Criminalizing Excess Profit Margins

Before we spend too much time in the bank-bailout hearings arguing about CEO salary caps and the types of hedge funds to be banned, let's think about root causes, shall we? How about banning any sustained profit margins above some arbitrary cap like 12 percent? Socialism, you say? No more so than nationalizing an insurance giant like AIG. And something tells me even Adam Smith might understand the point. Bear with me.

Before the S&L shell games and leveraged buyouts of the mid-1980s, investors were happy with regular profit margins for goods and services in the 5 to 8 percent range, with occasional surges into double digits when a buying craze hit anything from tulips to Teenage Mutant Ninja Turtles. The important thing was, the surges were related to specific goods and services over which the public at large went temporarily mad.

The common thread in short-sells, derivatives, collateralized debt obligations, hedge funds, vendor-financed Internet infrastructure, commodities speculation, et. al., is that investors seek and expect continuous profits in the 12 to 20 percent range. These kind of expectations killed the media industry. And in the case of financial instruments, they are seeking profits from bets waged on future market behavior, not on tangible goods and services. Excess profits are being conjured out of thin air. Sounds like a RICO violation to me!

Wait a minute, you say, how can excess greed be criminalized? Doesn't that destroy capitalism? Hell, no. Regulating externalities like labor rights and environmental factors not only has a long history, it has been critical to controlling capitalism to prevent it from being self-destructive. China's recent experience with losing control over additives in its food supply shows that early efforts like the Pure Food and Drug Act of 1906 were key to taming the capitalist beast.

When I was out walking the dog at 5 a.m. this morning, I was dreaming up advertising campaigns. Haul some Jenny Craig slim-down pictures out and say, "Wall Street: Slim down your profit footprint!" -- thereby linking the notion of excess profits to the carbon-footprint ideas of the environmental movement. And, of course, use the Monopoly symbols of the angry cop to insist: "Profit margins over 12 percent? Go directly to jail!"