WASHINGTON, D.C. - U.S. Senator Sherrod Brown (D-OH) chaired a hearing of the U.S. Senate Banking Subcommittee on Economic Policy today on the effects short-term Wall Street speculation and earnings performance have on long-term economic growth and job creation.
Below is the full text of Sen. Brown's statement:
In an age of Blackberries, instant messaging, and video-conferencing, we have become used to shrinking the distance between point A and point B, whether the goal is to gather information, resolve a problem, or exploit an opportunity. What was once considered expeditious is now considered the norm.
Yet perhaps in the same vein, there is a familiar business impulse to generate short-term results - no matter what the long term cost.
This is the subject - short-termism - that we are considering this morning.
It's a timely subject, given that by hook or crook, the Senate will reform Wall Street, and we'll do it soon.
One thing we have or should have learned from the events that lead to our current situation is that if Wall Street wheeler dealers become blindly obsessed with short-term gains, their actions can shatter the economic security of Americans and the nation in which we live.
Over the past year, I've chaired several hearings in this Subcommittee to examine the challenges and opportunities facing American manufacturing.
Chief among these challenges is the obsession with quarterly results - the short-term expectations from the world of finance - which can sacrifice long term economic growth and job creation.
Short-termism involves a trade-off between long-term productivity and fast cash. Financial transactions supplant manufacturing as a means of growing the economy, at the expense of our nation's self-sufficiency - our ability to make the products we need, generate the energy we use, and equip the armed forces upon which we rely.
Recent trends have transformed quarterly earnings into benchmarks for speculators to make bets.
The rise of private equity and hedge funds has deepened the volatility.
A couple of years ago, the middle-class community experienced the economic hardship that results when a short-term approach drives decisions.
Tiffin was home to American Standard, the kitchen and bathroom fixture manufacturer whose products likely grace the home of many of you here today.
In late 2007, American Standard was bought by Bain Capital - in cash. Bain then liquidized the assets, moved jobs offshore, and sold the controlling stake in the firm to another private equity firm.
More than 200 manufacturing jobs in Tiffin were eliminated - without WARN notices I might add - and the community was left with an empty plant.
Last week, we avoided a similar situation when Hugo Boss made a decision to keep its last suit manufacturing plant open in Brooklyn, OH. But the situation with Hugo Boss, and the private equity firm that has a controlling stake in its company, raised several questions about short-termism and the ripple effects of a plant closing decision.
This is just one example that illustrates the emphasis past Administrations, Congresses, and the corporate titans in this country have placed on financial services - at the expense and gross neglect of American manufacturing.
In the 1980s, manufacturing made up 25 percent of GDP and financial services made up 11-12 percent. By 2004, manufacturing accounted for just 12 percent of our economy while financial services were 21 percent.
In 2004, the financial industry accounted for 44 percent of domestic profits. In 2010, even after a year and a half of busts and bailouts, it accounts for more than 35 percent.
We can see the effects of short-termism as we work on Wall Street reform today.
Just look at the over-supply of "toxic assets" that clogged our credit markets. Too many mortgage lenders were so focused on booking revenue from loan transactions that they paid too little attention to the true risk.
Too many lenders actually encouraged borrowers to take on larger mortgages than they could actually afford. Why? Those lenders earned a quick buck.
This problem was made worse by bundling up these mortgages into big packages - mortgage-backed securities - and selling them off to other investors.
Putting Wall Street aside, there are some promising developments when it comes to risks and costs of short-termism.
Fortunately, more and more big businesses recognize the problems caused by short-termism. Over the past few years, more corporate executives and CEOs have done some soul searching, and more publicly-traded companies are not playing the quarterly earnings game.
And, groups like the Business Roundtable and some of our best business schools are taking a critical look at the short-term business model.
But, if quarterly earnings reports were to completely disappear as the primary metric of evaluating business, what replaces them? What is the appropriate measure of long-term value?
I hope our witnesses can help us think about this and other questions around short-termism today.
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