the breadth of the current financial crash suggests that we’ve reached the point where it is market dogmatism that has become the problem, rather than the solution.”  [Charles R. Morris, The Trillion Dollar Meltdown: Easy Money, High Rollers, and the Great Credit Crash, PublicAffairs, 2008, page 169]  He suggests re-separating commercial and investment banking, extending banklike capital requirements to nonbank lending intermediaries and requiring all derivative securities to be traded on exchanges. 


Robert Kuttner takes aim at private equity firms, which buy public companies and often drain them before reselling thier shares to the public.  He would take away their ability to deduct interest on the money they borrow, hit them with a windfall profits tax, prevent them from taking dividends out of the acquired business,  limit transactions fees and make them continue filing SEC public reports on the business.  [Robert Kuttner, The Squandering of America: How the Failure of Our Politics Undermines Our Prosperity, Alfred A. Knopf, 2007, page 127]


Paul Krugman, the Princeton economics professor, winner of the Nobel Prize in Economics and frequent media commentator, updated his earlier work in The Return of Depression Economics and the Crisis of 2008.   He says “the basic principle should be clear: anything that has to be rescued during a financial crisis, because it plays an essential role in the financial mechanism, should be regulated when there isn’t a crisis so that it doesn’t take excessive risks.”  That would include extending banklike regulation to nonbanks.  [W.W. Norton & Company, 2009, page 189-190.  Emphasis in the original]


Some proposals for tinkering with business as usual are directed at the one area in which Wall Street actually does raise money for companies, the underwritten initial public offering.  Raising capital from the public for young businesses is today limited to a very narrow channel.  It usually means first having institutional venture capital investors, who then go to a large investment banking department for an underwritten public offering of more than $50 million.  The IPO is sold to buy side institutional money managers and then traded on the NASDAQ stock exchange.


Nicholas Wolfson has detailed many of the abuses from IPOs, acknowledging that “One approach is to cut the Gordian knot of conflicting duties by divorcing investment banking from brokerage, block trading, and market making.”  Instead, using Merrill Lynch as an example, he says that an underwriter needs both a large capital base and a retail brokerage operation to perform a successful underwriting.  He then concludes that the “only realistic solution for the ordinary public investor” is to require immediate public disclosure of all corporate news, to take away the conflict created when underwriters have inside information.  [Nicholas Wolfson, “Investment Banking” chapter in the Twentieth Century Fund Report, Abuse on Wall Street: Conflicts of Interest in the Securities Markets, Quorum Books, 1980, pages 412, 413.  Nicholas Wolfson is University of Connecticut law professor and author of the Modern Corporation: Free Markets vs. Regulation, The Free Press, 1984]  The National Association of Securities Dealers filed a proposed rule in 2003, to put more limits on the tricks used to skim money off IPOs, In 2010, NASD's successor, The Financial Industry Regulatory Authority, filed the fourth amendment to that proposed Rule 5131.  []  If ever approved by the SEC, it would make the labyrinth a little more complex and the obstacles to doing an IPO a little more formidable.  Cheaters would find new ways to cheat.


Since the 1920s, competitive bidding for new issues of securities has been proposed, as an alternative to the investment banking oligarchy.  Instead of underwriters being chosen because of personal relationships, the corporations and governments would have to put the proposed issues up for competitive bidding.  The business would go to the bidder willing to pay the highest amount.  Congress has never taken an interest in requiring competitive bidding.  The issue was pressed on the SEC, in its role as administrator of the Public Utility Holding Company Act.   The SEC staff studied bond and stock issues by holding companies during 1934 to 1939, finding that over 60% were underwritten by six investment bankers.  It concluded that there was “an unwritten code whereby once a banker brings out an issue, the banker is deemed to have a recognized right to all future issues of that company.” [Charles R. Geist, Wall Street: A History, Oxford University Press, 1997, page 264]  Except for public utilities, competitive bidding was never required by Congress or the SEC.  Nothing has come from the SEC to encourage competitive bidding for new issues of securities.

One investment banking firm, W.R. Hambrecht & Co., has used an auction for IPOs, rather than a price negotiated between the company and the underwriter.  The firm’s founder, Bill Hambrecht, had a brokerage firm in the 1960s, specializing in public offerings of small technology companies, with total offering amounts as little as $1 million.  Before Hambrecht & Quist was sold to Chase Manhattan in 1999, Bill Hambrecht had started his new firm where he fashioned the “OpenIPO” alternative.  It is a so-called “Dutch auction,” like the U.S. Treasury uses for its debt issues.  Rather than forming an underwriting syndicate, the firm accepts bids for initial public offerings of shares, within a price range set by the company and the underwriter.  Bidders must have a regular brokerage account, with Hambrecht or with another broker who participates in the auction IPOs.  Bids are accepted, starting with the highest price bid and continuing down until bids cover all the shares offered.  Then everyone pays at the lowest price it took to sell all the shares.  People who bid higher buy shares at the lower final price.  People who bid lower than that do not get any shares.  Hambrecht has continued its OpenIPO alternative, but it hasn’t caught on with other securities firms.

Competition to the IPO underwriting oligopoly has come from the London Stock Exchange, through its Alternative Investment Market.  It adopts the philosophy of regulation by broad principles, rather than the detailed rules and rituals of Wall Street investment bankers, the SEC and NASDAQ.  The most innovative difference AIM introduced is the nominated sponsor, or “Nomad,” a securities professional who vouches for a company’s eligibility and compliance with the listing requirements.  American businesses have been choosing AIM listings, because of the smaller minimum amounts for an IPO and the lower underwriting commissions and costs.  Also a consideration is AIM’s closer relationship of the initial offering price to the trading price for the newly listed shares in the days and months after the offering.  The Wall Street game is to manipulate the offering price and the early trading so that the investment banker’s selected IPO buyers can reap a quick profit.  The bragging rights go to the underwriters who generate the biggest “pop” from the price received by the company to the price at which the first buyers can resell the shares they purchased a few minutes or days earlier.


AIM initial public offerings are also attractive if they do not require registration of the offering with the SEC and do not bring the business under the requirements for an SEC-reporting company, including the additional duties prescribed by the Sarbanes-Oxley Act of 2002.  Instead, AIM companies must issue financial reports every six months.  Their annual audited financials do not have to include the “Management’s Discussion and Analysis” section that takes up much of the SEC reporting.  Proponents of the AIM path for initial public offerings argue that the extra detail in underwritten SEC-registered offerings is really only useful to Wall Street securities analysts, that the minutiae of SEC reporting is wasted on the individuals who buy shares in young companies.  [Frederick Lipman and Tim Bird, “Securities Regulation Of Small Public Companies: What Can We Learn From The British?”  Insights: Corporate & Securities Law Advisor, Vol. 23, No. 7, Page 18]


To clean up the buy side of Wall Street, Jack Bogle foresees mutual funds separating from their management companies and conducting their business with in-house management selected by the trustees, who are elected by the funds’ shareowners.  Bogle, who is the founder of the Vanguard family of mutual funds, suggests:  “Mutual fund shareholders would, in effect, own the management companies that oversee their funds.  They would retain their own officers and staff, and the huge profits now earned by external managers would be diverted to the shareholders.  They wouldn’t waste their own money on costly marketing campaigns designed to bring in new investors at the expense of existing investors, nor would they start opportunistic funds at the drop of a hat.”  [John C. Bogle, The Battle for the Soul of Capitalism, Yale University Press, 2005, page 214]


There are those who believe that no amount of tinkering with business as usual will prevent future failures caused by large financial intermediaries.  For instance, Bank of England governor Mervyn King has warned:  “The sheer creative imagination of the financial sector to think up new ways of taking risk will in the end, I believe, force us to confront the ‘too important to fail’ question. . . . The belief that appropriate regulation can ensure that speculative activities do not result in failures is a delusion.”  [Natasha Brereton and Stephen Fidler, “BOE’s King: Big Banks Should Get Broken Up,” The Wall Street Journal, October 21, 2009, page C1]  AS David Korten puts it:  "Efforts to fix Wall Street miss an important point.  It can't be fixed.  It is corrupt beyond repair, and we cannot afford it.  Moreover, because the essential functions it does perform are served better in less costly ways, we do no need it."  [David C. Korten, Agenda for a New Economy: From Phantom Wealth to Real Wealth, Berrett-Koehler Publishers, 2009, page 45] 


Expecting Technology to Replace Wall Street

In 1989, The New York Stock Exchange commissioned the University of Pennsylvania’s Wharton School to study the stock markets.  The two Wharton professors assigned to the study concluded that computer and communications technology would simply make the securities industry obsolete.  Wall Street’s sell side would go away because individuals would be able to execute their own trades, without the need for an exchange or even a broker.  Their 1993 book envisioned that:  “There would be no need for an exchange or even for dealers, only a financial institution to verify the creditworthiness of the trades being executed. . . . Conceivably, a computer program could become a de facto portfolio manager, providing individuals with access to much the same expertise (although not the trading clout) of many a mutual fund manager.” [Marshall E. Blume, Jeremy J. Siegel, Dan Rottenberg, Revolution on Wall Street: The Rise and Decline of the New York Stock Exchange, W.W. Norton & Company, 1993, page 248] 

(In 2000 I responded to an SEC request for comments on the problem of fragmentation in the stock market, the trading of shares on multiple exchanges and alternative trading markets.  [SEC Release No. 34-42450; File No. SR-NYSE-99-48] My suggestion was that every publicly-traded company have its own website for providing information and executing trades in its shares.  One of our clients and others had already received SEC “no-action” letters, allowing them to operate an online trading system for their shares, with safeguards for a fair and open market.  [Real Goods Trading Corporation (June 24, 1996), Perfect Data Corp. (August 5, 1996), Flamemaster Corporation (October 29, 1996) and Portland Brewing Company (December 14, 1999.)])


Using the Government to Bypass Wall Street


The federal government has frequently acknowledged that Wall Street will not finance the needs for capital in important sectors.  To fill the gap, the government currently provides direct loan programs for agriculture, small business, housing, education and many other purposes.  []

Progress in the United States has often been traceable to purposeful government stimulation.  “In the decades before and during the Civil War, the government gave away some 100 million acres of land to the railroads, along with considerable loans to keep the railroad interests in business.”  [Howard Zinn, “A Big Government Bailout,” The Nation, October 27, 2008]  The Homestead Act of 1862, signed by Abraham Lincoln, gave federal land for family farms.  The same year, Lincoln also signed the law creating land grant universities by “Donating Public Lands to the several States and Territories which may provide Colleges for the Benefit of Agriculture and Mechanic Arts.”  [First Morrill Act, 1862]  A century later, the Department of Defense Advanced Research Projects Agency built the first wide area packet switching network.  It is now the Internet, developed and managed by several nonprofit organizations.  Government also financed development of computer hardware: “By one count, in the period 1958 to 1974, the Pentagon paid for $1 billion worth of semiconductor research.”  [John Micklethwait and Adrian Wooldridge, The Company: A Short History of a Revolutionary Idea, The Modern Library, 2003, page 143]

Louis Brandeis, in his 1914 book, described earlier examples where the government was way ahead of the investment bankers in financing important new developments.  Funds for the first railroads were “gathered together, partly through state, county or municipal aid . . ..”  He also tells how, after Samuel Morse and his partner, Alfred Vail, developed the telegraph, Congress appropriated the money to build the first transmission line, from Baltimore to Washington.  [Louis D. Brandeis, Other People’s Money: And How the Bankers Use It, Frederick A. Stokes Company, 1914, republished by National Home Library Foundation, 1933, Kessinger Publishing’s Rare Reprints, pages 93, 94] 

One of the New Deal’s big successes was the Reconstruction Finance Corporation, which “was the most powerful single force in providing funds for America’s industries during the Great Depression, and its chairman, Jesse Jones, wielded more influence than had any investment banker after the death of J.P. Morgan.”  [Robert Sobel, Inside Wall Street: Continuity and Change in the Financial District, W.W. Norton & Company, 1977, page 204]  James Galbraith is an economist at the LBJ School of Public Affairs at the University of Texas at Austin.  His seventh book will be The Predator State: How Conservatives Abandoned the Free Market and Why Liberals Should Too, The Free Press]  He has suggested a new Reconstruction Finance Corporation, “to meet industrial needs for credit and to help with restructuring and modernization.”  [James K. Galbraith, “What’s Missing in the Stimulus Plan,” The New York Times, January 28, 2009.  Less successful has been the Small Business Administration, with its history of   underfunded programs and corruption scandals.


The Federal National Mortgage Association (Fannie Mae) was created during the Great Depression, followed by the Federal Home Loan Mortgage Corporation (Freddie Mac) in 1970.  Their purpose was to help bring liquidity to the mortgage market and make mortgages more affordable for homeowners.  The companies buy billions of dollars in mortgages each month from commercial lenders.  Some are then sold to investors as mortgage backed securities; others are held by the two government-sponsored entities in their own investment portfolios on their balance sheets.  Together the two companies have been involved in about 70% of all new home loans.  Their original charters were changed to accommodate them going public with shares and becoming a Wall Street playground for the housing bubble/mortgage securities/derivatives games.  After the resulting Panic of 2008, they were taken over by the federal government.


Government funding was used for bailing out Wall Street, after it caused the Great Recession.  In November 2008, the Federal Reserve Board of Governors announced a plan to induce hedge funds to start buying mortgage securities again, with help from the Term Asset-backed Securities Loan Facility, or TALF.  The Federal Reserve would lend money to be used in buying mortgage securities, with an interest rate below the yield on the securities, so buyers can make money on the spread.  Best of all, the loans would be non-recourse, that is, the investor will not be responsible for any loss beyond the amount of the mortgage securities purchased with the loan.  [Thorold Barker, “TALF of the Town: Fed’s Move to Spur Lending,” Wall Street Journal, November 26, 2008, page C16.]


Green technology is a current federal funding program. The U.S. government’s fiscal 2009 spending paid for 30,000 jobs in university and government laboratories, for research in alternative energy.  The Department of Energy Office of Science funds 17 laboratories.  [Gautam Naik, “Energy Push Spurs Shift in U.S. Science,” The Wall Street Journal, November 25, 2009, page A1]  Federal spending on loans, grants and tax credits for clean technology is expected to reach $69 billion through 2011.  [Mike Dorning, “Obama: Clean Energy’s Venture Capitalist-in-Chief,” Bloomberg Businessweek, August 5, 2010,] Currently being considered is a “Green Bank,” which would use federal money “for low-interest loans to projects that can’t attract conventional financing because their path to profitability is too long.”  [Eric Pooley, “America Sits Out the Race,” Bloomberg Businessweek, August 2-8, 2010, page 5,7]


Individual states have created Community Development Finance Corporations, to provide long-term capital to businesses ignored by Wall Street.  Massachusetts recently reinvigorated a forty-year program, calling it the Massachusetts Growth Capital Corporation.  []Loans, guarantees and lines of credit are available in amounts from $100,000 to $500,000.    []  The Pennsylvania Community Development & Finance Corporation "is a Certified Development Company of the US Small Business Administration (SBA) developed as a non-profit corporation to provide SBA 504 loans to new and growing businesses seeking fixed rate, long term financing with below market interest rates." []  Illinois consolidated its Community Development Finance  Corporation with six other finance authorities in 2004, operating them as the Illinois Finance Authority.  It receives no taxpayer funds and the state is not liable on the bonds that it issues.  Its operating expenses are paid for by "closing fees, interest income and investment income."  []  Back in the 1970s, the community development corporations were seen as a  "model for an alternatively structured and democratically run economic system."  However, they run the risk of financing "only those business enterprises that have been abandoned by the private sector because of their inherent unprofitability . . . what some critics refer to as 'lemon socialsim'"  [Jeremy Rifkin and Randy Barber, The North Will Rise Again:  Pensions, Politics and Power in the 1980s, Beacon Press, 1978, pages 198 and 201]


Government has also been used to force regulated financial intermediaries to finance activities that they wouldn’t service on their own.  One of those programs is the Community Development Financial Institution (CDFI), which “works in market niches that are underserved by traditional financial institutions. CDFIs provide a unique range of financial products and services in economically distressed target markets, such as mortgage financing for low-income and first-time homebuyers and not-for-profit developers, flexible underwriting and risk capital for needed community facilities, and technical assistance, commercial loans and investments to small start-up or expanding businesses in low-income areas. CDFIs include regulated institutions such as community development banks and credit unions, and non-regulated institutions such as loan and venture capital funds.”  [ “Since its inception, the Fund has made more than $500 million in awards to loan funds, banks, credit unions, and community development venture capital funds.”  [

Commercial banks are required to place a portion of their assets back into the communities from which they draw deposits.  [] Noncompliance can mean a bank’s regulator may deny its next merger or other action requiring approval.  The huge banks have found that they can meet their Community Reinvestment Act requirements by investing in CDFIs, most of which are good credit risks because they provide technical assistance to entrepreneurs.  [John Tozzi, “How Goldman Profits from Nonprofits,” Bloomberg BusinessWeek, February 15, 2010, page 64.]


Changing the Corporation


This study, Bypassing Wall Street, takes the view that Wall Street has been the main cause of our economic problems.  For many, however, the chosen demon is the corporation.  Corporations are seen as too powerful, as being in control of government, the media, our thoughts and culture.  "It is corporations that have taken the place of political parties, to the extent anyone has."  [William Greider, Who Will Tell the People: The Betrayal of American Democracy, Simon & Schuster, 1992, page 331]  Some of the solutions proposed for abuse of corporate power would affect Wall Street, since most of the participants are also large corporations.  This is a brief reference to some of those proposals.


Adolph Berle and Gardiner Means published The Modern Corporation and Private Property in 1932. [Reprinted by Transaction Publishers, 1991]  It is the seminal treatise on how management of big corporations has become separated from shareownership, how this managerial class has used the huge resources of corporations like ancient monarchs and current dictators.  In the preface, Berle writesThe solution put forward by Berle, and also by John Kenneth Galbraith and others, was the concept of countervailing power.  [John Kenneth Galbraith, American Capitalism: The Concept of Countervailing Power, Houghton Mifflin, 1956]  They saw government as the strongest countervailing power, although now corporate chieftains and their lobbyists have become the principal shaper of government action.  Labor unions once exercised some countervailing power but they aren’t currently of much influence.  Consumers and grass roots activism have been effective around specific issues but they are rarely a match for corporate managers.  Robert Reich has argued that we need interwoven involvement of corporate managers, government and labor.  [The Next American Frontier, Times Books, 1983]


The stakeholder concept has been introduced to provide a countervailing power to the CEO-dominated corporation.  In response to the hostile takeover battles of the 1980s, state legislatures adopted statutes allowing corporate directors to consider the interests of constituencies or “stakeholders” other than shareowners.  The idea was that directors could refuse a takeover offer, even if it was in the best interests of the shareowners.  The statutes allowed them to consider the effect of the proposal on employees, the local economy, suppliers and others who could be affected.  The real purpose, of course, was to give managers a way to save their positions with the corporation, by refusing a buyout offer.  Economist
David Ellerman suggested that:  "One sometimes has the suspicion that 'stakeholder' governance ideas are being floated by managers who know that, by being responsible to everyone, they will be accountable to no one."  [Comment from a meeting, quoted by Marjorie Kelly, The Divine Right of Capital: Dethroning the Corporate Aristocracy, Berrett-Koehler Publishers, Inc., 2001, page 150 and chapter 10, note 10]  One stakeholder proposal would "reduce the financial and governance role of the stock market with an eye towards its eventual elimination.  Corporations should be placed increasingly under a combination of worker, community, customer, supplier, and public control."  [Doug Henwood, Wall Street: How It Works and for Whom, Verso, 1997, page 320]


"Relationship Investing" is one of the names given to the proposal that institutional money managers act as the countervailing power to corporate managers.  The idea is that pension funds, mutual funds and endowments would make large investments in a few corporations and hold them for the long term.  They would then monitor the corporations carefully and exert influence on the managers.  The concept is founded on the assumption that "the interests of large institutional investors such as pension funds tend to coincide with the interests of society at large."  [From a review of the subject in Margaret M. Blair, Ownership and Control: Rethinking Corporate Governance for the Twenty-First Century, The Brookings Institution, 1995, page 174]  Whether the premise is true or not, the fact is that money managers, whether employees or contractors, get paid based upon short-term performance, and it is they who make the investment decisions.


Even Wall Street has been seen as a countervailing force to big corporations.  As Charles Derber put it:  “The financial markets, while servicing corporations, have emerged as an important counterweight to corporate autonomy.”  [Charles Derber, Corporation Nation: How Corporations are Taking over Our Lives and What We Can Do about It, St. Martin’s Press, 1998, page 39]  Derber discounts the countervailing power of “America’s new ownership class,” the IRAs and 401(k) retirement plans, observing that they act “like traditional investors, narrowly, even greedily, focused on making a profit.” [page 41]  Derber favors a 1990s Congressional proposal for large corporations to have a federal “R” charter that has conditions like avoiding layoffs when they are profitable and furnishing employee medical and pension plans.  He would add respecting the environment and serving the local community.  [page256]  Derber also suggests replacing corporations with business cooperatives, worker-owned or community-owned businesses.  [page 264]


Jack Bogle, founder of the Vanguard mutual funds, thinks there should be stronger participation by shareowners.  He does not propose bypassing financial intermediaries.  He does believe that: “Our nation’s financial institutions transmogrified themselves from members of an own-a-stock industry into members of a rent-a-stock industry, enabling corporate managers to run roughshod over their owners.”  Bogle suggests that investors, which are mostly fund managers, “exercise their voting franchise, working with company directors to return capitalism to its owners so it can function effectively in the nation’s service.”  [John C. Bogle, The Battle for the Soul of Capitalism, Yale University Press, 2005, page xxi.  Bogle’s seven policy recommendations for returning corporate America to its owners are on pages 49 to 57]


Ralph Nader and co-authors proposed that a federal government charter be required for all corporations with more than $250 million in sales or 10,000 employees.  The federal charter would require all members of the board of directors to be independent employees of the corporation, would call for shareowner votes on fundamental transactions and more extensive public disclosure of public information.  [Ralph Nader, Mark Green, Joel Seligman, Taming the Giant Corporation, W. W. Norton & Co., 1976]  Robert Hessen's book, written "to respond to Ralph Nader's latest attack on corporations," provides rebuttal to each element of Nader's proposal.  [Robert Hesson, In Defense of the Corporation, Hoover Institution Press, 1979, page xv]  Former U.S. Senator and presidential candidate Fred Harris said the federal charter "should include a kind of Bill of Rights for workers--and consumers and stockholders too.  One of those worker rights should be sharing in ownership and job control."  [The New Populism, Thorp Springs Press, 1973, page 49]  Jeff Gates says about the Luddites, who destroyed work-replacing textile machinery:  "One can only speculate at their reaction had they been made part owners of those companies employing the technology that displaced them."  [Jeff Gates, The Ownership Solution: Toward a Shared Capitalism for the Twenty-First Century, Addison -Wesley, 1998, page 81]


Martin Weitzman, Professor of Economics at Massachusetts Institute of Technology, has written that “What is most desperately needed” is a “basic change in employee-compensation arrangements,” so that it is “tied to an appropriate index of the firm’s performance, say a share of its revenues or profits . . ..”   [Martin L. Weitzman, The Share Economy; Conquering Stagflation, Harvard University Press, 1984, pages 2,3]  His formulas would have the employer paying total employee compensation equal to a fixed amount or percentage of revenues.  Each employee would then get a share of that total.  If new employees were hired, their pay would come out of the fixed amount or percentage, reducing what goes to the other employees.  As the book’s subtitle suggests, it was written during a period of high unemployment and high inflation.  The proposed “share system possesses a relentless underlying drive toward absorbing unemployed workers, increasing output, and lowering prices which does not cease until all available labor is fully employed.”  [page 89.  Similar approaches are mentioned in Wealth Creation and Wealth Sharing: A Colloquium on Corporate Governance and Investments in Human Capital, led by Margaret M. Blair, The Brookings Institution, 1996]  A former president of the AFLCIO called for "a new social contract under which working people will enjoy a greater share of the wealth they produce . . .."  [John J. Sweeney, with David Kusnet,  America Needs a Raise, Houghton Mifflin Company, 1996, page 124] 


“Corporate personhood” is the name given to the effect of U.S. Supreme Court decisions giving many of the same rights to corporations as those of citizens.  The argument has been based on the Fourteenth Amendment to the Constitution, adopted to protect the rights of former slaves, which reads, “nor shall any state deprive any person of life, liberty, or property, without due process of law; nor deny to any person within its jurisdiction the equal protection of the laws.”  Right after the amendment was adopted, corporations began filing lawsuits against state governments, arguing that they were “persons,” entitled to due process and equal protection of the laws.  They consistently lost in the Supreme Court, including the case of Santa Clara County v. The Southern Pacific Railroad.  However, the Court recorder for that case, formerly a railroad president himself, put into his syllabus that “The defendant Corporations are persons within the intent of the clause in section 1 of the Fourteenth Amendment to the Constitution of the United States, which forbids a state to deny to any person within its jurisdiction the equal protection of the laws.” [118 U.S. 394, 395 (1886)]  This entry was published, despite the statement in Justice Harlan’s opinion for the Court that the lower court’s judgment could be sustained on a nonconstitutional ground, so that “it is not necessary to consider any other questions raised by the pleadings and the facts found by the court.”  [118 U. S. 416]  The latest furor over corporate personhood resulted from the Supreme Court’s extension of free speech protection to political campaigns financed by corporations.  [Citizens United v. Federal Election Commission,, 2010]


The case for abolishing corporate personhood is made by many individuals and organizations.  [Such as, Thom Hartman, “To Restore Democracy: First Abolish Corporate Personhood,” and Unequal Protection: The Rise of Corporate Dominance and the Theft of Human Rights, Berrett-Koehler Publishers, Inc., 2002, pages 252, 282]  One of the more direct and humorous remedies was in a letter to the editor from Ted Daum of Corvallis, Oregon: “If a corporation is indeed a ‘person’ under the law, then let’s just elect Goldman Sachs as president and the Fortune 500 to Congress, and eliminate the middleman.”  [The Wall Street Journal, September 28, 2009, page A22]


Some critics blame harmful corporate behavior on the value assumptions of economics and accounting.  For instance, Riane Eisler argues that the measurement of corporate performance should be based on “what supports and advances human survival and human development . . . concern for the welfare and development of ourselves, others, and our natural environment . . . not only short-term but also long-term considerations.”  [Riane Eisler, The Real Wealth of Nations: Creating a Caring Economics, Berrett-Koehler Publishers, Inc., 2007, pages 16, 17]  Missing from Eisler’s analysis is how Wall Street allocates capital, what people with money to invest have wanted to know before buying a corporation’s shares.  Their beliefs and practices would have to change before the financial information standards could be revised.  She uses SAS as an example of a business implementing caring values and having greater growth and profits than its peers.  But SAS is a private company, not one with publicly traded shareownership.  Its business, software and consulting, is not capital intensive and collects revenues within days after it incurs the associated costs.  Its growth has been financed from earnings, so SAS doesn’t need Wall Street.  As a result, its management can make decisions that are best for the long run, while Wall Street is quarter-to-quarter and generally rewards businesses that take away from employees.  []


Peter Barnes asks us to “Imagine Congress passes a law requiring every corporation—in exchange for limited liability—to have a triple bottom line,” financial, environmental and societal.  The law would also require the board of directors to include representatives of workers, nature and the local communities.  The directors would be protected from liability to shareowners for choosing to put profits after one of the other bottom lines.  Peter sees problems with measurement and accountability in this approach and offers the alternative of putting big prices on activities that cause environmental and social harm.  [Peter Barnes, Capitalism 3.0: A Guide to Reclaiming the Commons, Berrett-Koehler Publishers, Inc., 2006, page 57]  Charles Reich tells us that the "present split between the economic and the noneconomic, with the econiomic holding almost all the levers of power, is a historical anomaly that cannot be sustained."  He would have us expand "economic" measurement, so that it included considerations like "the raising of children, the support of community, and the development of human character and potential."  [Charles A. Reich, Opposing the System, Crown Publishers, Inc., 1995, pages 184, 185]


There are other corporate forms than those with publicly-traded shares.  They include nonprofit corporations, often referred to as nongovernmental organizations, or “NGOs.”  Then there are cooperative corporations, where customers or producers are members and owners, without freely transferable shares.  Nonprofit corporations may or may not have voting members who select a board of directors, but they have no transferable ownership and receive no dividends.  Can nonprofits be as effective as the for-profit model?  Vinod Khosla, a venture capitalist billionaire, owns six percent of SKS Microfinance, which became publicly-traded in 2010.  “He has invested in commercial microfinance lenders and has donated to nonprofit ones, and he said that moneymaking versions had grown much faster and reached many more needy borrowers. . . . But he says he is generally skeptical that nongovernmental organizations can accomplish much because they tend to drift away from what their donors wanted them to do.  [Vikas Bajaj, “Sun Co-Founder Uses Capitalism to Help Poor,” New York Times, October 5, 2010,]

There is an active political movement to have states charter a new type of corporation, in contrast to the conventional choice between “for profit” or “nonprofit.”  According to Jay Coen Gilbert, co-founder of B-Lab, which certifies mission-driven companies: "The intentions of entrepreneurs and investors have evolved over time to include a desire to create social value as well as shareholder value. . . . Corporate law has not evolved to serve these new needs." [Quoted by John Tozzi, “Turning Nonprofits into For-Profits,” Business Week, June 15, 2009,]  Three forms of charters have been put forward:  the “Benefit Corporation,” the “Low-profit Limited Liability Company (or L3C)” and the California proposal for a “flexible-purpose corporation.”  []  The California model would differ somewhat from the L3C and from the Benefit Corporation.  “Unlike the L3C, profitability is still an express purpose of the corporation, and directors are not required to prioritize the charitable purpose over profit. Unlike the Benefit Corporation, the CA legislation will not require that flexible purpose corporations and their “special purposes” be certified by a third party.”  [   The L3C was first adopted in 2008, in Vermont, where there were 53 L3Cs two years later.  Laws have since been adopted in Michigan, Utah, and Wyoming. “The . . . primary purpose of the L3C cannot be to make a profit, but rather the purpose of the business must be to achieve a social benefit, with profit as a secondary or ancillary purpose.”  []

Some businesses have developed their own structure, around a concept or personality.  One of those businesses is Linux, the open-source computer operating system available to anyone for free. Linus Torvalds was the leader in creating Linux.  It began as part of Richard Stallman’s  Free Software movement and had the same issue that split the group with whom Bill Gates worked in New Mexico: would all developments be shared with everyone, for free, or would it follow the for-profit, proprietary product model.  Linux has built an alternative form of corporate structure.  For the first years, Torvalds himself was the structure.  All suggestions for improvement went through him and he issued the product, free to anyone.  When programmers in his network complained of the slow progress, they formed a corporation.  Nearly all the member programmers have other employers, who support their Linux work and who benefit from selling hardware or software that operates on Linux.  A board of directors makes policy decisions.  But there is no central facility and no CEO.  One academic has said that “Linux is the first natural business eco-system.”  [James F. Moore, senior fellow at the Berkman Center for Internet & Society at Harvard Law School, quoted by Steve Hamm, “LinuxInc.”, Business Week, January 31, 2005, page 60, 62] 


The American corporation is an extreme example of “too much of a good thing.”  When they were first in use, corporations were granted charters by state legislatures for a business to accomplish a specific goal.  They were given a fixed life of, say, ten years to achieve the goal and operate a business.  Then the corporation would be dissolved, unless granted a renewed term.  Before long, state legislatures began to compete with each other in attracting businesses who wanted corporate charters.  The filing fees and franchise taxes helped the state budgets.  An early change was to drop the number of years that the corporation could exist.  Another competitive tool in attracting corporate charter applications was to offer a broader purposes clause in the charter, something like: “To engage in any lawful activity.”  Some groups wish to reverse these changes.  They  "seek the death penalty for corporations with a habitual record of criminal activity" and a "redesign of the corporate charter and corporate law to eliminate those characteristics that make public corporations a threat to the well-being of people and the planet."  [A Report of the International Forum on Globalization, Alternatives to Economic Globalization, Berrett-Koehler Publishers, Inc., 2004, pages 280-300; Program on Corporations, Law and Democracy,]   Other groups argue that corporations simply need to pay more in taxes for the privilege of doing business in the corporate form.  In the 1950s, corporate taxes were 30 percent of the U.S. total taxes, while they have gone down to only 6.6 percent in 2009.  [David Kocieniewski, "GE's Strategies Let It Avoid Taxes Altogether, The New York Times, March 24, 2011,]


The extreme remedy would be to abolish the corporate form altogether, requiring all businesses to be owned by a single individual or operate as a partnership of individual owners.  That way, every partner would be financially responsible for the actions of the business.  Of course, it was that unlimited liability that led to creating the “joint stock corporation” to begin with.  People with money to invest wanted to know that the most they could lose was the amount they put into the business.  If there were any chance that their own personal wealth was on the line, they would have nothing to do with owning a piece of the business, no matter how much they admired and respected the managers. 


Requiring all businesses to be partnerships or proprietorships would drastically interfere with world business.  However, it could be a good idea for the businesses on Wall Street.  One decided advantage of making securities firms operate as partnerships would be to keep them small and specialized.  A partner would need to have a personal relationship with each of the other partners, in order to be comfortable with the partner’s ability to put personal assets and reputation at risk.  All partners would need to have a basic understanding of all aspects of the business, so that they can sense when one partner is getting out to far on the risk spectrum.


Redistributing Income


Proposals for redistributing income range from keeping our existing system of progressively higher income tax brackets, all the way to having the government take over our economic system.  Naomi Klein has written about the Panic of 2008:  “Capitalism can survive this crisis.  But the world can’t survive another capitalist comeback.”  Ms. Klein sees capitalism as based upon “the lie that perpetual, unending growth is possible on our finite planet.”  [“Let’s Put an End to Sarah Palin-Style Capitalism,” The Progressive, August 2, 2009,]


At the other end from abolishing capitalism is acceptance of the current system, with some minor adjustments here and there.  Jared Bernstein directed each year’s edition of The State of Working America for the Economic Policy Institute, from 1991 until he became chief economist for Vice President Joe Biden and chief of staff for the Task Force on Middle Class Working Families.  He calls for a “We’re in This Together” approach, in contrast to the “You’re on Your Own” economics of the last quarter century [All Together Now: Common Sense for a Fair Economy, Berrett-Koehler Publishers, Inc., 2006]  His proposals are for government programs through political action, ones like increasing the minimum wage, Medicare for all, assistance when jobs are lost due to foreign trade, energy independence, infrastructure rebuilding and steps to keep unemployment below four percent.

Robert Reich has several proposals for taking money from the rich and giving it to the poor.  He would exempt the first $20,000 of income from payroll taxes, offset by a payroll tax on incomes over $250,000.  An 0.5 percent financial transactions tax would pay for expanding early childhood education.  In exchange for free education at public universities, graduates would pay 10 percent of their first 10 years of full-time income.  [Robert Reich, “The Wealthy Have Enough Money -- It's Time to Put Some Cash in Your Pocket,” September 5, 2010,  The latest book by Professor Reich is Aftershock: The Next Economy and America’s Future, Alfred Knopf, 2010]

One proposal for income redistribution comes from Ravi Batra, an economics professor at Southern Methodist University and author of books and papers on economic forecasts.  His moment of fame came from his book, The Great Depression of 1990.  Except for being 18 years premature, it is a rather accurate description of what caused the economic collapse in 2008.  Professor Batra wrote in the book’s preface that “The only way to stop the coming depression is to impose wealth taxes, free from loopholes, on the richest one percent of all nations, and to use the revenue either to eliminate government budget deficits or to reduce taxes on the poor and the middle class.” [Venus Books, 1985 and Dell Publishing, 1988, page 7]


Wade Rathke is the founder of ACORN, the Association of Community Organizations for Reform Now.  His book argues for more effective use of the existing government programs for getting money to the people who don’t have it.  "  We need to create ways to ensure that all individuals and families eligible for any program or entitlement actually receive them."  [Wade Rathke, Citizen Wealth: Winning the Campaign to Save Working Families, Berrett-Koehler Publishers, Inc., 2009, page 115]  On the other side, the claim is that it was too vigorous enforcement of the Community Reinvestment Act, pushed by ACORN, that led to the housing bubble, subprime mortgage abuse and mortgage securities collapse.  [“Acorn and the Housing Bubble,” Edward Pinto, consultant to the mortgage-finance industry, The Wall Street Journal, November 13, 2009, page A23]


Redistribution plans have been around for a long time and in many countries.  In 1933, Huey Long created the “Share Our Wealth Society,” which proposed that needy persons would receive a “household estate” of $5,000—about $80,000 today—and a $2,000 annual income of $2,000 ($40,000 today) and other benefits.  The money would come from a heavy tax on incomes over $1 million, including 100% over $8 million. [Alan Brinkley, Columbia history professor, “Railing Against the Rich: A Great American Tradition,” The Wall Street Journal, February 7-8, 2009]   Before its last election, England had started a “baby bond” program, which has been talked about in Congress.  Every baby born in England would receive a $10,000 savings account and the government would add to it each year.  The accumulated funds could be withdrawn only after reaching a certain age, entering college, starting a business or even retirement.  [J. Larry Brown, Robert Kuttner and Thomas M. Shapiro, Building a Real “Ownership Society,” The Century Foundation Press, 2005, page 34]  Worldwide, there have been many programs started in recent years for simply giving money to the poor, without any strings on how they spend it.  Proponents say that the results are more effective for long-term relief of poverty than programs with directed expenditures.  [Joseph Hanlon, Armando Barrientos and David Hulme, Just Give Money to the Poor:  The Development Revolution From the Global South, Kumarian Press, 2010]

Two professors at Yale Law School propose giving all Americans a one-time grant of $80,000 when they reach early adulthood. The money would be funded by an annual 2% tax on the nation's wealth, to be paid for by the wealthiest 41% of the country. The funds could be used for anything: education, home purchase, business investment. They argue that Americans don't begin from a "fair starting point" and speculate on intriguing possible effects: the grant might foster patience rather than instant gratification, cause colleges to compete more and give child-rearing women new independence.  [Bruce Ackerman, Anne Alstott, The Stakeholder Society, Yale University Press, 1999.  A list of similar proposals is at the book's footnote 56 on page 268]  There has been a proposal, based upon a program in England, to give a $10,000 "baby bond" to each of the four million babies born in the U.S. each year.  The estate tax has been suggested as the funding source for the $40 billion in annual bonds, as well as for a portable pension add-on the Social Security.  [J. Larry Brown, Robert Kuttner and Thomas M. Shapiro, Building a Real "Ownership Society," The Century Foundation Press, 2005, pages 34, 36]

Supply-siders, like George Gilder, believe that, "an effort to take income from the rich, thus diminishing their investment, and to give it to the poor, thus reducing their work incentives, is sure to cut American productivity, limit job opportunities, and perpetuate poverty."  [George Gilder, Wealth and Poverty, Basic Books, 1981, page 67]  However you may feel about income redistribution proposals, none of them goes to the core problem of Wall Street control over the movement of money.  So long as Wall Street uses the flow of money for its own games, we will have a boom and bust economy.  Until there is another path for financing business, money will be allocated in the ways that divert the largest portion to Wall Street, regardless of public support for other goals.

Changing our Culture

There is an undeniable consensus for major change in America today.  David Brooks says of the Tea Party Movement:  “They believe big government, big business, big media and the affluent professionals are merging to form self-serving oligarchy — with bloated government, unsustainable deficits, high taxes and intrusive regulation.” [David Brooks, “The Tea Party Teens,” The New York Times, January 4, 2010,]  William Greider believes that "an active faith in democratic possibilities dwells at the very center of the American experience. . . .Rehabilitating democracy will require citizens to devote themselves first to challenging the status quo, disrupting the existing contours of power and opening the way for renewal."   [William Greider, Who Will Tell the People: The Betrayal of American Democracy, Simon & Schuster, 1992, page 410.  See, also, page 162] 

However, there is great divergence about what brought about this harm and what needs to be changed.  In earlier sections of Bypassing Wall Street, “The Harm That Wall Street Causes” and “The Traffic Cops on Wall Street,” blame is placed on the Wall Street oligopoly and our complicit government.  The section, “What Government Can Do,” suggests how to bypass Wall Street and take away its power.  Proposals by others have gone much farther, suggesting changes to our very culture.  These are some of them.


Our economic culture divides all businesses into two essential but competing parts, that is, labor and capital.  It doesn’t have to be that way, especially today when so much physical and mental work can be done by the tools that capital has purchased.  Many theoreticians have proposed changes to that duality, such as having the government own the businesses, on behalf of the workers.  In a more modest proposal, “United States Labor Commissioner Carroll D. Wright said in 1903 that the essential problem of the wage system was that it treated labor as a commodity to be disposed of at market prices.”  He suggested replacing the wage system with “profit sharing and cooperative plans.”  [Lawrence E. Mitchell, The Speculation Economy, Berrett-Koehler Publishers, Inc., 2007, page 100]


More recently, Peter Barnes says that, “What we need today, then, along with more common property, is a set of institutions, distinct from corporations and government, whose unique and explicit mission is to manage common property.”  [Peter Barnes, Capitalism 3.0: A Guide to Reclaiming the Commons, Berrett-Koehler Publishers, Inc., 2006, pages 73-74.  Peter is founder of On the Commons, formerly the Tomales Bay Institute, See, also, Jay Walljasper and Bill McKibben, All That We Share: How to Save the Economy, the Environment, the Internet, Democracy, our Communities and Everything Else that Belongs to All of Us, The New Press, 2010 and Thom Hartman, Unequal Protection: The Rise of Corporate Dominance and the Theft of Human Rights, Berrett-Koehler Publishers, Inc., 2002, pages 32-42].  Peter Barnes suggests that individual trusts be created to hold each element of the commons.  The trustees would not only protect the trust property for future generations but they would also collect fees for its use and distribute them as dividends to all U.S. residents.  The aggregate of the distributions from all these trusts could be enough to bring everyone above the poverty level.  A problem with this approach is that the trust ownership would be sealed away from any participation by the persons it is intended to benefit.   Unfortunately, our history shows that self-perpetuating institutions get out of touch with the real world.  They need the continuous struggle with their constituencies to stay within their principles and adapt to changing conditions. 


(Peter Barnes was very early in the concept of socially responsible investing.  In the early 1980s, Peter and four others asked me to be their lawyer in creating a money market mutual fund called Working Assets.  The fund became a real success and the group sold their management company, to go on to other ventures.  Peter was a great client, with startling creativity and good judgment.  He supports many organizations in the social business field.  John Harrington, also a Working Assets founder, went on to run an investment advisory firm and author the book, Investing With Your Conscience: How to Achieve High Returns Using Socially Responsible Investing, [John Wiley & Sons, Inc., 1992])   For further comment on Peter Barnes work, see  [Related works include the chapter on "Reclaiming the Commons," in A Report of the International Forum on Globalization, Alternatives to Economic Globalization, Berrett-Koehler Publishers, Inc., 2004, pages 105-146 and Raj Patel, The Value of Nothing: How to Reshape Market Society and Redefine Democracy, Picador, 2009, pages 92-108]


Marjorie Kelly describes corporations as "inverted monarchies, with the financial aristocracy above the CEO-king."  [Marjorie Kelly, The Divine Right of Capital: Dethroning the Corporate Aristocracy, Berrett-Koehler Publishers, Inc., 2001, page 57]  She compares the development of corporate governance to the political evolution in England and America, from an all-powerful monarch to increasing control by a landed aristocracy, to the political democracy of today.  Prescribing for the future, her analogy is to the Dorr Rebellion of 1842 in Rhode Island, which led to eliminating property ownership as condition of voting. Her  "principles of economic democracy," include "public corporations . . . have a responsibility to the public good" and "the right of the people to alter or abolish the corporations that now govern the world."  [pages 10-11]


One set of proposals would have us change our accounting system, the way we keep track of revenues and costs.  The argument is that the current rules ignore social costs, like environmental depletion and pollution, while not measuring the contribution of unpaid household and personal caregiving work.  [Riane Eisler, The Real Wealth of Nations, Berrett-Koehler Publishers, Inc. 2008, pages 215-235, Raj Patel, The Value of Nothing: How to Reshape Market Society and Redefine Democracy, Picador, 2009, pages 43-60] .  Specific suggestions and the supporting organizations are included in A Report of the International Forum on Globalization, Alternatives to Economic Globalization, Berrett-Koehler Publishers, Inc., 2004, pages 198-208]


“Social entrepreneurship” is a name given to what we might have once just called “good business.”  It is the concept of using a business to meet a human need.  Practitioners recognize that profits and cash flow are essential for survival and growth.  However, in contrast to the Wall Street culture, the emphasis and measure of success comes primarily from how well the social objective is served.  Who gets rich and how quickly is beside the point.  “The idea of the social entrepreneur has been percolating for decades, but it has become a mass movement in the past couple of years. . . .  Until today’s entrepreneurs discover which business models really work, there will be uncertainty and wasted effort.  The movement is growing and taking on more ambitious projects.”  [Steve Hamm, “Capitalism with a Human Face: Social entrepreneurs tackle the world’s problems in the face of a global downturn,” Business Week, December 8, 2008, page 050 053].  An example of the social entrepreneur is Paul Polak, a psychiatrist who has developed products and methods for the world’s poorest to earn more from their farms and businesses.  “I have no doubt that the most important low-cost, high-leverage solution to the complex issue of poverty is helping poor people increase their income.”  [Paul Polak, Out of Poverty: What Works When Traditional Approaches Fail, Berrett-Koehler Publishers, Inc., 2008, page 55]  Like C.K. Prahalad, Polak believes that businesses can learn to make profits by designing for the poor.  [The Fortune at the Bottom of the Pyramid, Wharton, 2004]


Muhammad Yunus, founder of Grameen Bank with whom he shared the Nobel Peace Prize, subtitled his most recent book “Social Business and the Future of Capitalism.”    He considers a “social business” to be “a company that is cause-driven rather than profit-driven . . ..”  It must generate enough revenue to cover its costs, but it does not distribute profits to its owners.  Unlike a charity, it does not rely on donations.  By contrast, “any innovative initiative to help people may be described as social entrepreneurship” according to Yunus.  In response to advocates of the “triple bottom line,” of financial, social and environmental results, he says “ultimately only one bottom line calls the shots: financial profit. . . . The executives of these hybrid businesses will gradually inch toward the profit-maximization goal, no matter how the company’s mission is designed.” “Grameen Bank is a social business by virtue of its ownership structure. . . . Ninety-four percent of the ownership shares of the institution are held by the borrowers themselves.”   This resembles a cooperative “in which workers and consumers join forces in owning businesses and managing those businesses for the benefit of all. . . . However, the cooperative concept is not inherently oriented toward helping the poor or producing any other specific social benefit.”  Nonprofits are different from social businesses because they rely on charity and do not have the investor-owner feature, “creating a source of funds with an interest in ensuring both the efficiency and effectiveness of the social benefits generated by the business.” [Muhammad Yunus, Creating a World Without Poverty: Social Business and the Future of Capitalism, Public Affairs, 2007, pages 22, 32, 17, 33, 30, 35, 36.  For additional commentary on this book, see


(When we were advising businesses in direct public share offerings, our clients would be considered social entrepreneurs.  We learned to appreciate how difficult it was, in the culture that has prevailed since the 1990s, for the entrepreneur to stay focused on the social objective.  Wall Street, the popular media and their peers all seemed to be fixed on stock market value as the only measure that counted.) 


The Slow Money Alliance argues for a change in our cultural attitude about investing.    “There is such a thing as money that is too fast, companies that are too big, finance that is too complex.  Therefore, we must slow our money down -- not all of it, of course, but enough to matter. . . . The 21st Century economy will usher in the era of nurture capital, built around principles of carrying capacity, care of the commons, sense of place and non-violence.” [  See Deborah Mason, "Investors are Taking the 'Slow' Approach," Investment News, November 28, 2010,] The founder of the Slow Money Alliance writes that we need “new forms of intermediation that catalyze the transition from a commerce of extraction and consumption to a commerce of preservation and restoration.“  [Woody Tasch, Inquiries Into the Nature of Slow Money: Investing as if Food, Farms and Fertility Mattered, Chelsea Green Publishing, 2010, page 4].   One of the plans discussed at a 2009 Slow Money convention was creating regional funds for investing in local farms.  [Stephanie Simon, “Forget Conventional 401(k)s; Think Goat Cheese and Fennel,” The Wall Street Journal, September 16, 2009, page A23]


David Korten, in a series of books and articles, has presented the case for replacing our "insatiable quest for money and material consumption" with a "sense of spiritual connection."  [David C. Korton, When Corporations Rule the World, Berrett-Koehler Publishers and Kumarian Press, Inc., 1995, pages 267-268.  While the objective may sound idealistic, he includes many practical steps and guiding principles.  See his later books, The Post Corporate World: Life after Capitalism, Berrett-Koehler Publishers, 2000, The Great Turning: Form Empire to Earth Community, Berrett-Koehler Publishers and Kumarian Press, Inc., 2006 and Agenda for a New Economy: From Phantom Wealth to Real Wealth, Berrett-Koehler Publishers, 2009.  Also, "The Difference Between Money & Wealth:  How out-of-control speculation is destroying real wealth," Business Ethics, January/February 1999, page 4.] 


In their book, The Spirit Level, Richard Wilkinson and Kate Pickett call for the United States and Britain to reduce the income inequality between the rich and poor in their countries.  "Reducing inequality would not only make the economic system more stable, it would also make a major contribution to social and environmental sustainability."  [The Spirit Level: Why Greater Equality Makes Societies Stronger, Bloomsbury Press, 2009, page 263.  See their Equality Trust website,]    


Britain’s Archbishop of Canterbury, Rowan Williams, criticized former Prime Minister Brown’s economic stimulus proposals:  "It seems a little bit like the addict returning to the drug. When the Bible uses the word 'repentance', it doesn't just mean beating your breast, it means getting a new perspective, and that is perhaps what we are shrinking away from."  [an interview on BBC Radio, as reported December 18, 2008,]  The archbishop went on to suggest:  "I would like to think that in this sort of crisis people would be reflecting more on how you develop a volunteer culture, how you develop a culture of people willing to put their services at the needs of others so that there can be a more active, a more vital civil society."  [reported by]


Edward Hadas argues that: “The best way to ward off future crises is through serious analysis of financial morality.”  He suggests that we learn and teach moderation, shun excessive financial gains rather than seek them, use existing tools to crush financial greed, fight financial gambling, reinstate laws against usury, cut the pay for finance professionals, and limit finance to “pooling of resources to serve the economic good.”  [Edward Hadas, author of Human Good, Economic Evils: A Moral Approach to the Dismal Science, Intercollegiate Studies Institute, 2007, in “The Moralist Manifesto,” Breaking, [ manifesto.aspx]  

Professor Lynn A. Stout suggests that we need to change our culture's messages about selfishness. Her analysis of multiple studies concludes:  "Rather than leaning on the power of greed and selfishness to channel human behavior, our laws and policies might often do better to focus on and promote the force of
conscience—the cheapest and most effective police force one could ask for. . . . By manipulating social variables like instructions from authority, beliefs about others’ behavior, and perceptions of benefits to others, researchers have been able to dramatically change the behavior of human subjects in experimental
games. When the social cues favor prosociality, behavioral scientists can elicit universal or near-universal unselfishness. Conversely, when subjects are told to act selfishly, believe others would act selfishly, and believe selfishness is not too costly to others, they exhibit near-universal selfishness.  [Lynn A. Stout, "Cultivating Conscience:  How Good Laws Make Good People,Issues in Governance Studies, Number 38, The Brookings Institution, December 2010, pages 3,4, Professor Stout's book is Cultivating Conscience:  How Good Laws Make Good People, Princeton University Press, 2010.  See article by Emily Badger, "The Practical Effect of Cultivating Selflessness: A UCLA researcher argues that rather than assuming people are basically selfish, government could more profitably encourage pro-social behavior," Miller-McCune, January 6, 2011,]  Inevitably, this concept brings a clash between individual freedom and government mind control.  Scott Nearing suggested that we "turn over economic administration to a staff of competent social engineers."  [Economic for the Power Age, The John Day Company, 1952, page 29.]

Broadening the Ownership of Business

Ownership of corporate shares continues to be more and more concentrated.  The problem is that Wall Street has a government-protected monopoly on the purchase and sale of securities and Wall Street is only interested in doing business with professional money managers and wealthy individuals.  The more wealth and power that Wall Street commands, the more concentrated becomes the ownership of business and the more it is able to influence government.  A proposed solution is to disperse the ownership of business among individuals.  "The problem is not that capital is privately owned, as Marx supposed.  The problem is that most people don't own any. . . . The means exist to escape from this stale past and define a different social reality for the future: by democratizing capitalism, by ensuring that over time the ownership of capital will itself become broadly shared, dispersed among workers, citizens at large and communities, more or less universally."  [William Greider, One World, Ready or Not: The Manic Logic of Global Capitalism, Simon & Schuster, 1997, pages 416, 417]  Kathy V. Friedman suggests "that perhaps the time has come for economic rights in income-producing credit to be considered as a possible citizenship right."  ["Capital Credit: The Ultimate Right of Citizenship," Curing World Poverty: The New Role of Property, Social Justice Review, 1994, page 144.  John H. Miller, the book's editor, says its essays promote "what has been, for over a century, an intimate part of Papal social doctrine, namely, the wider distribution of private ownership of property."  Page ii.  The 1891 encyclical, Rerum Novarum of Pope Leo XIII decreed:  "The law, therefore, should favor ownership, and its policy should be to induce as many as possible of the people to become owners.", paragraph 46]  Judge Grosscup said over a century ago:  "The paramount problem is not how to crush, or hawk at, or hamper the corporation, merely because it is a corporation; but how to make this new form of property ownership a workable agent toward repeopleizing the proprietorship of the country's industries.  {Peter S. Grosscup, "How to Save the Corporation," 1905]

Broadening the ownership of business was endorsed by a joint committee of Congress in 1976:  "To begin to diffuse the ownership of capital and to provide an opportunity for citizens of moderate incomes to become owners of capital rather than relying solely on their labor as a source of income and security, the Committee recommends the adoption of a national policy to foster the goal of broadened ownership. . . . Whatever the means used, a basic objective should be to distribute newly created capital broadly among the population."  [U.S. Congress, Joint Economic Committee, 1976 Joint Economic Report, S. Rpt. 94-690, 94 Cong. 2 sess., Government Printing Office, March 1976), p. 100.  See, also, U.S. Congress, Joint Economic Committee, Broadening the Ownership of New Capital: ESOPs and Other Alternatives, Committee Print, 94 Cong. 2nd session, U.S. Government Printing Office, June 17, 1976The 1976 Congressional Committee statement on broadening the ownership of capital has not been followed by any significant legislation.  Nor to we sense any prospects for taking up the cause.  Robert Kuttner has written that "restoring a financial economy that would serve the goal of connecting investors to entrepreneurs, rather than inviting insiders to reap windfall gains by manipulating paper, would require a degree of reregulation of the sort not seen since the New Deal."  [Robert Kuttner, The Squandering of America: How the Failure of Our Politics Undermines Our Prosperity, Alfred A. Knopf, 2007, page 302]  One formula for broadening the ownership of capital is akin to plans for redistributing income--have the government force it.  For instance:  "A strategy of reform must transfer capital from the corporations to the public . . ..The logical vehicle for that process should be the government . . ..  Yet the government is heavily influenced (if not controlled) by these very same corporations. . . .  It is essential, over the next two decades, to build a mass political movement . . .."  [Martin Carnoy and Derek Shearer, Economic Democracy: The Challenge of the 1980s, M. E. Sharpe, 1980, page 5] 

Most proposals for reform of the corporate/government power structure suggest restrictions, like campaign finance laws, or forcing managers to serve social objectives, or modifying corporate governance rules.  These restrictions turn out to be fleeting challenges to managers, their lawyers, accountants and lobbyists.  Nothing will really change until we change who owns corporate America.  Milton Friedman is praised and pilloried for his statement that corporate executives are employees of the shareowners, responsible "to conduct the business in accordance with their desires, which generally will be to make as much money as possible while conforming to their basic rules of the society . . .."  [Emphasis added. "The Social Responsibility of Business Is to Increase Its Profits," The New York Times Magazine, September 13, 1970, www.umich.ed/~thecore/friedman.pdf.  Earlier Friedman wrote:  "Few trends could so thoroughly undermine the very foundations of our free society as the acceptance by corporate officials of a social responsibility other than to make as much money for their stockholders as possible."  Capitalism and Freedom, The University of Chicago Press, 1962, page 133]  However, Friedman qualifies this by adding:  "Of course, in some cases his employers may have a different objective. . . .  The manager of such a corporation will not have money profit as his objectives but the rendering of certain services."  All Professor Friedman was saying is that managers should do the job their shareowners hired them to do.  Interference by government or social pressure in that relationship doesn't work.  Managers need to have shareowners who are more representative of the general public and give their managers direction to serve purposes beyond just making money.  In an imaginary address by the President of the United States, David Korten included:  "Because absentee ownership invites irresponsibility, we will create incentives for publicly traded corporations to break themselves up into their component units and to convert to responsible ownership by their workers, customers, or small investors in the communities in which they are located."  [David C. Korten, Agenda for a New Economy: From Phantom Wealth to Real Wealth, Berrett-Koehler Publishers, 2009, page 165] 


We often come across statements like “half of all Americans own corporate shares.”  The more careful reporters will add something like “including shares owned through retirement plans and mutual funds.”  Financial intermediaries have usually inserted themselves between individuals and corporations.  Even in 1904, a study showed that at least ten percent of Americans were investors, with “almost all through savings banks and insurance companies.”  [Lawrence E. Mitchell, The Speculation Economy, Berrett-Koehler Publishers, Inc., 2007, page 103]  A true broadening of the ownership of business would build a direct relationship between individuals as shareowners and the business managers they elected.  According to a report in 2000 by The Joint Economic Committee of Congress, “nearly half of all U.S. households are stockholders.  In the last decade alone, the number of stockholders has jumped by over fifty percent.”  However, most of the increase “has come through indirect ownership, as a majority of stockholders no longer directly own stock.”  The report concludes that “the key reasons for this democratization of the stock market include:  The popularization of the mutual fund,” “the genesis of the IRA and 401(k) plan” and the “emphasis of the Federal Reserve on price stability.” [Joint Economic Committee Study, “The Roots of Broadened Stock Ownership,” 2000,]  With help from Congress, Wall Street has gathered money from the middle class and directed it into the securities chosen by Wall Street.  This is "broadening the ownership of business" in economic effect, without participation in selecting where their money goes or monitoring how it is used.


If there were a “broadening-the-ownership-of-business movement,” its founder would be Louis O. Kelso.  As an author, lawyer and investment banker, he developed theories and implemented practices aimed at creating ownership of businesses in groups of individuals, without taking anything away from existing owners.  The goal was to have income from the ownership of businesses be able to supplement and eventually replace income from working a job.  [For a description of Lou Kelso’s writings, see's%20books.htm and Also, comments about Lou Kelso by William Greider in One World, Ready or Not: The Manic Logic of Global Capitalism.  [Simon & Schuster, 1997, pages 419-443]  Lou Kelso described specific legal mechanisms for broadening the ownership of business, worked with Congress to enact laws that would encourage use of these mechanisms and helped clients put them into practice. 


The one part of Lou Kelso’s program that has been implemented is the Employee Stock Ownership Plan, which Lou built out of an existing provision of the Internal Revenue Code, along with amendments he got through Congress with help from Senator Russell Long.  [See article by Senator Long, "Employee Stock Ownership Plans: Spreading the Wealth to the Average American Worker," The American University Law Review, volume 26, Number 3, Spring 1977, page 515, For continuing information about ESOPs, see the National Center for Employee Ownership,]  Under an ESOP, a trust is created to purchase shares from the employer’s existing owners.  Cash for the purchase is borrowed by the trust from a bank, with the shares pledged to secure the loan.  The company is required to pay dividends directly to the bank.  After the loan is paid, dividends can go to the employee beneficiaries of the trust.  (Lou told me that he once had dinner with Henry Kravitz and his cousin, George Roberts, telling them about this  mechanism he proposed for ESOPs. He said that became the model for their huge leveraged buyout business.) 


The ESOP became a significant tool but its benefits have gone mostly to private equity firms, corporate management and Wall Street intermediaries.  “Most large corporations have adopted ESOPs mainly for the tax benefits, to ward off hostile takeovers, or to achieve other managerial goals which have nothing to do with workplace democracy.”  [Charles Derber, Corporation Nation: How Corporations are Taking Over Our Lives and What We Can Do About It, St. Martin’s Press, 1998, page 262]  Management guru Peter F. Drucker rather bitterly berated Lou Kelso and Senator Long for promoting "an incentive to expropriate workers' pension funds so as to finance weak companies that otherwise could not get capital."  [The Unseen Revolution: How Pension Fund Socialism Came to America, Harper & Row, 1976, page 37]


The popularity of ESOPs has faded since the predictions  of just two decades ago.  [Joseph Raphael Blasi and Douglas Lynn Kruse, The New Owners: The Mass Emergence of Employee Ownership in Public Companies and What It Means to American Business, HarperBusiness, 1991, page 3]  The tax benefits for ESOPs was the driving force in their popularity.  In 1989, Congress eliminated the tax deduction for payment of dividends on ESOP shares.  "That killed of the market in ESOP's very quickly."  [Jeff Gates presention, Seminar Proceedings, Future of the Corporation, Capital Ownership, Foundation for Enterprise Development and The Aspen Institute, October 20-22, 1989, page 22.  A seminar presentations by Joe Walkush included many reasons why employee ownership wasn't more popular, including their regulation by several government agencies, their difficulty in obtaining financing for operations and for their employees to buy more shares, and how hard it is to understand the complexities of their structure.  Pages 27-30]


Lou Kelso’s vision went well beyond ESOPs, into a series of ownership trusts which would help households become owners of corporate shares.  They would pay for the shares through bank loans.   To provide cash for loan repayment and household income, corporations would be required to pay out their entire net income in dividends, except that younger businesses could retain earnings for growth and reserves against risks.  His program would require that the “entire net income of a mature corporation . . . be paid out in dividends to its stockholders. . . .The voice of the stockholder is ineffective unless he receives the entire product of his capital and then determines, by his own affirmative action, whether he will return any part of such earnings to the corporation as a further investment of capital.  No other conceivable arrangement can force corporate management to justify its performance from time to time before stockholders, just as holders of political office must justify theirs from time to time before the electorate.”  [Louis O. Kelso and Mortimer J. Adler, The Capitalist Manifesto, Random House, 1958, page 210.  See description of Ownership Plans by Jeff Gates, in The Ownership Solution: Toward a Shared Capitalism for the Twenty-First Century, Addison -Wesley, 1998, pages 71-78 and Democracy At Risk: Rescuing Main Street from Wall Street: A Populist Vision for the Twenty-First Century, Perseus Publishing, 2000, pages 125-131]


The requirement that all earnings be paid in dividends would cause management to provide better information, while making the shareowners more likely to pay attention, according to the Kelso theory.  “The task of educating stockholders in the affairs of corporations—an indispensable requirement in a society of capitalists—will be placed upon management.  Stockholders will have the incentive to become knowledgeable about the activities of their corporations.  The stockholder’s present apathy to corporate communications cannot be overcome as long as he feels that the economic effect upon him will be the same whether he scrutinizes them meticulously or wholly disregards them.  But if the stockholder’s hand is restored to the economic throttle of the corporation, his decisions will then affect the return upon his capital, and he will be attentive.” [Louis O. Kelso and Patricia Hetter Kelso, Democracy and Economic Power, Ballinger Publishing Company, 1986, page 212] 

Lou Kelso proposed a federally chartered “Capital Diffusion Insurance Corporation,” to insure against some of the risks on bank loans, such as the failure of a business to sell all of a securities offering and the catastrophe to a borrower from multiple business failures.  This insurance is intended to lower the bank’s interest rate so that the borrower’s loan payments would be less than the expected dividends on the shares. The borrower/investor would be required to have a diversified portfolio and the risk insured by the CDIC would be that the value of the entire portfolio sank below the amount of the loan.  Lou Kelso’s model was the Federal Housing Administration, which is “the only government agency that operates entirely from its self-generated income and costs the taxpayers nothing.” []

Those of us who worked with Lou Kelso often carried with us his beliefs and theories.  One is author Jeff Gates.  [The Ownership Solution: Toward a Shared Capitalism for the Twenty-First Century, Addison-Wesley, 1998 and Democracy at Risk:  Rescuing Main Street from Wall Street, A Populist Vision for the Twenty-First Century, Perseus, 2000.]  Jeff was counsel to the United States Senate Finance Committee in the 1980s, working with its chairman, Russell Long, to enact Lou Kelso’s concepts into legislation expanding employee stock ownership plans.  Jeff Gates' second book proposes a course "similar both in process and structure" to the program of  Russell Long's father, Huey P. Long.  Just before the senior Senator Long's assassination in 1935, " he could claim that 7.7 million people had joined 27,431 Share Our Wealth clubs nationwide. [Jeff Gates, Democracy at Risk:  Rescuing Main Street from Wall Street: A Populist Vision for the Twenty-First Century, Perseus, 2000, pages 302-329.  For more about Jeff Gates, see and,%20Democracy%20at%20Risk%20by%20Jeff%20Gates.htm]


Norman Kurland was lawyer, lobbyist, and political strategist for Lou Kelso from 1965 through 1976.  He went on to be a consultant on employee stock ownership programs, an author and president of the nonprofit Center for Economic and Social Justice.  []  He has focused primarily on legislation that could further Lou Kelso’s programs.   [Norman Kurland, Dawn K. Brohawn and Michael D. Greaney, Capital Homesteading for Every Citizen:  A Just Free Market Solution for Saving Social Security, Economic Justice Media, 2004.  Papers by Norman Kurland are included in Curing World Poverty: The New Role of Property, John H. Miller, editor, Social Justice Review, 1994.  He presented a summary of his thoughts at the 2004 Conference of the Center for the Study of Islam and Democracy,  See commentary on Norman Kurland's writings at


Robert Ashford is Professor Law at Syracuse University College of Law.  [] He was chief operating officer and general counsel for Kelso and Company, the investment banking firm Lou Kelso formed to implement employee stock ownership plans and other ownership trusts.  He has written and spoken about the theoretical background of Lou Kelso’s work.   His book, co-authored with Rodney Shakespeare, is dedicated to Lou Kelso and Patricia Hetter Kelso and has a brief history of Lou Kelso’s life and work.  [Binary Economics: The New Paradigm, University Press of America, Inc., 1999, pages 405-425

For a conversation with Robert Ashford on binary economics, see]


Stuart M. Speiser was a lawyer specializing in plaintiffs’ aviation crash cases when he met Lou Kelso on an airplane.  They continued a friendship and Stuart Speiser wrote extensively on Lou and his work.  [A Piece of the Action:  A Plan to Provide Every Family with a $100,000 Stake in the Economy, Van Nostrand Reinhold, 1977; Superstock, Everest House, 1982; The USOP Handbook:  A Guide to Designing Universal Share Ownership Plans for the United States and Great Britain, Council on International and Public Affairs, 1986; Mainstreet Capitalism:  Essays on Broadening Share Ownership in America and Britain, New Horizons Press, 1988; Ethical Economics and the Faith Community:  How We Can Have Work and Ownership for All, Meyer Stone & Co., 1989;  Equitable Capitalism: Promoting Economic Opportunity Through Broader Capital Ownership, Apex pr, 1991 and Socializing Capitalism, New Horizons Press, 1991.  For more description of Stuart Speiser’s work, see  His obituary says he was the author of more than 50 books, but does not mention any of those about Lou Kelso or his theories.  The Wall Street Journal, November 3, 2010, page 18]


Broadening the ownership of business was often one of the stated objectives for "privatization" of government-owned businesses.  After World War II, when Britain nationalized private companies, the government's objective had been "to secure for the producers by hand and brain the full fruits of their industry, and the most equitable distribution thereof that may be possible on the basis of the common ownership of the means of production."  [Clause 4 of the Labour Party Constitution, quoted in Oliver Letwin, Privatising the World: A Study of International Privatisation in Theory and Practice, Cassell, 1988, page 3]  By 1977, after the Conservative Party came to power, the policy became:  "The long-term aim must be to reduce the preponderance of state ownership and widen the base of ownership in our community.  Ownership by the state is not the same as ownership by the people."  [Conservative Programme 1977, The Right Approach to the Economy, also quoted in Letwin's book, page 10]  The minister in charge of privatization said:  "Possession means power, the kind of power that matters to ordinary people . . ..  Our aim is to extend this power to as many people as we can.  We are doing it by extending ownership as widely as possible."  [John Moore, MP, The Value of Ownership, Conservative Political Centre, London, 1986, quoted in Letwin's book, page 11]  When France privatized government-owned companies in 1986, it gave special rights to assure ownership by employees and those investing small amounts.  Privatization in eight countries through 1987 resulted in selling shares to over 25 million investors, including a million employees of the newly privatized businesses.  [Letwin's book, page 106]


Why hasn’t the broadening-the-ownership-of-capital effort become a “movement?”    Opinions can differ on why it hasn’t and whether it ever will.  Our current financial and political condition could be suggesting that we need to change the concentration of business ownership and power over government.  Yet the issues seem to be limited to more government or less government.  Perhaps all that we can do now is prepare for the day when a significant number of people start asking how we can all have a chance to be owners of business, rather than have it be concentrated through Wall Street into the hands of the very few. 


One path is to end Wall Street’s monopoly over the flow of money from individuals into securities.  The elements of that plank are in the section “What Government Can Do.”  Nothing will happen to change how money is allocated until Wall Street’s grip on the process is loosened.  The other path is to encourage individuals to use their savings and credit to become shareowners in the businesses they select.  Lou Kelso and his followers have designed tools for that purpose.  There are two modifications I would suggest:


Eliminate the intermediaries.  The stock ownership plans all use a trustee to actually own the shares purchased on behalf of the employees or other group.  Lou believed that individuals were not ready to exercise the rights of shareowners.  With education and experience, they could eventually take over from the trustees.  Our experience in direct public offerings has demonstrated that individuals do a far better job in corporate democracy than Wall Street money managers.  Lou told me that his programs needed an investment banker to package and distribute the complex trust instruments.  By contrast, direct public offerings of shares were successfully accomplished through direct marketing, with no investment banker, securities broker or other commissioned intermediary. 


Minimize the role of government.  When I talked with Lou about direct public offerings, he would tell me that individuals couldn’t save enough of their income to pay for more than a trifling amount of shareownership, that they needed to borrow the money and that banks wouldn’t lend them money without a government guarantee.  However, in the direct public offerings we advised, individuals would forego spending in order to become shareowners, when they believed in the business.


Broadening the ownership of business would combat the fear of poverty that comes to many of us who see a job as our only way to get money.  It would bring us the reasonable hope that we could one day get by on what we earn from our investments.  Shareownership can ease the sense of powerlessness we have over big business and its control of big government.   The right to vote, to petition management and to join with other shareowners makes it possible to believe that we might one day effect change in the management of business solely for short-term gain.


Ownership of business will only continue to become more concentrated, so long as Wall Street has a monopoly on the flow of money into securities.  Broadening the ownership of  business will only come from bypassing Wall Street.