It sounds like such an ugly term, “Robber Baron.”  The phrase brings to mind thoughts of abuse and theft.  But who and what exactly did these so called Robber Barons rob?

The most famous Robber Barons were John D. Rockefeller, Andrew Carnegie, and Cornelius Vanderbilt.  Each of these men built up remarkable wealth – each would be worth hundreds of billions of dollars in today’s currency.  Remarkable feats, so they must have stolen from somebody to get there, right?

Henry Ford, founder of Ford Motor Company who also built up hundreds of billions of dollars (in today’s currency) in wealth, has a famous quote that goes something like, “The man who will use his skill and constructive imagination to see how much he can give for a dollar, instead of how little he can give for a dollar, is bound to succeed.”  This is a creed that every robber baron has followed, including Rockefeller, Carnegie, and Vanderbilt.  In a capitalistic free market, as was seen in the time of the Robber Barons, the only way to build true, long-lasting wealth is to offer a product of greater quality and/or lower price than one’s competitors to as many people as possible.  As such, a capitalist is only able to amass wealth by providing his fellow man with something that he would otherwise not be able to enjoy or afford.  Rockefeller did it primarily with oil.  He was able to drill and extract oil and sell it to his customers at lower prices than his competitors could.  This allowed people to operate machinery, grow industry, heat their homes, cook their food, and perform a number of tasks that would have otherwise been too expensive.  By offering people cheaper, more accessible energy products, Mr. Rockefeller was able to amass huge amounts of wealth.  Carnegie did the same thing with Steel and Vanderbilt provided the nation’s people with cheaper, more effective shipping and railroads.  It is impossible, in a free market, to amass the huge amounts of wealth these men did without dramatically improving the lives of a vast number of people – and that is exactly what each man did.

Not only did these Robber Barons improve the lives of their customers, but they provided countless jobs and created growth in the economy.  Carnegie not only provided jobs to his steel workers and administrators, but he also made it possible for men to have jobs laying his steel along Vanderbilt’s railways, building Rockefeller’s oil derricks, manufacturing Ford’s automobiles, or building skyscrapers in Manhattan.  Furthermore, each of the men created huge amounts of wealth for other people that either invested in their respective concerns or purchased their goods and used them to build up companies of their own.  Each Robber Baron created many times the wealth and income that he, himself, took home.

So, it seems that Robber Barons did not really rob anybody – in fact they seemed to have improved the lives of most of the people in this nation.  So why the nasty name?  It must be their unrelenting selfish greed that brought on this negative perception of these magnates.  After all, a man such as John D. Rockefeller cannot build up $320 billion in wealth without greedily hoarding everything he can get his hands on like Ebenezer Scrooge, right?  Wrong.  The Robber Barons, despite their name, were notorious for actually giving away their money.  Never has there been a series of philanthropists such as these.  Each man puts Bill Gates, Warren Buffett, and Bono of U2 to shame.

John D. Rockefeller

•    Throughout his life, he gave a minimum of ten percent of his earnings to education and public health services.
•    Rockefeller funded the University of Chicago with an $80 million grant (1900 money), making it one of the preeminent American universities today.
•    He provided much of the funding for Spelman College (named after his in-laws, who were ardent abolitionists before the Civil War), which was a college in Atlanta for black women.
•    He established what he called his General Education Board, which promoted education at all levels everywhere in the U.S. and was especially active in promoting the education of black children in the South.
•    His donations led to a revolution in medicine with the Flexner Report, which essentially established the medical profession as we know it today.
•    He gave extensively to Yale, Harvard, Columbia, Brown, Bryn Mawr, Wellesley, Vassar and other universities.
•    He became one of the greatest benefactors of medical science, founding the Rockefeller Institute for Medical Research, which later became Rockefeller University.
•    He founded the Rockefeller Sanitary Commission, which eradicated the hookworm disease, which had plagued the Southern United States.
•    He gave $250 million to his own Rockefeller Foundation, which in turn endowed the Johns Hopkins School of Hygiene and Public Health, founded the Peking Union Medical College, helped in the World War I war relief, and other great feats.
•    He founded the Laura Spelman Rockefeller Memorial foundation, which supported work in social studies.
•    Later in his life, he was known for walking around town with pockets full of money and would hand it out to children and adults as he went from place to place.

Andrew Carnegie

•    He established public libraries throughout the United States, United Kingdom, and other English-speaking countries.  In all, he funded approximately 3,000 libraries in 47 U.S. States, Canada, the UK, Ireland, Australia, New Zealand, the West Indies, and Fiji.
•    He helped fund the University of Birmingham.
•    He founded the Carnegie Institute of Technology in Pittsburgh, which became part of Carnegie Mellon University.
•    He founded the Carnegie Institution in Washington, DC, which was setup to support scientific research and is still advancing science today.
•    He served on the board of Cornell University.
•    He funded the construction of the Hooker telescope, which was the largest telescope in the world for three decades.
•    He founded the Carnegie Trust for the Universities of Scotland to assist education at Scottish universities.
•    He notoriously established large pension funds for his former employees and later established TIAA-CREF, a pension fund for college professors.
•    He built Carnegie Hall in New York City.
•    He was a large benefactor of the Tuskegee Institute for African-American education and he helped Booker T. Washington create the National Negro Business League.
•    He founded the Carnegie Hero Fund in many nations for the recognition of deeds of heroism.

To go on listing each of the Robber Barons’ philanthropy would be a waste; let us just say there was a lot of it.

Not only did these men provide cheap goods and services, countless jobs, and unprecedented wealth, but they also gave more to charity than anyone before or since.  The free market set the sky as the limit for these men and they capitalized on it.  By doing so, they improved this nation and the lives of its citizens.  It is time we stop referring to these men as “Robber Barons” and call them what they are: Capitalists.

I’m sure by now pretty much everyone has heard of Madoff’s 50 billion dollar pyramid scheme. I’d hate to divulge deeper into this scandal as I’m sure the news has covered it quite extensively already. However, I’d like to cast light on another Ponzi/Pyramid scheme that has been in the making for over 70 years now; the one and only Social Security Act of 1935.

The idea behind Pyramid schemes are that the first people into the system are paid off money from the newer participants who are promised the same payoff in the future. The problem with this is they become unsustainable because they become larger and larger, so called “bottom heavy”

How does Social Security fit into this scheme? Quite nicely (See below).

Not a whole lot of explanation is needed except for that in this Social Security scheme the problem is even exacerbated by the fact that the next “rung” of the pyramid is mis-shaped with the baby boomers which has helped to hide the problem and imminent failure of social security. This is because this enlarged rung of the pyramid has been over-adequate the past few years and masked the future inability of this program to sustain itself. But, the problem will be magnified because of this as the so called baby boomer generation retires leaving the next rung to the burden of somehow supporting this oversized generation.

The scary thing is that today, we are farther away from the real solution to the Social Security system which is a privatized system. Why are we farther from this idea then we were 5 years ago when President Bush stated in his State of the Unions it was a priority? Because of the idea that somehow Americans are unable to decide their own future. The argument was always that if given the investment choices and ability to control their social security funds, Americans would be hurt because they would invest it and lose it. Well, today that scenario seems more likely than it did a few years ago. It is a sad state we live in where the Government not only attempts to use, but successfully uses a free individuals potential for poor investment as a justification for why they should not be able to determine their own financial future. Just fathom that for one second. We may lose our money if we invest it. Therefore, we should not have the authority to decide where our money goes. If you break it down even further, that is some flat out dangerous logic, and an even worse precedent.

The Social Security system, established in 1935 as a “temporary” solution, has hardly been temporary, and even worse hasn’t been a solution, but a ticking time bomb. We may lose our money if we invest it ourselves, but we will certainly lose it if it stays in the 74 year old ponzi scheme. Just ask some of Madoff’s clients.

Over the past century, there has been an unprecedented shift in power from the states to the federal government. The idea of 50 relatively autonomous states under the blanket of the federal government has completely been thrown out the window. Go to another state and you will see that there are tremendous differences in the people; their ideologies, their “typical” jobs, their culture, and even their demographic make-up. Yet, you will always find that one relative constant: all of them have essentially the same laws, income taxes, and government services. Now, how does it make sense for the same set of “one size fits all” rules and regulations to apply to 300 million people who are all incredibly diverse in their needs and wants.

It doesn’t.

It breeds inefficiency. If there is one way to describe the federal government, it would be inefficient. If you are a congressman from a state, and a potential project is being talked about in congress, you will push your hardest for it to pass… even if the costs outweight the benefits. The reason for this is you are really only paying 1/50th (for simplicity sake, I’m assuming all 50 states are the same size tax revenue wise) of the cost. This may not seem like a huge deal, until it happens over and over again and all 50 states are doing it. The bottom line is there is absolutely no incentive to reduce spending since all the costs are spread around.

Imagine how much more efficient and strong our economy would be if each state could specialize in the needs and wants of its citizens. This was the original idea of the whole 50 state system! It allowed for each state to set its own rules that fit its own people. It was a brilliant idea, and it still is. The idea that we could have 50 states each competing with each other economically and ideologically for people, and competition drives efficiency. For example, states would have incentives to actually reduce spending, not only because they are paying the whole 100%, but also, the more they save, the more they can reduce taxes or provide services to its citizens.

The fundamental concept behind the free market is that no transaction occurs unless it benefits both parties. This is a concept that is violated over and over in our country. People are paying taxes for services that they do not want and they are not receiving services that they are willing to pay for. Under the “original” concept of the United States, the taxpayers actually had a voice… which today has been reduced to the faintest of whispers. Sure we can determine the President, our congressmen, but can we really drive our politicians to change? I would argue we have very little impact, because of how un-localized our voices are. The more local and specific your voice is, the stronger it is. A single voice among 300 million is quite miniscule, but a single voice within a single state is magnified by about 50x.

To be honest, I’m getting sick of everyone talking about how “Washington is broken”, because it reminds me of just how far we have fallen away from the original founding principles of the country. I’m not angry that Washington is broken, I’m angry that people aren’t questioning when Washington became the sole decider of all things American. When is the last time you heard someone say “Albany is broken” or “Phoenix is broken” or “Olympia is broken”. Chances are it has been a long time. In fact, state capitols have become such a figurehead name and they don’t even have any importance in the grand scheme of everything (to test this, try naming all 50 capitols… I had enough difficulty naming 3). Well, at least relative to their intended importance set forth by our founding fathers.

I love the idea of the United States of America. Fifty states all operating independently but under one united entity. But, I fear that over the past century the fifty states are no longer operating independently under one entity, but they have become one entity. Being united is great, but not when it comes as a Washington mandate.

I’m sure most of you are aware of the fact that on Friday the SEC effectively banned short selling of about 799 financial stocks. But I’m not sure whether or not people are actually aware of the unintended consequences of doing so. Everyone sees the headline of “Dow soars” and “Nasdaq rebounds”, but through their positive reactions to the SEC ruling, it is pretty evident that most people are in the dark in terms of what it actually means.

Two points stand out above the rest:

1. The rally really wasn’t a rally – it was just the fact that every short seller had to cover their position. If you look at the technicals of the trading and a chart of the trading, the rally was simply a “gap up” in the mornings. What this means is the rally wasn’t volume driven, it wasn’t as if a stock traded up to 70 from 50 slowly throughout the day. The opening bid of the biggest gainers was pretty much where it ended up for the day. It wasn’t as if people were “more willing” to buy and to “pay more” per share of stock as the news media would have you believe, but it was people were “less willing” to sell (primarily because it was now illegal in many cases).

2. The banning on short selling of financial stocks creates massive massive mis-pricing. Case in point: Merrill Lynch being acquired by Bank of America for .86 BAC shares per MER. Their respective closing prices were as follows: 37.48 BAC and 29.5 MER respectively. This means that (ignoring all time value of money arguments and built in risk), Merrill Lynch should be trading at $32.23 per share. That reflects roughly a 10% discount to which the deal was valued and agreed upon. This may not seem shocking, but it is considering the deal is expected to close within 4 months and there is little to no resistance to the deal since it has strong Fed and government backing. So what causes this?

Well, the quintessential arbitrage trade here would be to short Bank of America shares and to long Merrill Lynch, but oh wait, you can’t short Bank of America shares anymore! So the only thing would be to long Merrill Lynch, but all this would really do is potentially inflate an asset simply because it is pegged to another inflated asset… all in all, creating massive amounts of mispricing.

Are there ways around this? Sure, you could always buy put options on the asset and I suppose put options is the new short sell, but it’s clearly not as effective a means of hedging.

Yet again, this is simply another example of how the federal government is trying to have all the benefits of capitalism and trying to use government intervention to prevent any of the “necessary destruction” of capitalism from occurring. But, the essence of capitalism is the idea of creative destruction which “incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one” (Schumpeter).