Monday, November 15, 2004

Questioning US capitalist credentials

John Plender has a good piece in the 14 Nov Financial Times on flaws in the US system:

General Motors recent third quarter figures showed that this corporate colossus made no money from motors and was in profit thanks only to its financial subsidiary, GMAC. Within GMAC, mortgage lending was the biggest earner. In effect, GM has been doing a similar job to Fannie and Freddie in encouraging car buyers and home owners to borrow and spend, thereby keeping the US economy afloat after the stock market bubble.

GM's equity is a slender $28bn wedge that supports hundreds of billions of dollars in debt, healthcare liabilities and pension obligations. It is more of a social insurance system for employees and retirees than an exemplar of shareholder capitalism. In short, GM looks increasingly like a Japanese stakeholder company, as does Ford Motor. Oddly enough, their chief Japanese competitor, Toyota, still manages to make big profits from motor manufacturing

Nor should we forget that one reason Fannie, Freddie, GM and Ford operate like this is down to another non-market feature of the system. The Federal Reserve is one of the world's busiest price fixers and has fixed interest rates at an unprecedentedly low rate in the post-bubble period, with the result that the US system is awash with credit while household debt is at sky-high levels. There are uncomfortable similarities with Japan in the 1980s, even if the Japanese were more thrifty.

On US corporate governance:

Consider now the biggest curiosity of US corporate governance - namely that shareholders' votes on directors' appointments at annual meetings have no force. Shareholders can "withhold" their votes, but even if more than 50 per cent do so the gesture is purely symbolic and the company can continue on management's chosen path. This shareholder democracy is about as democratic as Cuba or the old Soviet Union.

Plender concludes

The US may be a capitalist economy. But in matters corporate it often lags behind Old Europe and Japan Inc. Perhaps the stellar compensation of US chief executives should be reduced towards German or Japanese levels. But the free market plays little part in boardroom pay decisions. Yet another non-capitalist fix.

No comments: