|John Coates' "The Problem of Twelve: When a Few Financial Institutions Control Everything"
The Problem of Twelve: When a Few Financial Institutions Control Everything
by John Coates
Columbia Global Reports, 190 pp.
The Harvard economist John Coates argues that the growth of two types of investment companies--private equity firms and index funds--has concentrated power and imperiled democracy. But one of these things is not like the other.
In his new book, The Problem of Twelve, the Harvard law and economics professor John Coates writes that were "in a moment that is starkly different, if no less dangerous for democracy and capitalism, than the 1920s and 1930s." At that time, the power accumulated by financial institutions--which Coates calls a "problem of twelve," because those financial institutions were in turn controlled by a small group of men--was so great and so uncontrolled that it risked becoming a threat to both our political system and our economic system. Coates argues that although our modern too-powerful financial institutions look different than those in the Gilded Age, we once again face a similar--and little understood--issue of concentrated power.
Today's problem, he says, comes in two different forms: index funds and private equity firms. Index funds, which are a seemingly banal part of many investors' portfolios, simply mirror the performance of a given segment of the market, like the big companies that make up the S&P 500 index. Private equity firms use a little bit of capital from investors and a lot of debt to take over existing companies. Both have grown dramatically in recent decades. Index funds now own more than 20 percent of large American public companies, Coates writes, while private equity's assets in 2020 were 18 percent of total corporate equity, as measured by the Federal Reserve, compared to 4 percent in 2000.
That growth, he argues, brings with it dangers, because at scale, both institutions are effectively countermanding the rules that are meant to bring transparency and fairness to the business world--the rules that allow capitalism and democracy to coexist. Those rules, the most important of which were put in place in the wake of the crash of 1929 and during the horrors of the Great Depression, helped create a sense of oversight and fairness, which prevented capitalism from overpowering democracy and, in the process, destroying the very system that allowed it to flourish. But in the ensuing decades, Coates writes, many features of the New Deal that helped legitimatize capitalism were eliminated or reduced.
Now, we're once again at a point where Big Business and capitalism itself are facing societal skepticism. It's an enormous issue, one that's larger than this book, and Coates's well-articulated argument that the power wielded by index funds and private equity firms poses a "legitimacy and accountability issue of the first order" may be an important and insufficiently understood slice of the problem. Ultimately, though, the conceit of the book is also its major flaw, because it's not at all clear that index funds and private equity...
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