If you were to pick one company that symbolizes how America has changed and been changed over the last half century or so, it would be General Electric. The company founded by Thomas Edison is in many ways a microcosm of the American economy over the last century or more. It rose to become an industrial giant in the 20th century, the symbol of America manufacturing prowess. It then transformed into a giant of the new economy in the 1990’s, a symbol of the new America.
Today, General Electric is a company in decline. After a series of problems following the financial crisis of 2008, the company has steadily sold off assets and divisions in an effort to fix its financial problems. In 2019, Harry Markopolos, the guy who sniffed our Bernie Madoff, accused them of $38 billion in accounting fraud. The stock has been removed from the Dow Jones Industrial composite. Many now speculate that GE will end up in bankruptcy in order to reorganize.
For those interested in a longer discussion about the history of General Electric, Myth of the 20th Century did a podcast on the company. One aspect they did not cover is how General Electric transformed from a company that made things into a financial services company that owned divisions that made things. Like the American economy in the late 20th century, the company shifted its focus from making and creating things to the complex game of financializing those processes.
Like many companies in the late 20th century, General Electric found that their potential clients were not always able to come up with the cash to buy their products, so they came up with a way to finance those purchases. This is an age-old concept that has been with us since the dawn of time. Store credit is a way for the seller to profit from the cash poor in the market. He can both raise his price and also collect interest on the payments made by his customers relying on terms.
For American business, this simple idea turned into a highly complex process, involving tax avoidance strategies and the capitalization of the products and services formerly treated as business expenses. Commercial customers were no longer buying products and services, but instead leasing them in bundled services packages, financed at super-low interest rates and tax deductible. Whole areas of the supply chain shifted from traditional purchases to leased services.
For example, a local supplier of industrial goods used to own a warehouse to hold the products he supplied to clients. Inside would not only be the products, but material handling equipment like forklifts and shelving. Outside at the loading docks would be a fleet of big scary trucks used to deliver the products. Of course, to make it all work would be a staff of people loading and unloading trucks, moving product around the warehouse, making deliveries to clients and so on.
All of this would require a lot of money to acquire and maintain. That small local distributor would have millions tied up in assets. This is where the magic of cheap credit came into the economy. Companies like GE could go to these suppliers and unleash that capital tied up in those assets, by converting them into leased services. The trucks, for example, would no longer be purchased, but leased from a GE division that paid the taxes, did the repairs and provided spares in peak times.
As an aside, another aspect of this new leased economy is what happened with the people inside of it. That local supplier could not only lease his trucks and material handling equipment; he could lease his people. The building, the warehouse people, the administrative staff, the trucks, all of it, could be turned into a single lease payment for larger operators. This allowed the big players to muscle out the small players in just about every aspect of the supply chain.
What really made this new form of store credit work was both super-low borrowing rates for big players like GE, but also changes in the tax laws that allowed these lease payments to be treated like depreciation. The customer not only got the benefit of holding his cash he would normally use for asset acquisition; he could also get favorable tax treatment on the lease expense. To no one’s surprise, the big lobbyists for these changes in the tax laws were the financial services firms.
That is what GE became in the 1990’s. It was no longer a company that made stuff and financed it for select clients. It was a financial services firm that owned manufacturing facilities that supplied products it could finance. GE Capital became a massive commercial bank, not entirely regulated like a commercial bank and free to invent new financial services to meet its needs. They bought up manufacturing and commercial services companies, in order to monopolize their financing operations.
In the old economy, the credit system existed to serve the broader economy. In the new economy, the broader economy exists to serve the credit system. That which can be turned into a credit instrument increases in value, while that which cannot be bundled into a financial instrument loses value. Small players that provide specialized services lose value, while global players with easy access to credit increase in value. Everyone and everything serves the global credit system now.
This is what happened with General Electric as its credit empire grew. It was first and foremost a finance company. Since the flow of cheap credit was unlimited, the need to find new places for the credit became the point of GE. They bought companies in order to have new clients for their financing arm. They expanded the realm of that which could be leased and financed. By the end of the Jack Welch era, the point of General Electric was to grow bigger in order to supply more credit.
This financialization of the economy also allowed companies like General Electric to maintain implausible growth rates. This is where that credit machine at the heart of the company came into play. They could finance acquisitions with cheap credit. They could structure the purchase of a company in such a way as to realize its revenue now, while amortizing its debt and expenses. Suddenly that new division was wildly profitable through the miracle of off-balance sheet transactions.
The last financial crisis broke General Electric, by exposing a reality of the modern credit-based economy. Without new ways to move credit through the system, the credit system begins to seize up. Since the profit in this system is entirely through the skim, the slowing of credit means a collapse in profits. Once those profits disappear, the ability to make interest payments declines and that slows the system further. GE was close to insolvent within days of the mortgage crisis in 2008.
That is the real lesson of General Electric. The company became something like the old Mafia bust-outs. The whole point of the business was to squeeze every drop of value from clients and divisions. Instead of running up the credit lines and burning down the building for the insurance, General Electric turned the human capital of companies into lease and interest payments. They were not investing and creating, they were monetizing and consuming whatever it touched.
GE came close to collapse in the financial crisis, but they were bailed out. They stagger on, despite having lots of divisions that make high quality products. The cost of unwinding the company back into a normal company will be high, maybe too high for them to survive. The same can be said of the American economy. It will have to be unwound, but there will be no bailout. Instead, it will have to unwind quickly and painfully, in order to become a normal economy again.
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I wouldn’t even know a GE product if you handed me one. The company is something I don’t understand. I get the financial aspect, and that they supposedly still make stuff, but I haven’t seen their logo on anything in years.
What you do see their name on is a GE in name only. The same is true of RCA and other formerly great American brands.
jet turbines
As recently as the 1980s, we had decent anti-usury laws in some states. Time to bring them back in all states and at the federal level.
We son’t have a problem with usury. We have a problem with too much cheap credit. Interest rates of today were unheard of for most of human history. In 1965, even the most bullish financier could have imagined what is common today.
i wonder how many of your younger readers even know that banks traditionally gave 5% interest on savings account — and this in a very low inflationary environment.
Yeah, I remember. I also remember my parents mortgage interest rate being in the 15-18% range. Even my first mortgage in the late 90s was at 5.3%.
My first bank account as an adult was in 1988. A savings account paid like 4% interest. What I don’t remember at 50 is ever living in a low inflation period. There are very few people living who can remember a period without inflation. Anyone under 75 has spent their entire lives in an inflationary environment. Anyone under 50 has lived their entire lives under a fairly high inflationary environment. Even according to inflation . com, there has been 50% inflation between 2000 and 2020. My lifetime has seen 600% inflation. Inflation.com doesn’t take productivity increases into consideration. The real… Read more »
Depends on commodity you choose. A bad example is Gold 😀 When it had a monetary link it was valued (approx.) $20/oz (????-1933); $35/oz. (1933-1970), and not linked to dollar afterwards. Since gold is near $2000/oz now, does this mean that prices in general are 10x higher than 20 or 40 years ago (gold hit the $200s then), or for that matter, nearly 100x higher than the early 30s? Of course not. In fact, if you look at historical prices for common items, Gold seems to be grossly overvalued. I did a calculation a few years back using (for example)… Read more »
People don’t understand that cheap credit inflates asset values, and when the credit either gets more expensive or dries up, those asset values shrink dramatically, even as the outstanding debt stays on the books. That’s why the Treasury and the Fed are massively money printing and buying up assets, to keep the asset values up.
In the fullness of time, the “crossing the Rubicon” moment for America will be when the Federal Reserve decided to intervene in the credit markets. Once they stepped into prevent revaluation, they were trapped to do so forever.
You under-estimate the value of an idealistic mind unclouded by facts and reason 🙂 For example, to extirpate all the problems of inequality and poverty, all we have to do is tear down some statues, remove objectionable flags from public buildings (at least the ones we didn’t burn down), rename some things, and finally, suppress any debate, speech or thinking about political, historical, social or race issues that don’t fit The Narrative, think pure thoughts, and everything is going to turn out great! 😀
The central banks are doing all they can to prevent inflation from going down and avoiding the word ‘ deflation ‘. I think part of it is that their revenues are predicated upon inflation and not deflation which would mean a reduction in revenue. We are ground down by the twin millstones of taxation and inflation. I’ve been watching this asset bubble grow, fed by the lowest interest rates in history.The government and the bankers distort the free market and artificially raise the price of housing. Unlimited immigration – even if the immigrants aren’t going to the particular neighbourhood in… Read more »
It’s not so much the rates themselves as the idea of “money working for you” in general, particularly where those gains are preferentially taxed compared to income and are coupled with a bankruptcy system which caters to the worst cheaters without providing real relief to legitimate debtors who’ve fallen into “household zombie economy” status.
Since the libertarians took over economics, the old conservative standard of “two cheers for capitalism” has become four.
Government has almost entirely abandoned the idea of policing economic excess and instead promotes the worst abuses of unfettered finance capitalism.
Cheap credit for the super-rich maybe. But have you checked the interest rates on your credit cards? I rarely carry a balance, but last I checked it is still 18-24% annualized.
Ending usury, periodically-clearing debts, much steeper progressive taxation on the top end and placing personal income, capital gains and corporate tax rates on an equal footing are major steps we need to start draining the American economic swamp.
Contra Larry Kudlow et al, the economic problems of the Carter years did not stem from steeply progressive taxation. High-end tax rates didn’t stifle growth or innovation in the postwar years of America’s greatest prosperity – GE’s heydey.
Did anyone really pay those high marginal tax rates? They had to impose the Alternate Minimum Tax because they weren’t.
We are in a new gilded era, only without the white people. The heart of the empire is being ripped out.
.
“You’ve nothing to say? They’ll drag you away,
If you listen to fools, the Mob Rules!”
— Black Sabbath, “The Mob Rules”
I interacted with General Electric representatives while I worked on Capitol Hill between 1985 and 1995 and again while I worked for a regulatory commission between 1995 and 2004. I remember thinking that it seemed to be a terrible place at which to work; I’d do it only if I needed money for groceries.
Quite the opposite. It was one of the better places to work in corporate America. Of course, that is from the perspective of the dreaded private sector. Government work is another world entirely.
Whether or not it was a good place to work really depended on 1) how far up the food chain you were and 2) how good you were at networking. If you were C-Suite or C-Suite adjacent (VP of XX) the rank and yank didn’t apply to you. If you were a great networker then you could be confident that at minimum you would never be in that bottom 10%, and could likely be in the top group. But if you were a low level grunt in a back office somewhere, or were an introvert with poor networking skills, the… Read more »
The 10% rule, which gave many a sociopathic CEO’s and McKinsey & Co vampires a hard-on for years, created a level of paranoia and internal politik that was ultimately toxic to the culture. As Z points out the lease-credit-arbitrage model did not spare the people. Why should it. If you aren’t building anything you don’t need to build your people either. The dark triad scrum for “talent” was just one more way to moralize and treating people as capital. Meanwhile, all the smartest guys in the room looked to GE for guidance on how to turn their people into savage… Read more »
A lot of this has to do with eliminating “horizontal” trust and replacing it with vertical trust. The idea in economics was that vertical trust enabled coalitions to form that were poorly aligned with the goals of the profit-maximizing corporation. One way to eliminate this horizontal trust was to super-charge the promotions process: each step in the promotion ladder was a large increase in pay, so the competition for that promotion became much more intense. That is also one contributing factor to the dramatic increase in inclusion and stakeholder talk – few can live the empty lives that corporations want,… Read more »
GE as a company that makes things is heavily dependent upon the aviation industry. Aviation is in for a rough ride. Demand is way down and is probably going to stay that way. Lots of bankruptcies are probably inevitable. Ship building and oil refineries are other sectors where they manufacture big ticket items. Neither of those are going to come roaring back either. While small businesses and paycheck Americans will get endless lectures about the integrity of the market and the benefits of playing by the old rules…Gov will pump trillions into GE and other too big to fail entities… Read more »
I can’t find the image, but around twenty years ago the government was considering breaking up Microsoft. The cartoon shows two shoppers in a “Microsoft Mall” where all the stores are Microsoft-branded (but not software) goods and services. The caption says “I knew they would find a way to wiggle out of it!”
Perhaps that is a future we shall see, but due to FAANG picking up the pieces, not because the Justice department took anti-Trust actions 🙁
Aviation is in for a rough ride.
Not only because of the Virus. As the West, and the world, becomes increasingly 3rd worldized, flying will become less and less safe. The Canadian TSA is entirely non-white, Arabs, Sikhs and other vibrants who look to have a chip on their shoulders.
The airport staff, security, and people who clean out the planes are increasingly taking on a Somali appearance, in Canadian airports.
One day it will go boom, either due to malfeasance or simple incompetence. Air travel will become less and less attractive.
Boeing is a very similar story. As the finance whiz kids moved in, the engineering standards slowly faltered. That’s how you moved from the B-17 which was famous for staying up after the Luftwaffe blew huge holes in it to the 737 Max, which has a tendency to fall out of the sky on its own.
That was not a coincidence. James McNerny, CEO from 2005-2015, came from the GE executive ranks and imposed GE-style cost cutting at Boeing. The 737 Max design disaster occurred under his watch, but he retired just in time to shift blame onto the new CEO, Dennis Muilenburg.
I did a decent amount of tech consulting work for Boeing during that time. Every corner that could be cut was cut, twice. Complete disaster.
Thanks for the indepth. Engineering firms and manufacturers should not play investment banks.
The US and the West in general is in for a very tough time in the coming months and years. People will find themselves in desperate straights and not know how it came to be. They will blame whomever the demagogues tell them are the evil ones that destroyed their lives. I was married in the inflationary 70s. I knew which evil bastards to blame. But I suppose I might have taken to the streets if I found everyone out of work; myself included. Out of work, hungry people might well be the tender that sets off the fires of… Read more »
[Grammar police = On] “Tender” should probably be “tinder.” Perhaps you actually have excellent grammar but subconsiously didn’t want to reference an App for men wanting to “take a walk on the wild side.” 😀 But it’s a good accidental pun: the out of work could be the tinder (fuel) to spark the fire, and they could also be the tender (maintainer) of the fire once started. [Grammar police = Off] I agree the most with your point that the masses will blame who the media tell them is at fault. This is one of the scary things of social… Read more »
Sounds a lot like what Amazon is doing now . . .
The COO of my old company was a GE alumni. Like most GE guys, he’s super smart and detailed when it comes to improving operations. Like most GE guys, he’s also blind to strategy and customer satisfaction. At some point cutting costs, paying people less, and charging customers more stops working. Looking at how the old place is doing, I’d say they are way past that point.
I’m sitting in front of a GE motor/generator set at this moment wondering who’s going to be able or even want to work on something like this when I hang up my fluke in the near future. I’m guessing a little brown man unfortunately. the other day I needed a part from the shop.they sent it in a UBER. No more truck driver.As far as I can tell a lot of what we’ve been seeing goes back to the 1880s when ((lipshitz)) started to open department stores. People loved the convenience. The cobbler, blacksmith, cooper ,glazer all lost control over… Read more »
GE leveraged its high credit rating to buy all sorts of assets with borrowed money. It turns out a lot of the assets weren’t worth what GE paid for them, assets where the nominal “valuation” was determined by GE’s inflated purchase price. The assets fell in real world value, while the outstanding debt abides. Individuals and governments are doing the same sorts of things.
Vendor financing is a horrible, horrible idea. The incentives are just too perverse. There’s a possibility that GM may go bankrupt again for the same thing.
GE even owns (owned? it’s hard to tell anymore) its own propaganda division, NBC. It reminds me a lot of IBM, which used to make stuff through the 1990s, then sold all that off to foreign companies and now only offers vague “services.” What the lolbertarians and other GOP apologists for what passes for “capitalism” these days don’t realize is that pretty much every American company of a certain size now behaves like Mitt Romney’s Bain Capital: financializing and selling off assets to foreigners and using foreign scab labor to undercut Americans. They all behave like scrappers at auction and… Read more »
There isn’t a way back to an economy of things rather than finance and “information” that doesn’t start from the ground up. Private sector ETF outfits like Blackrock are increasingly replacing the Fed by performing services it is not legally permitted to offer – like picking winners & losers in the marketplace. And their scale is beyond imagining – tens of trillions of dollars in assets effectively under their control while they Talmudically deny owning the underlying assets. Having an ETF firm as the foundation for the American economy is even worse than the Fed. It makes bailouts mandatory and… Read more »
GE was the company that popularized the “six-sigma” management philosophy, which was nothing more than “fire everyone at the bottom end of whatever metric you choose to measure”. This led to the Romneyesque hollowing out of assets and the offshoring of jobs, all dressed up as a Wharton School style MBA dissertation.
Welch was always highly regarded in business circles for his streamlining GE’s overall business segments – of course at the expense of ten of thousands of employees – neutron Jack. He did begin getting the company into the financial services during his tenure, but I always considered Immelt to be the ceo who drove the firm into the ground. GE is pretty much the perfect metaphor for the rise and decline of US manufacturing prowess.
The post-Depression laws began to change in the 1980s. I remember when it was news that Sears (remember them?) was offering mortgages 😀 Later came the repeal of laws restricting insurance and banking to mix. As a result, my State Farm agent (I’ve used all my life) now offers banking and credit cards. I’ve not taken advantage of banking with them (or Sears.) Where was I going with this? Oh yeah, the only thing missing is a new Depression 🙂 The Glass Seagull 🙂 and other Depression era laws were of course meant to reign in the abuses that exacerbated… Read more »
When is greg gonna update us about the virus. C’mon greg, don’t let a crisis go to waste. Bodies are supposed to be piled up on the streets by now.
Clarity matters. GE (like Boeing and other companies) was seduced into a transformation from producer into parasite. And, like a drug dealer that preys on the weak in order to manufacture new addicts, a few nefarious individuals used this corporate seduction in order to enrich themselves on the newly created parasite companies. It only took a few bad actors to accomplish this intentional looting. The good news is that they are few in number and clearly known. It’s the only way to be sure.
What is amazing to me is how simple a thing greed is, but how deeply and thoroughly it can rot a society out. There is no replacement, no complex system of financialization or incentives, that can replace good character and moral uprightness. I try to think of this when i am tempted to do the wrong thing: did all of this start with small personal compromises that just kept snowballing? I mean i know that a lot of this is just the presence of alien people who dont care about anything but themselves, but at the end of the day… Read more »