Back-to-basics investing

As a trustee of the Los Angeles City Employees' Retirement System, every week I receive materials in the mail from money mangers imploring me to consider investing in their strategy for generating high returns for our $10-billion pension fund. One of the most fascinating -- and revealing -- set of marketing materials comes from a company that lists the following options for investing our fund's money: credit default swaps, merger arbitrage strategies, collateralized debt obligations, interest rate contracts. You get the picture. Or perhaps, like most Americans not involved in the arcane "science" of finance, you don't get the picture.

It's unfortunate that it takes a financial crisis for Americans to divert their attention from what kinds of glasses Alaska Gov. Sarah Palin wears to issues that really matter, but a reevaluation of priorities may be the only upside to a meltdown that the news media is now desperately trying to explain.

In the so-called old economy, investors looked at the health of a company, the skills of management, potential market opportunities and the quality of the products produced. If, for instance, Harley-Davidson motorcycles looked as if it were producing high-quality bikes, investing in new engineering and training skilled workers, then that company could be a solid investment. Your investment was a wager, of course -- like all stock investments -- but nonetheless based on some modicum of analysis and solid research. If Harley-Davidson sold more motorbikes, then profits were made, investment was plowed back into the company and more jobs were created. Americans understand that basic logic of capitalism.

But try explaining a credit default swap -- the financial instruments now collapsing -- to your neighbor. Here is how one popular website defines the strategy: "A credit default swap is a credit derivative contract between two counterparties, whereby the 'buyer' or 'fixed rate payer' pays periodic payments to the 'seller' or 'floating rate payer' in exchange for the right to a payoff if there is a default or 'credit event' in respect of a third party or 'reference entity.' " At what point in this elaborate series of maneuvers is the economy enhanced and American workers' standard of living increased?

It is easy to parody the language quoted above. And Karl Marx did so in his mid-19th century writings by referring to various paper transactions as "fictitious capital." In our "postmodern" economic system, money makes money through speculation without the arduous process of actually producing anything.