GUEST BLOG: Here Be Dragons by Aegis Frumento Esq

November 1, 2018

In ancient maps, uncharted seas were drawn infested by dragons, sea-serpents and other monsters -- so you'd know if you went there, you'd gone too far. The past week has us feeling adrift in just such waters. I won't add to the voices decrying the careless alarmism that encourages violence. I don't disagree, but I've nothing to add. Neither do I dispute those who say that people, not guns, kill people. Guns make it a lot easier, but sure. And, yes, we will always be at risk of the random demented, though it seems blasphemous to treat a mass murderer as if he were an earthquake or meteor.

Today is November 1, which in the western Christian calendar is All Saints Day, a day set aside to honor all the "saints," known and unknown, living and dead. Shakespeare, as usual, tells us best who they might be: "They that have the power to hurt and will do none . . . They rightly do inherit heaven's graces."

All of us have the power to hurt somebody. We are that cartoon character who, faced with a decision, finds an angelic self-image on one shoulder and a demonic on the other. Hell is empty, and all the devils are here. All too often, we listen to the worse demons of our natures. Most of us don't go so far as to kill our neighbors. But we do abuse them, be it verbally, physically, psychologically, or sexually, often without even thinking it. Mostly, we exploit them economically. And that has more to do with what's happening to us today than many who deal in finance want to face.

People do indeed kill people. One tries to with pipe bombs in the mail; another does so with a machine gun in a shul. But each of them is still a member of the society we have let form. Someone observed after the Tree of Life massacre that anti-Semitism is like the herpes virus -- always there, usually dormant, but activated by stress. It's the stress that interests me. The stress that has been nurturing this virulence has been growing for decades, and its root is an economy that since the Reagan years has created an underclass of the forever down and out.

A recent poll of college students shows an increasingly favorable view of socialism and a growing ambivalence towards capitalism. Thirty-one percent had an unfavorable view of "capitalism." The Wall Street Journal's Stephen Freeman called it "barely reassuring" that 45% still had a favorable view. He suggested that capitalism has gotten a bad name, that it would have polled better if called "free markets" or "open economies." And even better, I suppose, if they'd called it "free weed" or "open bar."

Freeman's right on the name, but not how he thinks. An economic system designed to reward the top 1% of the population with close to 20% of all income and 30% of all growth should not properly be called capitalism. That's a plutocracy heading towards an oligarchy. These kids aren't stupid. If that's what "capitalism" means, they want no part of it, and I'm with them.

To be clear, I do believe in free markets. Centralized economic control inevitably leads to the tyranny of the few over the many. But what do we gain when that which we are pleased to call "capitalism" gets us to the very same place? Nor is regulation the answer. As Paul G. Mahoney so well points out in Wasting a Crisis, his excellent study of crisis-induced securities regulation, more often than not regulators just make the practices of big firms mandatory for all, forcing small firms into compliance regimes they can't afford. And so the big firms, for all their belly-aching, acquire competitive advantages over small firms. Each recent post-crisis regulatory push has resulted in a general consolidation that makes the big bigger and the smaller disappear.

That's not capitalism. Capitalism's free market forces would allow the masses to acquire a livelihood from a freely chosen work. Some few would get very rich, for sure. But the great many who would otherwise be poor would become something else, a middle class. A middle class with a stake in the system than provided those opportunities and a reasonable hope that their children will be better off, or at least no worse off. Capitalism, at its best, creates that nation of shopkeepers that Adam Smith envisioned.

But it's not working out that way. Capitalism as we practice it today favors the rapacious, and finance is at the heart of it. We who deal in finance don't often reflect on what an amazing tool it is. Modern societies could not exist without finance. Modern life depends on infrastructures -- from roads to buildings to data networks -- that can only be built by the concentration of resources. Financial technologies provide those resources by shifting the wealth of one person, one place or one time to benefit another person, in another place, at another time. But today, finance is often hijacked to make the already wealthy even wealthier. The result has not advanced capitalism. It has fed the massive wealth and income inequality which I believe is the root of many if not all our evils.

The problems of inequality are well known, but a series of articles in this month's Scientific American highlights the extent of the objectively measurable stress it causes. Our growing economic underclass is less healthy, less educated, less economically secure, more anxious, more prone to violence, and more susceptible to mental illness and fanatical thinking than the population at large. Factory robots and cheap overseas labor have left them underemployed and, with no time left to start again, hopeless. Productivity has nearly tripled since 1970, and yet their real wages haven't budged. The productivity gains have all gone to the top 10%. The left behind reacted with their votes: If only 2% fewer factory robots had been employed in the Midwest, Donald Trump would have stayed as he was, just Manhattan's village idiot.

A whole segment of Americans who used to be middle class have been shut out of the American dream, and so have their children. Many are slowly exterminating themselves, out of sight and out of mind, by alcoholism, drug overdoses and outright suicide. Only those who are moved to exterminate others grab our attention. There is a relationship between the stress of the left behind and lunatics like Cesar Sayoc and Robert Bowers, even if we can't trace it directly. They are, in Bob Dylan's words, a couple of "the countless confused, accused, misused, strung-out ones and worse." When the slaughter happens at a high school or a concert or a theater or an elementary school or a marathon or an African-American church -- or a synagogue in Pittsburgh -- we are always shocked. But we shouldn't wonder that once in a while one of the strung-out ones, deceived into thinking he has something to protect, does so with deadly arms. We should be grateful it doesn't happen more often. 

It is well and right that we condemn the murderer, mourn the victims, and comfort the survivors, knowing even as we do that the next massacre will be upon us soon enough. The monsters do not live at the edge of the map. They are here and they are legion. Is it inappropriate to speak of economics at a time like this? Perhaps. Or perhaps all we can do is be mindful that the inequality that so often results from our work feeds demons. Talmud and Quran both say that to save one life is to save a world. We cannot save all or even many future victims of random violence. But maybe it's enough to hope that -- somehow, sometime, somewhere -- we just might help save one.


Aegis J. Frumento
Stern Tannenbaum & Bell
Co-Head, Financial Markets Practice

380 Lexington Avenue
New York, NY 10168

Aegis Frumento is a partner of Stern Tannenbaum & Bell, and co-heads the firm's Financial Markets Practice. Mr. Frumento represents persons and businesses in all aspects of commercial, corporate and securities matters and dispute resolution (including trials and arbitrations); SEC and FINRA regulated firms and persons on regulatory compliance issues and in SEC and FINRA enforcement investigations and proceedings; and senior executives of public corporations personal securities law and corporate governance matters. Mr. Frumento has also represented clients in forming and registering broker-dealers and registered investment advisers, in developing compliance policies, procedures and controls, and in adopting proper disclosure documents.

Prior to joining the firm, Mr. Frumento was a managing director of Citigroup and Morgan Stanley, a partner and the head of the financial markets group of Duane Morris LLP, and the managing partner of Singer Frumento LLP.

He graduated from Harvard College in 1976 and New York University School of Law in 1979. Mr. Frumento is a frequent author and speaker on securities law issues, and is often quoted in the media on current securities law developments.

NOTE: The views expressed in this Guest Blog are those of the author and do not necessarily reflect those of Blog.