- Terminator Myth
A picture that we see on our television screens, in books, in films, in everyday commentary is one where an army of robots descends on the workplace with one goal in mind: to displace human beings from their work. And I call this the Terminator myth.Yes, machines displace human beings from particular tasks, but they don’t just substitute for human beings. They also complement them in other tasks, making that work more valuable and more important.Sometimes they complement human beings directly, making them more productive or more efficient at a particular task.So a taxi driver can use a satnav system to navigate on unfamiliar roads.If we think of the economy as a pie, technological progress makes the pie bigger. As productivity increases, incomes rise and demand grows. The British pie, for instance, is more than a hundred times the size it was 300 years ago. And so people displaced from tasks in the old pie could find tasks to do in the new pie instead. But technological progress doesn’t just make the pie bigger. It also changes the ingredients in the pie.As time passes, people spend their income in different ways, changing how they spread it across existing goods, and developing tastes for entirely new goods, too. New industries are created, new tasks have to be done and that means often new roles have to be filled.So again, the British pie: years ago, most people worked on farms, years ago, in factories, and today, most people work in offices.And once again, people displaced from tasks in the old bit of pie could tumble into tasks in the new bit of pie instead. Economists call these effects complementarities, but really that’s just a fancy word to capture the different way that technological progress helps human beings.Resolving this Terminator myth shows us that there are two forces at play: one, machine substitution that harms workers, but also these complementarities that do the opposite.
Now the second myth, what I call the intelligence myth. What do the tasks of driving a car, making a medical diagnosis and identifying a bird at a fleeting glimpse have in common? Well, these are all tasks that until very recently, leading economists thought couldn’t readily be automated. And yet today, all of these tasks can be automated.They’ve fallen for the intelligence myth, the belief that machines have to copy the way that human beings think and reason in order to outperform them.In the case of AI making a medical diagnosis, it’s not trying to copy the judgment or the intuition of a doctor. It knows or understands nothing about medicine at all. Instead, it’s running a pattern recognition algorithm through 129,450 past cases, hunting for similarities between those cases and the particular lesion in question. It’s performing these tasks in an unhuman way, based on the analysis of more possible cases than any doctor could hope to review in their lifetime. It didn’t matter that that human being, that doctor, couldn’t explain how she’d performed the task.Resolving the intelligence myth shows us that our limited understanding about human intelligence, about how we think and reason, is far less of a constraint on automation than it was in the past.What’s more, as we’ve seen, when these machines perform tasks differently to human beings, there’s no reason to think that what human beings are currently capable of doing represents any sort of summit in what these machines might be capable of doing in the future.
Now the third myth, what I call the superiority myth. It’s often said that those who forget about the helpful side of technological progress, those complementarities from before, are committing something known as the lump of labor fallacy. Now, the problem is the lump of labor fallacy is itself a fallacy, and I call this the lump of labor fallacy fallacy, or LOLFF, for short. Let me explain. The lump of labor fallacy is a very old idea. It was a British economist, David Schloss, who gave it this name in 1892. He was puzzled to come across a dock worker who had begun to use a machine to make washers, the small metal discs that fasten on the end of screws. And this dock worker felt guilty for being more productive. Now, most of the time, we expect the opposite, that people feel guilty for being unproductive.But this worker felt guilty for being more productive, and asked why, he said, “I know I’m doing wrong. I’m taking away the work of another man.” In his mind, there was some fixed lump of work to be divided up between him and his pals, so that if he used this machine to do more, there’d be less left for his pals to do.Schloss saw the mistake. The lump of work wasn’t fixed. As this worker used the machine and became more productive, the price of washers would fall, demand for washers would rise, more washers would have to be made, and there’d be more work for his pals to do. The lump of work would get bigger. Schloss called this “the lump of labor fallacy.” And today you hear people talk about the lump of labor fallacy to think about the future of all types of work. There’s no fixed lump of work out there to be divided up between people and machines. Yes, machines substitute for human beings, making the original lump of work smaller, but they also complement human beings, and the lump of work gets bigger and changes.But LOLFF. Here’s the mistake: it’s right to think that technological progress makes the lump of work to be done bigger. Some tasks become more valuable. New tasks have to be done. But it’s wrong to think that necessarily, human beings will be best placed to perform those tasks. And this is the superiority myth. Yes, the lump of work might get bigger and change, but as machines become more capable, it’s likely that they’ll take on the extra lump of work themselves. Technological progress, rather than complement human beings, complements machines instead.To see this, go back to the task of driving a car. Today, satnav systems directly complement human beings. They make some human beings better drivers. But in the future, software is going to displace human beings from the driving seat, and these satnav systems, rather than complement human beings, will simply make these driverless cars more efficient, helping the machines instead. Or go to those indirect complementarities that I mentioned as well. The economic pie may get larger, but as machines become more capable, it’s possible that any new demand will fall on goods that machines, rather than human beings, are best placed to produce. The economic pie may change, but as machines become more capable, it’s possible that they’ll be best placed to do the new tasks that have to be done. In short, demand for tasks isn’t demand for human labor. Human beings only stand to benefit if they retain the upper hand in all these complemented tasks, but as machines become more capable, that becomes less likely.
So what do these three myths tell us then? Well, resolving the Terminator myth shows us that the future of work depends upon this balance between two forces: one, machine substitution that harms workers but also those complementarities that do the opposite. And until now, this balance has fallen in favor of human beings. But resolving the intelligence myth shows us that that first force, machine substitution, is gathering strength. Machines, of course, can’t do everything, but they can do far more, encroaching ever deeper into the realm of tasks performed by human beings. What’s more, there’s no reason to think that what human beings are currently capable of represents any sort of finishing line, that machines are going to draw to a polite stop once they’re as capable as us.Now, none of this matters so long as those helpful winds of complementarity blow firmly enough, but resolving the superiority myth shows us that that process of task encroachment not only strengthens the force of machine substitution, but it wears down those helpful complementarities too. Bring these three myths together and I think we can capture a glimpse of that troubling future. Machines continue to become more capable, encroaching ever deeper on tasks performed by human beings, strengthening the force of machine substitution, weakening the force of machine complementarity. And at some point, that balance falls in favor of machines rather than human beings. This is the path we’re currently on.I say “path” deliberately, because I don’t think we’re there yet, but it is hard to avoid the conclusion that this is our direction of travel. That’s the troubling part.Let me say now why I think actually this is a good problem to have. For most of human history, one economic problem has dominated: how to make the economic pie large enough for everyone to live on. Go back to the turn of the first century AD, and if you took the global economic pie and divided it up into equal slices for everyone in the world, everyone would get a few hundred dollars. Almost everyone lived on or around the poverty line. And if you roll forward a thousand years, roughly the same is true. But in the last few hundred years, economic growth has taken off. Those economic pies have exploded in size. Global GDP per head, the value of those individual slices of the pie today, they’re about 10,150 dollars. If economic growth continues at two percent, our children will be twice as rich as us. If it continues at a more measly one percent, our grandchildren will be twice as rich as us.By and large, we’ve solved that traditional economic problem. Now, technological unemployment, if it does happen, in a strange way will be a symptom of that success, will have solved one problem — how to make the pie bigger — but replaced it with another — how to make sure that everyone gets a slice. As other economists have noted, solving this problem won’t be easy. Today, for most people, their job is their seat at the economic dinner table, and in a world with less work or even without work, it won’t be clear how they get their slice.There’s a great deal of discussion, for instance, about various forms of universal basic income as one possible approach, and there’s trials underway in the United States and in Finland and in Kenya. And this is the collective challenge that’s right in front of us, to figure out how this material prosperity generated by our economic system can be enjoyed by everyone in a world in which our traditional mechanism for slicing up the pie, the work that people do, withers away and perhaps disappears. Solving this problem is going to require us to think in very different ways. There’s going to be a lot of disagreement about what ought to be done, but it’s important to remember that this is a far better problem to have than the one that haunted our ancestors for centuries: how to make that pie big enough in the first place.
- Before the dust had settled on the economic collapse of 2008, Wall Street had already figured out a new way to package garbage as gold. They were engineering an enormous fraud that spanned the globe. But this time, the lies at the center of the scam were 100 percent legal. This time, the crime was based in China.
- The only market that people actually were confident would go up, was China. This is gonna be the largest economy in the world. Let’s invest in it now. It blew my mind ’cause it was so completely different from what I thought it would be it was booming. There were certain cities, you’d go one time, and you’d go a year later again, and suddenly there’d be a whole new shopping district that didn’t exist last time. Gold rush. There was almost no company that you could invest in in 2009 that was China-based that you would lose money on. Roddy: For an American set of eyes looking at this, you were just like, “Well, my gosh, “China really is this golden land of rapid economic growth.” I really thought, “Well, jeez, you know, “the American century is over now. This is it.”
- Everyone wanted a piece of China. There was just one problem, foreigners like Dan couldn’t invest directly in Chinese markets. That’s where the small California bank Roth Capital came in. Roth found a niche that the big banks had overlooked, taking small Chinese companies and listing them directly on U.S. stock exchanges.
- Roth is a second, third-tier boutique investment bank from California. Someone else had described it as a frat house. Roth Capital would get behind small companies and push them out into the market. They definitely were heating up 2010, 2011. Roth was well known for doing China deals at a time when we were looking. They’d have a three-day extravaganza– 100, 150 companies– and these CEOs would be saying, “For these six or seven or eight or ten reasons, we think we’re gonna grow revenues 75 percent next year. Between 2006 and 2011, Roth hosted over a dozen conferences and raised billions for Chinese companies.
- Roth wasn’t the only bank cashing in on the China boom. In New York, a small operator named Rodman & Renshaw ran investment conferences with a slightly different feel, centered on the political star power of its chairman, General Wesley Clark. Rodman & Renshaw had a troubled past. After years of management turmoil, they declared bankruptcy in the late ’90s. But with a luminary like General Clark as their public face, they’d reemerged as a respectable-looking bank, hosting parties and selling Chinese stock. They would typically invite presidents, ex-presidents, Colin Powell, Diana Ross, Henry Kissinger.
- During the six years that General Clark was chairman, Rodman & Renshaw brought over 40 Chinese companies to U.S. markets, with an aggregate value of over $31 billion. While Rodman and Roth made fees for bringing Chinese companies to the U.S., the real paydays came when the companies listed on major stock exchanges Their analysts would recommend the risky stocks as great investments, and then their salesmen would push them on their investment network. Once the stocks rose high enough, the banks and insiders could cash out, leaving others holding the overvalued shares.
The catch was, listing a company on the stock exchange normally required audits and public vetting, but the banks found a way around all that. They used a backdoor process called a reverse merger. It’s dollar denominated. It trades onshore, the New York Stock Exchange, the NASDAQ. It’s normally a shell company that is a public-traded stock that has no operations underneath it. You need to go to Nevada. A lot of them were there, that had started off as mining companies or whatever, and they were just sort of sitting there, waiting, you know, to find the right partner who could merge into them. So you need the shell company.
- Here’s how these reverse mergers work. a Chinese company looking for a way into American exchanges merges with the shell of a defunct U.S. company that no longer operates but still legally exists and has a listing on a U.S. stock exchange. The Chinese company then takes the shell company’s place in the market. Presto! You just appear. You’re a stock that’s trading in the U.S., and you’ve got a story to tell. And no one asks any questions.
- Between 2006 and 2012, over 400 Chinese companies listed on U.S. markets. 80 percent of them were reverse mergers. Our exchanges are monitoring them. Our banks are vetting these companies. You don’t have to worry about them because they’re on the U.S. exchanges. Between 2009 and mid-2010, the average China-based reverse merger was up several hundred percent– the average!
By 2010, Dan and the guys at Roth and Rodman were making a killing on the China stocks. It seemed like it would never end, and maybe it wouldn’t have, had it not been for one earnest young American businessman who’d gone to Shanghai to seek a completely different type of fortune. Carson: The business I set up was the first self-storage business in mainland China. It was called Love Box Self Storage. World-class. And we did win an award for self-storage facility of the year. On the way to setting up that business, I co-authored “Doing Business in China For Dummies.” Narrator: Carson’s father, a stockbroker back in the U.S., wanted to invest in Orient Paper, a company that Roth Capital had brought to the markets through a reverse merger.
- The company claimed that it was doing $100 million in business a year and shipping tons of high-quality paper all over China. It was one of the fast-growing companies that Roth and Rodman had sold and that investors like Dan had bought. Richard: The goal was to do some research, make sure that it was legit. His father would write up the report. Again, a fairly easy to understand and analyze business the opposite of an American software company. Narrator: Carson and a friend went to check out the factory, but right away, something seemed off. Carson: It was a country road. It was in poor shape. That road could not support the massive trucks that would be going in and out of that facility all day. Then we got into the factory. (indistinct chatter) Roddy: It was a complete dump. Half the machines were broken, weren’t working. Garbage rotting out in the front yard, no signage. And this is their main manufacturing facility. There’s water everywhere, all right? This is a company that’s a paper company. Carson: The company had just claimed to have clocked in $100 million U.S. in revenue, which was up substantially from the year before. How was this growing 50 percent a year? On the balance sheet, they were showing about… $5 million in raw materials. Carson: And so they had heaps and heaps of this old corrugated cardboard out front. Carson: My friend climbed one of those heaps to take a look at the expanse of rotting cardboard, and when he came down, he said, “If this is worth $5 million, the world’s a much richer place than I knew.”
- This business was a complete sham. This is going to zero. It’s a total fraud. I’ve never seen anything like this. Carson wrote a report of his findings and announced that he was going to back his claims by making a bet in the market that the stock would collapse. It would change the course of his life, but more importantly, it was the first time anyone had poked a hole in the Chinese miracle. I sent it out into the ether in late June of 2010. I stayed up for a little bit to watch it close, and going into the close, it just moved down a little bit. And so as I went to sleep, I wondered whether that was a reaction to the report. Well, the next day answered the question down 25 percent. And it ended up trading down as much as 55 percent from where we had put out the report.
- Even though it’s China and it’s a fast-growing economy, pigs do not fly in China, and I think that… There’s a proverb in Chinese, “Muddy waters makes it easy to catch fish.” Opacity creates opportunities for people to make money. That’s China’s view, muddy waters. I thought that that was a very apropos name for the firm and chose it. The “Muddy Waters Report” was the first major claim against a Chinese company, and it began to resonate throughout the industry nowhere more so than at Roth Capital, who’d engineered the deal.
- What was “going on” was that the company had deployed a classic move in the reverse-merger playbook: get a stamp of approval from a trusted source. Deloitte and Touche had come out with an independent investigation saying that the company was accurately telling about its financial statements. In the mortgage crisis, banks used rating agencies to disguise crappy mortgage bonds. Now Orient Paper was using an even more recognizable cover one of the Big Four global audit firms. Every day, all around the world, Deloitte professionals are making an impact that matters… It turns out that dozens of Chinese reverse mergers used the same trick hiding shady financials behind audits from the Big Four. It was like handing investors a shiny, thin file – stamped, “Trust me.”
- Whether it’s Deloitte or PwC, they expect these brands to have significant value wherever they are in the world, but in actuality, the way these partnerships are structured is that each office is its own entity. Roddy: So they were able to dollarize renting their name out, effectively. All they hoped was that this company didn’t collapse. Many of these companies would say, “Well, look. We’re being audited by Pricewaterhouse.” No, they’re not. They’re being audited by Pricewaterhouse China, which is like a franchise. It’s not really Pricewaterhouse.
It’s important to understand, and most people don’t know this, that the financial statements are prepared by management, not by the auditors. Auditor’s job is to simply review management’s work. And if management is trying to hide something or has co-opted the auditors, they will hide it.
If hiding it doesn’t work, they opt for plan B. hire a good lawyer. Orient Paper brought in Mitch Nussbaum of Loeb & Loeb to respond to Muddy Waters’ allegations. Nussbaum’s firm led an investigation. His unsurprising conclusion was that Carson’s allegations were false and that his report amounted to slander.
- I wondered how just how much diligence they had to do to satisfy regulators. Forget about the lawyer. Forget about the banker. The banker doesn’t go into the books and records of the company. The lawyers don’t go into the books and records of the companies. We don’t go check to see whether the shipments were received. You know, we don’t go visit the customers’ homes. I mean, no law firm does this. No law firm does this. This is the part of the story where I had to do a double take. All of the people who we think of as gatekeepers, the lawyers, the bankers, the auditors, the people making good money to ensure that the markets are clean, weren’t doing anything of the sort. They simply processed the necessary paperwork, took their fees, and moved on. If the companies were lying, so what?
- In investigating China Green Agriculture, what we came up with is, they were doing 10 percent of the business that they claimed. So we went to the investment banks. We took them our evidence. We said, “Look what we found. If you hire us and our team to do diligence, you’ll have a better product to sell to the American people.” They said, “Get out of here. You’re telling us to pay you not to collect 10 percent fees on every transaction done through this bank. The less we know, the better, and by the way, if you tell anybody what you found, we’ll sue you. Go back to Skippack.
- If you want to think about short selling, all kinds of commercial transactions are short selling. An airline that sells you an advance-purchase ticket, for example, is shorting you a seat. Short selling is betting that a stock is gonna go down, as opposed to go up. So shorting a stock, you’ll often hear it referred to as “borrowing shares.” Narrator: This is where a lot of people get confused. Here’s a simple way to think of it. Say I want to short sugar. I think that sugar is overvalued and it’s going to cost less in, say, six months than it does today. I see a business opportunity. I go to my neighbor and borrow one pound of sugar. Then I turn right around and sell that sugar for the going rate of $1 a pound. Manly Voice: Yeah! Narrator: In about six months, when I have to give my neighbor a pound of sugar back, I go buy it on the open market, where the price has come down, and it only costs me 50 cents. I give my neighbor a pound of sugar back, plus a little extra for interest, and pocket the 50-cent difference. She’s got her sugar back, and I’ve made money on my bet.
- You want everybody else who’s trading in that stock to believe what you’re saying if you think that the company is a fraud or you think that something about the company is not true.
- Here’s a new way to understand what was really going on with the hundreds of Chinese companies listed on U.S. exchanges. What you need to look at are Chinese State Administration For Industry & Commerce (SAIC) filings. The filings in China tended to be very accurate or more accurate than the fictions that were filed with the Securities and Exchange Commission in US.
In China, a company might accurately say they made $10 million, while in the U.S., they could report making $100 million or more. These SAIC filings were dead reliable. They showed exactly what was going on.
- This is due to the cultural difference. US can’t find auditors in China that will help then, because the government of China will kill ’em. This was, from the beginning, a deception. The purpose of it was to deceive, from day one, and we’d never really seen that at this scale in the United States market. And that’s probably why it took everyone by surprise. Narrator: That included Matt, and his reaction was telling, maybe it says something about human nature, about why we keep getting into these messes. He realized that hundreds of millions of dollars in Chinese reverse mergers that he’d sold were frauds, but he didn’t react with shame, just pragmatism. He wanted to make sure he got a piece of the ride down, so he switched sides and became a short seller, like Dan. I– I did it and made 78 percent in… four days. Eventually LLEN collapsed. Narrator: For short sellers like Dan and Matt, the filings were the final piece of the puzzle– not just evidence from one company or another but data from all the companies. For the first time, they could see the full scope of the deception. Carson: I don’t know what the numbers are, but it’s well into the billions of dollars that U.S. investors have lost. It’s between $20 billion and $50 billion of market capitalization of stock that’s listed here in the United States that might be worth zero. Individual mom-and-pop investors and mutual funds were invested in these Chinese companies, so it really does affect the average person on the street as well. Soren: If this one company is so brazenly fraudulent, what does that say about the rest of the market? Over 300 reverse mergers with businesses operating in China. This whole thing could be fraudulent. And that money could never be recovered, and if you got caught, there was no consequences.
- When you talk about the investment banks, especially the bigger ones, fraud is baked into the income statement. How many investment banks have had to pay fines this year for fraud? Wells Fargo? Check. Bank of America has in the past. Check. Morgan Stanley has in the past. Check. Nobody’s going to jail. It’s a fine. So it becomes part– it becomes part of what you budget. You budget for fraud.
- Companies lie. Companies lie. Companies have companies’ best interests at heart– not a community’s, not a people’s. The people need to have their own interests at heart.
- Matt had seen the bird’s-eye view of their SEC filings. Together they began to realize how shockingly simple the whole thing was. Let’s say that you wanted to construct a fraud. Matt: What you would do is, you would have a factory. You would have a chairman. And then you would find someone, a gatekeeper, for example. A finder says, “This is your business. What could you do with $100 million?” Matt: He would help with connections with auditors, legal tier-three banks. Dan: This operator in China would be like, “Well, that’d be– it would be a game changer.” “I’d buy up my competition. I could do this. I could do that. I’d be this big.” Get to the United States. This guy or this company in China would say, “Okay, I’m gonna get you a $100 million, but this is what you have to do. You have to tell people that you’re already this big.” You just had to make sure that you checked all the boxes in order to get it to be sold. Dan: And don’t worry, because if they even find out that we’re lying, you won’t go to jail. – You’re in China.” – All you needed was the collusion of a couple players, and you could defraud anyone you wanted. Dan: And if we’re lucky enough to get the money and they find out you’re lying, you get to keep the money. So there’s really no risk here. I’ll do all the work. All you have to do is continue to tell the lie.
- You know, if you’re gonna be a CEO of a public company, you’ve got to be educated, gone to college, got an MBA. These guys had zero of that. Zero, a lot of these guys. They came from second, third-tier cities in China. They came from a different way of doing business… Like running their own candy store type of way doing business. Dan: A Chinese chicken farmer does not wake up one day and understand how to defraud the U.S. capital markets. From the creation of these little companies, it’s all about stock market fraud.
- Once Dan, Matt, and the other shorts figured out the basic characteristics of the China frauds, they started taking them out, one by one. Puda Coal, the chairman, stole investors’ shares. SINO Clean Energy, super technology. This company puts advertisements on buses. Dan: They would crush coal, mix it with water, and that was energy… phenomenal. They hired none other than Loeb & Loeb to sue us. China Integrated Energy, for weeks and weeks and weeks, there was nothing happening at this company. All of a sudden, things get turned on. Lights start working. The next day, Rodman & Renshaw shows up with a busload of investors. Take a tour of the facility, get back on the bus, leave. All the lights go back off. Rodman investors, invest in a bunch. You continue to find really interesting anomalies in China.
- In China, business is done following a tradition of not having a particularly strong legal system. So people rely more on trust and on personal relationships. There’s a lot of focus on building those relationships so that you can build the trust. The Chinese call this network of personal relationships, guanxi. Paul: And so I give you small gifts and I do you favors, and then you owe me one. You scratch my back, I’ll scratch yours. Paul: If you do enough favors of people, you have the ability to call on them for a favor that might be quite inconvenient for them. And that they would feel an obligation to actually go forward.
- At the end of the day, investors counting on the SEC to save them from their own lack of due diligence, or greed, are kidding themselves. Mitch: We have more opportunity in our markets than anywhere in the world. But, at the same time, we don’t have a regulator that looks over our, our filings and says, “I want to protect the public from this.” Our system… you know, we file with the SEC, and the SEC reads the disclosure, and they comment on, on the disclosure. They don’t determine whether it’s viable to be public or not. They don’t make that determination. They let the free market make the determination. The SEC should do its job. Your job is to look out for investors, but you’ve put the interests of the Chamber of Commerce and their big-business members at the top of your priority list. Narrator: It is the SEC’s job to protect investors. But it was chartered in the 1930s, at a time when stock prices rolled off of ticker tape and the markets closed at four. Now, they’re outgunned and outmanned.
- Even if the SEC gets its entire wish list of documents from the company and they have enough evidence to pursue a case, the Chinese people responsible for this, don’t really care. Dan: When somebody breaks the law here, there is a process where they’re accountable. At some point in a China-based company, that accountability ends. And it ends at the ocean. In China, it’s not illegal to steal from foreign investors. I couldn’t believe the SEC would allow companies to list on U.S. markets, if it really had no way to police them.
- Bottom line is, the Chinese government and the U.S. government, on most levels, don’t work that well together. You can’t compel somebody that has stolen millions and millions of dollars from U.S. investors to come here from China. You can’t compel them to testify. You can’t even find them. If a company releases false information about its financial report in the U.S. market, Chinese domestic regulatory authorities have no power to punish it. I will surely be punished by law if I make counterfeit products in China, theoretically speaking. If I go abroad, if I lie to foreign investors Chinese authorities can do nothing to me.
- You’re in an alternate universe. There’s kind of this arms race to do the simplest things. You can’t even look at the bank statement. You can’t even go into the local bank and ask them. A lot of times, the manager of the local bank, will actually reprogram the books of the bank to make it look like the books of his client are better than they are. Gregory: Anytime you have a country like China, where information is not easily obtained, any society like that is a much greater risk. In the United States, we can go directly to a firm and we can subpoena those records. To get records out of China is significantly more difficult, if not impossible. If you wanted to set out to be a criminal, probably the best place to be a criminal is someplace with no cops, and that was China. It was the Wild West.
- What is capitalism? Is it an economic system? Or is it an apparatus that we can use to make more money for ourselves and take more money from others? At its heart, it rewards those who work hard, but it also rewards those who are willing to take advantage of others. Narrator: When we describe a fraud like this one, we use terms like “white-collar crime” to distinguish it. But really, it’s just theft, in its way, as violent as being mugged in the street. It can be traumatic to chart the trail of personal loss. How much was stolen from each pension fund, each retirement fund, each of us.
- The real story is the aggregate value. It’s the investors who, by the end, were mostly retail investors. These were mostly just people playing the American stock market, who looked at the financials and believed them. Alexandra: That money is money that belonged to individual mom-and-pop investors who thought, “Hey, I want to be a part of the China growth story.” And they were also shares that belonged to mutual funds, like Vanguard, that manage money for, for example, The New York Times, right? The employees. My pension fund money. Roddy: We sold ourselves on a myth of China as a really compelling market. A nation that wanted the leveling effects of free trade. It’s like a game of musical chairs, when the music stops, if you’re left holding the paper, if you’re left holding the shares, you are the victim.
- Shame on the auditors for allowing this shit to go through? Shame on the regulators for not making the, the requirements more stringent and difficult”?
- China is fundamentally a broken or fucked-up societal system. The people who get to the top, get to the top by breaking rules. Good people who want to play by the rules, get stepped on and pushed to the bottom of the pile. This, in some ways, has nothing to do with China. If you gave American management teams that incentive structure, oh, my God, we’d have the same amount of fraud here. It was just a no-brainer for them. Bulls versus bears, constantly. And now that I’m deemed a bear, I don’t know if I’m ever gonna be able to go back to the bull side. But, no regrets working for them. My clients made money. Ping: We’ve never seen a credit buildup to the likes of what China is doing today, that hasn’t been followed by a, a major, major financial crisis. So, stay tuned.
- We, we have, by far, the most vibrant markets in the world. By far! And so, that freedom, leaving those decisions to the private sector, you know, it, it frees up a lot, a lot of capital. This is the largest financial crime of the last 25 years, with the exception of Bernie Madoff. It’s still way too easy for the bad guys in finance to keep Washington off their backs. We’re cutting regulations. I would say 70 percent of the regulations can go. I think you see a lot of the similarities with the mortgage crisis in, in ’08 and the China situation. We had our chances, post-global financial crisis, in my opinion, and we missed it. This was sort of the appetizer, in, in that these were the small, crappy companies that, often times, were demonstrable frauds.
- We point to $50 billion, and that’s like an empirical number. That’s a number we can say, “Boom.” We can point to this and this fraud and tie it in nicely on a bow. What we don’t talk about is that there’s hundreds of billions of dollars that we can’t even begin to touch. And the fraud that can be perpetrated… through China by other means. So it’s not $50 billion, and it’s not some investment banks, and it’s not some people in the United States. It’s everybody. It’s every bank. Whether they know it or not.
- There’s an old joke that the biggest lie on Wall Street, is that this time, it’s different. (chuckles) Woman Reporter 2: Alibaba’s profit for the second quarter, jumped some 179 percent to $2 billion. It’s a perfect storm. That’s what this is. You don’t have the ability, to really research it. You’re buying lottery tickets. Alibaba is lottery tickets. The CEO of Alibaba, Jack Ma, says, “Just trust us, just trust.” In this country, when anyone says, “Just trust us,” the first thing you do is, hold on to your wallet. You don’t trust anybody, and you don’t trust anything, you can’t see and research for yourself.
The obvious consequence of Companies hiring the best and the brightest minds is that these people are then conflicted between serving the company’s best interests ie profits and the society’s best interests. This allows companies to get away with all kinds of fraudulent practices as the workers choose to keep their mouths shut and draw big paychecks instead of doing right by the society. Latest instance of this I came across is in “The China Hustle”
We fear AI destroying society by taking away jobs, but companies have been destroying the planet and hence society since the dawn of industrialization.
- In a capitalist system, management blames labor, labor blames management. Worker blames Worker. Confrontation rules the day with the law trying to hold the ring.
- Knowledge is power. The underprivelaged must raise themselves using the power of skill and competance.
- Types of CoOps:
- Consumer CoOps
- Producer CoOps
- There are only 2 theories of economics. In first, money rules and hires men to make more money. In second, men rule and rent money for their benefit
- BBC Horizon The Mondragon Experiment video:
- Part 1 of 2: Morality And Markets
- SLIDES: https://photos.app.goo.gl/EJRvI2ag2UwDQHYF3
- Smith was brightest lights of the Scottish Enlightenment
- He called himself an ardent observer of everything more than anything else. His great gift was observation and study of human behavior and of society and creating principles and insights from his observation.
- He firmly believed that division of labor leading to high productivity and specialization are key to wealth and prosperity
- He said “Do what you do best and trade for the rest”
- He was against Govt Intervention in controlling the market, and instead proposed that free markets driven by invisible hand of supply and demand are the best for the economy to thrive.
- He’s called the father of modern world and father of economics.
- Smith On The East India Company
- EIC was according to Adam, a grotesque monopoly
- It never made much profit, but it’s management thrived
- It essentially became “Too big to fail”
- It had it’s own army of 7K troops and its own Navy and ruled India
- The British Govt had to bail it out and assist it on many occasions using public funds. One such incidence was when it was given rights to sell tea to American Colonies(US was a British Colony then) at a lower tax rate than the British Govts. local tax rate in Boston. This led to Boston Tea Party and was followed by the American Revolution.
- Smith on Trade
- Smith saw the formation of Britain in early 18th century and later the French Revolution
- He was a fervent advocate of free markets and the power of invisible hand of the market
- He was against the mercantile system and promoted open and free trade and not hoarding of wealth
- Smith calculated and proved that controlling the colonies by extracting wealth would never be profitable in the long run due to the cost of Army and Navy to keep the colonies under the thumb. Instead he lobbied the british govt. to promote free trade and open migration between colonies. He even imagined US to be the future seat of the british empire.
- He was equally a moral philosopher and a free market advocate
- Part 2: Ideas That Changed The World
- SLIDES: https://photos.app.goo.gl/9ALx4wOmMlzlkIw92
- More than a Economist, Smith was truly a social psychologist.
- Benign neglect is a free market economic policy (along with no corruption, fair and swift judiciary and low and easy tax system) implemented first in Hong Kong in 1960s by their Finance Minister who was a follower of Smith’s principles. This caused their GDP to increase 10 fold in the next 40 yrs while Socialist China remained stagnant with its low performing state controlled industries. Soon China followed suit and is now a Capitalist Economy
- Smith maintained that free market doesn’t promote selfishness but cooperation coz everyone is doing what their strengths are and sharing their talents and services and produce with others.
- His key insight was that Competition is not a way of giving power to Companies, but a way of giving us power over them.
- He was against special laws and subsidies for anyone coz it promotes lobbying as a means to make profit instead of innovation and in fact stifles innovation and alternate ideas.
- A free market is one of the most powerful forces in the world
- US Constitution is Smithian in it’s bones. Madison, Jefferson and Hamilton had studied and admired Smith.
- 750 million people have been lifted out of poverty as global trade has increased from 2 trillion to 19 trillion $ in the last 40 yrs, just as Smith had predicted.