We’ve pointed out from time to time that the financial services industry has lost sight of its role. While helping companies borrow and raise money, providing investment and saving vehicles and payment services are all useful activities, the cost of financial intermediation is ultimately a tax on commerce. Perversely, some businessmen complain bitterly about how big a role lawyers play in the economy (their real beef is usually tort lawyers), when bankers simultaneously extract much more, yet have also been much more successful in co-opting their customers than lawyers have been. Analysts and financiers not only tell businessmen how to run their affairs, the now-notorious short-termism of American companies says they listen and comply.
But most important, Wall Street no longer serves the interests of broader society.
Now before you say, “Well that is just how markets are,” the markets in which major capital markets firms operate are hardly natural constructs. The modern securities industry grew out of the heavily regulated US equity markets; all the leading firms today either were long-established players or bank aspirants who drew on securities industry know-how. Firms are regulated and subject to licensing requirements. Even the rating agency business has restricted entry and capital requirements. So these were always regulated businesses precisely because financial services was understood to serve public ends. Yet the industry managed to persuade government officials and the public that it could be trusted to operate its businesses responsibly and everyone would benefit from more “innovation”. As we noted in ECONNED:
Institution after institution was bled dry. Yet economists and central bankers applauded the wondrous innovations, seeing increased liquidity and more efficient loan intermedation, ignoring the unhealthy condition of the industry.
The firms that had been silently drained of capital and tied together in shadowy counterparty links teetered, fell, and looked certain to perish. There was one last capital reserve to tap, U.S. taxpayers, to revive the financial system and make the innovators whole. Widespread anger turned into sullen resignation as the public realized its opposition to the looting was futile.
The authorities now claim they will find ways to solve the problems of opacity, leverage, and moral hazard.
But opacity, leverage, and moral hazard are not accidental byproducts of otherwise salutary innovations; they are the direct intent of the innovations. No one at the major capital markets firms was celebrated for creating markets to connect borrowers and savers transparently and with low risk. After all, efficient markets produce minimal profits. They were instead rewarded for making sure no one, the regulators, the press, the community at large, could see and understand what they were doing.
Nearly two years after the worst phase of the crisis the bogus premise of what passes for innovation in banking is largely unchallenged. Entire swathes of the industry that were once thought to live and die on their merits are now government backstopped (“living wills” and resolution authorities are public-placating headfakes, even though some members of the officialdom may be so naive as to believe they will work on globe-spanning megafirms). So both the scale of damage done and the recognition that capital markets activities and payment functions are now government supported means the case for regulating major financial players like utilities is even strong than ever, but instead, we are more or less back to status quo ante.
In the UK, some members of the media are questioning this sorry state of affairs. John Plender notes in the Financial Times:
First, Lord Turner, head of the UK’s Financial Services Authority, put the cat among the pigeons by questioning the social utility of much financial innovation. Then Paul Volcker declared that the only financial innovation that had impressed him over the past 20 years was the automated teller machine. Yet, despite these reservations the world remains remarkably tolerant of anti-social behaviour in the markets and in the wider business environment.
Exhibit A is high-frequency trading. This type of computerised dealing exploits the millisecond gaps between news events and their impact on the markets. With the regulators sitting on their hands, such trading has expanded rapidly to the point where, on some estimates, it accounts for 60-70 per cent of the trading volume in US equities. Much of this volume is conducted by a very small number of companies.
A big reason for concern is that exchanges appear to have joined in an unholy alliance with this small group, which is allowed to see orders before the public. In effect, these people are privileged insiders who are profiting at the expense of those who are innocently saving for retirement and what have you.
Worse, the exchanges, which have a business interest in high volume, encourage co-location whereby traders can route their orders to servers in the same location as the exchanges’ computer matching systems. Reducing geographical distance in this way cuts milliseconds off the time it takes for buy or sell messages to be sent into or back from an exchange.
This is all a form of front-running, even if the trading is not taking place in front of a client order. Proponents argue that anyone can co-locate, but genuine private investors cannot engage in this with an entry price measured in thousands of dollars. The supposed benefit is greater market liquidity. But the resulting market liquidity is far more than is needed for genuine investment. Why should a difference in the milliseconds be relevant to meeting pension liabilities with a 20-, 30- or 40-year duration? And, as the “flash crash” of May 6 showed, the activity can be highly disruptive.
Now that the regulators are taking an interest, they will probably focus on making the playing field more level. Far better would be to recognise that this competitive technological battle reduces social welfare in a similar way to an arms race. The fact that a handful of traders are creaming off big profits at the expense of genuine investors undermines the integrity of the market. A more draconian regulatory response would be appropriate.
Yves here. We haven’t said much about HFT because, in all honesty, as offensive as it is from a fairness and integrity of markets perspective, the damage done by it pales in comparison to the devastation wrought by abuses in the credit markets, where we normally focus. And truth be told, equity investors are a vocal lot, and many commentators had taken up the attack on HFT.
So it is remarkable that a highly visible abuse, one that unlike the bad practices in the credit markets, can be addressed readily, in isolation, without widespread ramifications, still persists. And as Plender points out, the planned remedies look certain to be inadequate.
This says that critics need to keep hammering on the observation that financial services is only a support function to commerce, that when it is too big and profitable, that means it has become parasitic and extractive. The public understands that intuitively; it’s time the media and government officials have the nerve to state the obvious.
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For the links for today, from Bloomberg: “China Wins Higher Rating Than U.S. in First Ranking.”
“Dagong Global Credit Rating Co. rated U.S. government debt AA with a negative outlook, and China AA+ with a stable outlook…” So the Chinese have their own credit rating company; the Europeans won’t be long.
Nice posting Yves. I wish it were so. I am very glad you keep trying to goad these folks into doing the right thing.
Ah yes, the cancer stage of capitalism. Radio therapy, chemo or fully invasive sugery? What to do?
Financialization is the economic phenomenon that’s being described in the post. Wikipedia has a nice overview of it, sans a lot of jargon.
Since it is hard to assume that world leaders do not understand this or at least have advisers that do not, one must conclude that western world leaders are accomplices of the looters and banksters.
Yet this is self defeating: letting the looters take so much out of the normal economy makes ordinary people less happy (an understatement at present for many people) and therefore risk no re-election of aforesaid world leaders.
I must be missing something somewhere because this defies ordinary logic. The only solution is that elections are rigged. Could that be???
The part you fail to consider is that there is no downside for politicians who facilitate looting. If they have been at it a while, they will have a generous government pension to fall back on. But that’s actually small potatoes, most who go down to defeat doing corporations’ bidding can look forward to a highly paid job as a lobbyist, counsultant, senior vice president of whatever, or senior fellow at the center/institute for crony welfare. And if you rate it, there is tons of money to be made via speaking fees.
So when you have an election like the one coming up with many incumbents “retiring” or facing defeat, you have to ask yourself are they taking a step down or a step up.
In the never-ending conflict of individual interest vs. general interest (or what Yves calls “social purpose”), I believe there is an underestimation of just how thoroughly individual interest has triumphed. This is not something that is unique to orthodox economic theory. The sacrificing of group interest on the altar of individual interest has been almost ubiquitous throughout the behavioral and biological “sciences” over the last 40 or 50 years.
In the individual interest vs. general interest debate, there are three types of ideologies to be on the watch out for:
1) Ideologies that claim to promote the general interest and do indeed promote the general interest.
2) Ideologies that claim to promote the general interest but in reality promote individual interest.
3) Ideologies that overtly promote individual interest.
From some of the comments I’ve seen here on Naked Capitalism, there are some (Reinhold Niebuhr dubs them “moral pessimists” or “the children of darkness”) who believe that human beings are not sufficiently intelligent or adaptive to be able to sort out number 1 from numbers 2 & 3. The long sweep of history, however, I would argue belies this assertion.
Good comment for simplifying the dynamic.
But in the long sweep of history no one has ever so thoroughly used the ill gotten gains made in 2 and 3 to co-opt 1 through propaganda and thereby drastically mess with the intelligence of the masses. This post attests to that fact. The leverage in media is like the leverage in flash trading and the steep entry fee favors the status quo. The rich man owns the brunt of the externalities of humanity.
As Yves says, “keep hammering”, but at some point the overwhelming power of the propagandistic voice has to be overcome. That is one of the big nuts to crack and the longer it goes on the more difficult it is to reverse.
The only real hope, the internet, already loaded with co-opted phonies, has to be used far more efficiently.
Deception is the strongest political force on the planet.
You set out the issues very well, but I take exception to the last sentence (as you probably assumed that I fall into the children of darkness category).
First, I’m not sure the “long sweep of history” would ever be terribly relevant (“In the long run, we are all dead…”), and whether any self-correcting mechanism exists doesn’t mean we have to attribute it to human adaptability or resilience when it could be attributable at least partly to outside forces.
Second, and more importantly, as a result of gigantic improvements in communication and transportation, we live in a much more interconnected world than at any other time in history. The “general interest,” now comprising billions of individuals you can get on the phone in five seconds, is a far different beast than before. Also, I’m not going to say that rhetoric has improved on a per capita basis, but *the people who have access to worldwide communication channels* seem far more adept at rhetoric than at any time before, and yes, my experience has led me to believe that a very large group of people now can be fooled all the time. I would think most who have studied rhetoric for any decent period of time would have to concede that even the most absurd propositions can be made to seem incontrovertible (at least temporarily) through very well constructed arguments. One of my math professors once showed us a detailed proof that 3=47, and most of us could not determine the mistake in the proof even though we knew the proposition was absurd.
Re: Reinhold Niebuhr dubs them “moral pessimists” or “the children of darkness”
Or perhaps realists?…
I see no reason to expect that the smartest amoral scumbag (sociopath) in ANY group of people wouldn’t win.
Perhaps the question is why do some societies appear to control their sociopaths “better”. I would suspect that one reason would be the fear of other nations (tribes). A Canadian sociopath leader would still have a “fear” of the US that might make him less likely to sell the entire country down-the-tubes. The US has no such fear as our dumbass peasants have been condition for 50+ years to assume American is the greatest country in the entire universe. And who better to lead a group of peasants – that believe a fantasy – than sociopaths.
Perhaps “the greatest nations” always fall when the peasants believe in the fantasy too much.
I think it is actually simpler than what you suggest. A slogan of the Romans was “We expand or we die”. Slaves were required as fuel for ancient civilizations. In our civilization, conquest to capture slaves demonstrates increasingly diminishing returns (including the Plutocrats eventually).
Abundant energy must be pursued. The thieves and rascals of Washington (or any capitol for that matter) mug populations because it is easier than working hard for a living. It is cyclical human behavior and now we really are interconnected. The behavior is called laziness.
Such leadership is expunged for new aggressors, but these find a way to add longer-lasting value. Being lazy is not God’s work! The natural design is productivity for a long-lasting and mentally sound rewarding life. Once the golden calf is created and there is no money to make it through the desert to the promised land, under utilization creates revolutions be it political or physical. Attempts to divert the condition through war creates a revolutionary effect meaning the lazy in power don’t stay there. I could net it out and say it is simply evolution. We truly will expand or die, but fighting the evolutionary process will simply lead to a far greater tragedy. Yes, the Plutocrats will lose people they love and finally, they will understand.
No different than WWII except this time, many nuclear weapons will be used. How will that radiated global paradise look then? Get busy all of you lazy maggots.
“There was one last capital reserve to tap, U.S. taxpayers, to revive the financial system and make the innovators whole. Widespread anger turned into sullen resignation as the public realized its opposition to the looting was futile.”
In defense of the taxpayers…they overwhelmingly were against TARP…Twice!
Let’s take a look at who comprises ‘the public’ and maybe we can come a bit closer to understanding the ‘public’s sullen resignation’. For simplicity let’s break it down to 2 groups…though there is much overlap.
About 50% of the public is dependent on a government sector job or are recipients of government redistribution of wealth schemes of some sort (everything from SS to food stamps to ag subsidies). If this portion of ‘the public’ were to complain too loudly they would be ‘breaking their own rice bowl’…as the Chinese say.
Then there are the debtors, that huge swath of Americans that are up to their eyeballs in debt either in revolving or non revolving debt. They have allowed themselves to become debt slaves and are now waking up to that reality. Some are angry and some are sheepish and some are a bit of both…and many of this group are in varying states of shock. Eventually most of this group will realize that, because of their eagerness to take on more debt, they are the enablers of the TBTF banks. Eventually most of this group will realize that without their debt contributions the TBTF banks could not have grown into the monstrosities that bought the public’s/debtors representatives.
When viewed from this perspective does anyone believe that more debt (more Fed printing of all duration debt from dollars to notes to bonds) will fix the current US deficits that are growing ever larger? The more debt that is paid down by the private sector (individual citizens), the more debt the public sector (all citizens as taxpayers) is encumbered with by Fed Gov spending. The current Fed Gov spending will be manifest in the form of coming higher taxes and fees by state, local and federal govs. Debt is simply a claim on future earnings. The enormous debts that have been rung up by the US Government could have been avoided at many turning points in the past…but it was not. Bad businesses and financial institutions were not allowed to fail in most cases if they were deemed too big to fail…or, friends of the Fed, Treasury, or whatever administration was in office.
The two groups mentioned above will muddle along, doing little, until one of the folling happen…
US declares soverign default on all or some debt obligations…foreign and/or domestic.
Fed prints enormous sums of dollars (yes, much much more than has already been printed) in an attempt to cause a controlled amount of inflation to reduce US debt in real terms. Note: If the Fed pursues this course they run the risk of destroying the public’s confidence in the currency and causing hyperinflation. Another problem with super printing is that the debt purchasers (US notes and bonds)will demand much higher interest rates on the perceived riskier debt…they will smell inflation in the air.
US finds or invents a reason to start a war because of it’s untenable economic situation.
A Black Swan occurs; ie, some event that none of us anticipate.
Your four options are correct. Everybody is being forced to bet on a roulette (like) game. Black (inflation) or red (deflation).
The ball is spinning ’round n `round… (and there’s that green box too… )
Yves wrote: We’ve pointed out from time to time that the financial services industry has lost sight of its role. While helping companies borrow and raise money, providing investment and saving vehicles and payment services are all useful activities, the cost of financial intermediation is ultimately a tax on commerce.
First, I wholeheartedly concur with Yves’ thesis.
Second, you fail to address the problems that our outsized, predatory ‘financial services’ sector now poses to viable businesses, to business expansion, and to general economic productivity.
Third, you appear to be unaware that by summer 2008, commodities speculation — hidden within the economic sector defined as ‘financial services’ — had destabilized markets. By Sept 2008, the banksters – many of whom had participated speculation through special “financial services vehicles” specifically designed to speculate and leverage – were telling large, mid, and small businesses that the banksters could not provide short term loans for payroll, etc, etc.
In other words, the banksters threatened to shut down commerce unless they got their TARP money.
Why didn’t the banksters have money to lend?
Because they’d leveraged – and lost – one too many speculative bets, so their next option was to tell the Fed, “Bail us out, or we’ll shut down commerce.”
In my view, that is ‘economic hostage taking’.
It is a brazen, desperate threat: do what I want, or I’ll kill your darling.
It is a power-play designed to show who ‘really’ runs the show.
There is no real negotiation: it’s all or nothing.
And the Bush Administration caved.
So it’s worth revisiting what I believe is the thesis of this post: the ‘financial services sector’ has lost sight of its role.
The ‘tax’ it takes off productive businesses has outgrown the usefulness of this sector as it is currently comprised – both for individuals, but also for businesses. The issue of personal credit card debt, which you seem to focus on, is only one piece of a much larger puzzle; it’s the larger economic role of servicing business that makes quite clear the ‘financial services sector’ has lost sight of its role.
Ask yourself: is political extortion (via TARP) an economically productive activity?
I believe that it is deeply antisocial, and therefore dangerous to everyone in a society. It is very economically destabilizing.
Ask yourself: is it the role of ‘financial services’ to construct investment vehicles to leverage, and then speculate about, commodities futures?
When did leverage and speculation become primary features of ‘financial services’?!
Because IMVHO, building complex ‘financial vehicles’ in order to speculate is a very far cry from servicing businesses who need short term loans, long term loans, and other banking services.
Those two activities: speculation vs what might be better termed ‘economic husbandry’ (the traditional servicing business loans) are two extremely different things.
Servicing loans to grow businesses is economically critical.
Speculation and gambling, not so much.
This is not about ‘individuals’ who get in debt.
This is about why one economic sector can hold governments, small businesses, and even Fortune 500 companies over an economic barrel.
What did we get in return?
The topic of how financial services have lost sight of their economic role is extremely important and needs far more attention and discussion.
Yves, I really tip my cap to you for this post.
I hope it generates a similar discussion on other econ blogs and forums, because it seems to me that this is a key issue of the present historical moment.
Thank you.
Re: I believe that it is deeply antisocial, and therefore dangerous to everyone in a society.
Unfortunately, a society run by sociopaths won’t be self correcting. Let’s assume for a moment that the US Party system is actually (and very simply) a sociopath vetting system. The Party vets local sociopaths judging their ability to manipulate the Party dumbasses with the approved stories (lies: ie, “those people”, “global warming”, “Sarah’s gonna git ya”, “peace n justice”, “Freedom n Democracy”, “Eeee-vil-doers”).
The best sociopaths are granted access to the State Party level, and finally the Federal level.
Perhaps the US peasants are truly unable to differentiate between sociopaths and non-sociopaths. As Party campaigns are nothing but marketing campaigns (a political sociopath is interchangeable with a F-150 truck) then how WOULD the average dumbass tell the difference?
I’ve been involved in local and regional government activities from time to time, and although most electeds that I’ve known cover a wide range of talents, motives, ‘smarts’, and effectiveness, for the most part I have missed the sort of caricatures that you describe.
I have huge ‘issues’ myself with some of my electeds.
However, I know others — some Dems, some Republicans — who put enormous time and energy into what they do, and try to work through what can be a tremendously confusing, complex, often distorted system of issues, agencies, and legal processes.
I have my own serious aggravations with individuals that I may personally view as unqualified, or incompetent. But those are at least evened out by some of the highly motivated, conscientious, smart electeds that I know.
Basically, we live in a society that is extremely complex: banking systems, derivatives, budget items, and a myriad of complicated systems are hard to understand and require tremendous knowledge, time, and persistence to suss out.
The idea that ‘anyone can run for office’ is deeply embedded in the American psyche, as is the notion that ‘they’ are ‘all’ criminals.
It’s been my experience that most people, most of the time, are fundamentally decent and want to ‘do the right thing’ because it makes them feel worthwhile. But when systems become extremely complicated, it is easy for even the most well-intentioned, hard-working elected to get taken for a ride by private interests.
And then of course, the lazier, dumber, or more timid electeds are sitting ducks for any clever private interest.
The odds of righting a system seem, to my mind, to rely on educating the greatest number of people. That will enable them to ‘keep the backs’ of the truly valiant electeds, as well as an eye on who gets appointed to judgeships.
Electeds, judges, and the public all need to get clear about the fact that ‘financial services’ has lost sight of its role in the economy. Simply castigating caricatures is not going to solve this problem.
More people grasping what has happened, and talking in sane voices about reasonable responses, strikes me as the better path to pursue. Six months ago, no one that I knew had heard of ‘Abacus’ or ‘Magnetar’, and many were not familiar with CDOs.
Now, most that I talk with seem to grasp that these terms are important, even if only for the implications for their retirement plans.
I have to say, I don’t see this in my local government (which in the distant past I was also involved with).
Local government exists primary to divert public money to developers. When a politician delivers the goods at this level, he’s “promoted” to county and State or Federal levels. It’s a pure services for fees system. The trick – for all politicians – is to have the ability to tell the “same” stories to different sets of dumbasses AND have them all hear the part of their story that already exists in the semi-psychotic brain. Seeing this is truly magic.
Btw, I don’t see being a sociopath as a bad thing. The ability to lie in public, to the public; the ability to support – in public, in the OPEN – conflicting goals; the ability to live in multiple parallel realities is – to me – a person who has reached full maturity and the pinnacle of human evolution. I don’t despise sociopathic behavior, I admire it.
Yves recently had a post requesting greater civility, and more focus on thread topics, among commenters.
In keeping with her request, I’m going to take a ‘pass’ on further discussion on this branch of the main thread; it’s getting too OT (off topic).
“Second, you fail to address the problems that our outsized, predatory ‘financial services’ sector now poses to viable businesses, to business expansion, and to general economic productivity.”
It was my intention to address the problems in the private sector that can be corrected by citizens and by small business owners. If citizens cutail their rampant consumerist activity using plastic we will have progressed a long way toward curtailing TBTF banks and the associated outsized financial services sector. Think grass roots movement because you and I are not going to change the course of GS, the Fed, treasury or US Gov…as the failure to prevent tarp from passing should amply demonstrate to you.
“Third, you appear to be unaware that by summer 2008, commodities speculation — hidden within the economic sector defined as ‘financial services’ – had destabilized markets.”
I went short oil when it was ~ $147 and made a killing…So, no, I was not unaware of what was going on.
“The issue of personal credit card debt, which you seem to focus on, is only one piece of a much larger puzzle”
I am focusing on private sector debt and stated both revolving and non revolving…try rereading my post.
“This is not about ‘individuals’ who get in debt.
This is about why one economic sector can hold governments, small businesses, and even Fortune 500 companies over an economic barrel.
What did we get in return?”
Yes, it is about individuals who get into debt because their debt is what enabled the TBTF to become TBTF. Prior to the ramp up in private sector debt the TARP debacle would never have happened because money center banks were much smaller and could not afford to buy all the politicians.
“What did we get in return”
The opportunity to become homeless and declare bankruptcy, in many cases. Go take a look in the mirror and stop with the ‘I didn’t do anything wrong’ routine. If you personally did not take on more debt than you could reasonable afford, good on ya. The fact remains that the money center banks were enabled by private sector debt and private sector debt began to ramp up about the time credit cards became the norm.
Of course there were/are many bad actors but this country, if it is to reestablish a sustainable economic course, needs to stop enabling the bankers with credit card interest dollars every month. Starve the beast!
I’m not sure I get the whole “social purpose” argument. Surely the only question is whether the state funds an activity and that can be decided without appeal to such a nebulous concept.
Also, the FT article is very weak. “This is all a form of front-running, even if the trading is not taking place in front of a client order.” So it’s not front-running then!
And by the way, the cost of entry to HFT is really pretty low – just a few $K per month. That’s something a small independent professional investor *can* do. Is the argument that the markets shouldn’t permit trading activity that can’t be performed by a mom-and-pop-type investor in a mutual fund? That seems bizarre to say the least.
“I’m not sure I get the whole “social purpose” argument. Surely the only question is whether the state funds an activity and that can be decided without appeal to such a nebulous concept.”
There is nothing ‘nebulous’ about how a financial system should function. Here is a very simple explanation from Wiki that anyone can understand.
‘In finance, the financial system is the system that allows the transfer of money between savers and borrowers.[1] It comprises a set of complex and closely interconnected financial institutions, markets, instruments, services, practices, and transactions.
‘Financial systems are crucial to the allocation of resources in a modern economy. They channel household savings to the corporate sector and allocate investment funds among firms; they allow intertemporal smoothing of consumption by households and expenditures by firms; and they enable households and firms to share risks. These functions are common to the financial systems of most developed economies.’
HFT, government intervention to pick winners and losers, Fed intervention in FX, commodities, securities, treasury debt issues, et al, do nothing to help the main st economy. As the US financial system is misfunctioning right now there is no price discovery that anyone can believe. Without the main st economy there is no reason for for a financial system…Hell, we could do as well with a barter system…at least the financial vampire squid would not get a percentage of all transactions.
” This says that critics need to keep hammering on the observation that financial services is only a support function to commerce, that when it is too big and profitable, that means it has become parasitic and extractive. The public understands that intuitively; it’s time the media and government officials have the nerve to state the obvious.”
Bravo- well said!!! I truly wish the public understood this intuitively.
Shoot- I meant to reply to the main article directly.
“And by the way, the cost of entry to HFT is really pretty low – just a few $K per month. That’s something a small independent professional investor *can* do. Is the argument that the markets shouldn’t permit trading activity that can’t be performed by a mom-and-pop-type investor in a mutual fund? That seems bizarre to say the least.”
Nice to see the Horatio Alger myth being kept alive.
Deception is the strongest political force on the planet.
Such an important post! Keep at it! The message has got to get through to anybody with a brain left…
But the MSM is nowhere close…
Just heard Jim Kramer on the Today Show suggest that recent increased hiring on Wall Street was a GOOD thing!
(I know the Today Show is nonsense but I usually try to catch the first 20 minutes. It’s a great daily indicator for just how far astray the general public has been led… and is willing to go!)
Somehow Mr. Kramer is convinced that feeding the tumor is supposed to be good for the patient. Gee, I wonder why the same ‘experts’ just keep coming back? BOOYAH Indeed!
Silly Bands – they serve no socially useful purpose, they’re rubber so bad for the environment, some child might swallow one and choke on it, they’re rent seeking at 2.99 for a pack of ten…I say ban or regulate them out of existence. HFT and silly bands – bad for America!
Re: The public understands that intuitively; it’s time the media and government officials have the nerve to state the obvious.
I’m not sure the public does understand. Perhaps “the public” you hang-wit is more intelligent than “the public” I hang-wit.
My homey’s still have faith in our hard working financial institutions of this great nation. Most of them are starting to suspect this was all “those people’s” fault, and the government. We really just need to get government out of the way and everything will be fine.
“The public” is large – unfortunately their brains are tiny. AND, their tiny brains are filled with information from “the media” – the same media you want to have “the nerve” to tell the truth. Nope, ain’t gonna happen.
“This says that critics need to keep hammering on the observation that financial services is only a support function to commerce, that when it is too big and profitable, that means it has become parasitic and extractive.”
Can we put this on a bumpersticker somehow so it will seep into American consciousness?
How about:
TBTF = Parasites Killing The Host (PKTH)
And i on the ball, I love your phrase as well.
Good idea about the bumper sticks but unfortunately the word “parasite” would be misinterpreted (from your intended meaning) into “those people” by about 40% of the peasant dumbasses.
The problem with manipulating dumbasses is that you’ve GOT to put yourself INTO their tiny brains and understand the semi-psychotic stories that already exist; AND THEN understand how your own words will be twisted by their brains hard-working bullshit machine. The human brain is simply a bullshit generation machine (stories) and rationalization machine (duplicity).
So, you’ve got the right idea (a simplistic story the dumbasses can remember) but your words are already used. Keep trying…
OK. We’ll save that one for the “more informed” bumpersticker consumer.
How about this:
What has Wall Street done for YOU lately?
or
Wall Street Took My Money, my 401K, my House, and Now they Want My Guns.
Yves, Thank you for highlighting the failures of our Executive Branch and Congress on financial reform. We stand with Senator Feingold, as the sole Democrat, who will vote no on the financial reform bill, it is an insult to the American people.
This morning Bloomberg posted an article(http://www.bloomberg.com/news/2010-07-12/peter-lynch-s-lesson-leads-top-rated-manager-ellison-back-into-bank-stocks.html) on why an equity analyst is recommending a few of the large derivative banks (in addition to smaller banks) and condones the behaviors whereby these large banks soon will reap profits again by getting around the “new” financial regulations, the exact behaviors that destroyed our economy.
As you point out, our economy will not return to where it was as long as we have equity analysts and media not criticing the actions of Wall Street, which do nothing to build a sustainable economy. I apologize for the length of this comment, but we need the journalists and equity analysts to shame Wall Street. Here is a copy of the email I sent to the Bloomberg reporter this morning:
Dear Mr. Stein:
In 1988, when US Bank’s CEO Dennis Evans, speculated with the bank’s balance sheet with government bonds and the direction of interest rates, U.S. Bank realized a paper loss of over $600 million, negligible by today’s standards. However, U.S. Bank’s Board of Directors soon asked Mr. Evans to move on, they took the losses on the bonds in the portfolio and the then Salomon Brothers’ Research Analyst put a sell on US Bank (USB) for not acting in the community’s best interest. The entire story is at http://www.thederivaitveproject.com, The Simple Story, given to the FCIC, in a live FCIC Blog entry February 27, 2010.
Here is an excerpt from The Simple Story at http://www.thederivativeproject.com:
Minneapolis Star Tribune – October 1988
“FBS set off a small bomb in the financial community when it revealed its $8 billion portfolio of U. S. Treasury bonds and other securities was $640 million in the red.
“A number of Wall Street’s most prestigious firms have turned against the bank, some with a vengeance. For example, in a burst of gunfire rare in the normally placid Wall Street commentary, Thomas Hanley of Salomon Brothers wrote:
“… We are disturbed by the company’s inability or unwillingness to adequately manage the credit and interest rate risks inherent in the banking industry…Because management has clearly demonstrated that it is immune to the creation of shareholder value, we believe that investors should dispose of their current positions in First Bank System.”
“Some people wonder whether First Bank is in the business of making loans or managing a leveraged bond portfolio,” said one Minneapolis Money Manager, “It raises the question of what’s best for the community.”
Mr. Davis, CEO of US Bank, is now Chair of the Financial Services Roundtable(http://www.fsround.org/), and represented the large banks to the press, when President Obama called them to the White House. US Bank escaped the most recent financial crisis without incident. The Board of US Bank learned its lesson, the East Coast research analysts would not shame this MInnesota bank ever again. The Board placed limits on proprietary trading, continued to responsibly manage counter party credit risk and continued trading currencies and interest rates in the OTC inter-bank market, but also acted in the community’s best interest.
Yes, some of us in the heart land cling to the values that had built our economy to what it was 10 years ago. Why do you think unemployment is close to 10% and we are moving into a deflationary decade? The short term trading profits of the major derivative trading banks do not make a sustainable economy, pure and simple. For Mr. Ellison to ignore this fact, shows the limitation of today’s equity analysts and to urge investment in a major bank because they will soon determine “how to get around the new financial regs” is unconscionable.
The American investor has grown tired of the hollow words and lack of ethics of CNBC and most equity analysts. The retirement investor will soon be moving their 401k’s to mutual funds, like Appleseed, that prohibit investments in these banks that are not acting in the community’s best interest and building “sustainable value.”
It is not time to buy the top five derivative banks. It is time to rebuild our economy with sustainable value, not speculative trading income from credit default swaps, whose revenues reached an all-time high in the first quarter of 2010, based on the recent U.S. government OCC report, also available at The Derivative Project. For Mr. Ellison, to highlight that the top banks’ revenues will return by “working around the rules” and condoning this behavior, is why there is “something rotten in Denmark.” Our society, our economy, will never return to a preeminent world position with this attitude.
There is a new world out there. It is time Bloomberg caught up with it. The equity analysts that see beyond the Wall Street hype and urge investors to invest in commercial banks that are acting in the community’s best interest, are the enlightened analysts that understand which banks to invest in to restore our economy on a sustainable basis and to have lasting equity positions that may be held for the long-term. The reporters that seek out the stories outside the usual suspect Wall Street analysts, by showing a balance, are doing our society a critical service. Giving “airtime” to equity analysts endorsing derivative trading banks “getting around the rules” as a reason to buy a bank stock is quite simply unconscionable and why our economy and society is struggling.
This is not Peter Lynch’s lesson, he urged one to invest in what they understand and to invest in strong, sustainable companies for the long-term. I am certain Mr. Lynch would not think favorably of this unethical strategy of going for the short-terrm trading profits, by breaking all the rules.
Sincerely,
Susan Seltzer
http://www.thederivativeproject.com
susanseltzer@thederivativeproject.com
Thanks for the excellent post. The Derivative Project website is excellent. Good luck.
” the now-notorious short-termism of American companies”
That has me pondering Moore’s law, and wondering about the technological disruptions that impact infrastructure build-out and thus job creation and GDP-kinda stuff. Our society … no, our World is run by technology and we seem to all be attempting to adapt to the concept that there is logic in this assumption. Our banking industry obviously can’t keep up and thus we have just seen a global systemic meltdown, because the only way banks could explode profits was through the distortion of derivative-backed fraud.
It would be interesting to apply Moore’s law to the Whip & Buggy Industry or perhaps even something more modern like radio stations, or blogs, i.e., does the expansion of a cycle always continue infinitely — or do most cycles decay at some point. Cycles by nature are not one-way parabolic spikes, just as with, the growth of financial innovations.
I propose that we as a society are doomed to be more and more subservient to the whims of technology, so please, strap-on your hat and plunge deep into the place where only robots will survive.
See: The law is named after Intel co-founder Gordon E. Moore, who described the trend in his 1965 paper.[7][8][9] The paper noted that number of components in integrated circuits had doubled every year from the invention of the integrated circuit in 1958 until 1965 and predicted that the trend would continue “for at least ten years”
BP sucks!
It’s really quite funny how some people suddenly don’t understand “social purpose” or rather the lack of one. Yet they have probably seen a thousand films and TV shows where the mob skimmed off profits from a business, jacked up prices in garbage hauling or a fish market, or otherwise engaged in predatory, non-productive activities that not only weakened businesses but worked against the interests of investors and consumers alike. They no doubt immediately knew this was bad, not to mention criminal, but when we talk about the same kinds of things going on in financial markets, increasing the costs of business, skimming, distortion, if not destruction, of price discovery, rigging the system, suddenly as I said, they can’t see it. What makes this even more laughable is that they can’t see it nearly 3 years into the current economic and financial crisis.
You forgot the influence of Gordon Gekko.
I knew as soon as I heard him say, “Greed is Good” that we were headed for big trouble. I had no idea it would last 25 years.
Agreed. But the myth of Free-Enterprise has many stories (threads).
When talking with the peasants I know, one of the most powerful stories is that “business success” in America requires (some form of) “goodness”. This means that in the peasant’s brain (his bullshit story machine) the most successful of all – those at the top – must be “the most good”. This is also why (I think) most “conservative” Christian sects in America worship business success along side their deity, and their deity’s favorite county (all represent equal amounts of “goodness”).
Your average semi-psychotic peasant dumbass is going to have a VERY VERY hard time reconciling that the winners of the “Free Enterprise Game” – in the greatest country in the entire universe – are the worst elements of that society.
This is also related to why Americans hate unions so much. Your average American peasants knows that the “low-life losers” in unions don’t deserve to win, and he despises them. This is normal peasant dumbass self-loathing. This is why Americans peasants despise each other MORE than their nobility (as the nobility are the “honest hard-working bidness leaders of this great and glorious nation” in the semi-psychotic tiny brains of the dumbasses).
“This is also related to why Americans hate unions so much. Your average American peasants knows that the “low-life losers” in unions don’t deserve to win, and he despises them. This is normal peasant dumbass self-loathing. This is why Americans peasants despise each other MORE than their nobility (as the nobility are the “honest hard-working bidness leaders of this great and glorious nation” in the semi-psychotic tiny brains of the dumbasses).
Who are you working for? Donald Rumsfeld? Jaime Dimon? What’s your social purpose? To relate and spew the hate? To demonize and denigrate?
There is a vast difference between someone who has been propagandized to a viewpoint and someone who is a; “dumbass peasant”, or with, “tiny brains”, or, “semi-psychotic peasant dumbass”, or “those people”, or “peasant dumbasses”, etc.
Unions are defensive reactionary structures to overwhelming size and control that seeks to exploit the union members. Many scamericans love them and understand that they are a force for net social good.
If the average scamerican hates or loathes themselves, or one another, or unions, it is because some deviously deceptive sell out scum bag is working overtime to fill their heads with the kind of poisonous bullshit you spew out on this thread.
Deception is the strongest political force on the planet.
Re: Who are you working for? Donald Rumsfeld? Jaime Dimon?
Bah, small potatoes. Minor minions.
I’m working for the big guy himself.
So what about the relationship between the human brain and human consciousness?
Is there more to consciousness(our internal private thoughts)then our attempts to generate our individual identities and sense of self?
Could a new political order be established on a different understanding of human consciousness–based on the assumption that at the foundation of all politics is a moral idea?
Re: Could a new political order be established on a different understanding of human consciousness–based on the assumption that at the foundation of all politics is a moral idea?
There is no “new political order” possible. There can only be one; the collective sum of all the human consciousness(es) on the planet; which is already established. So, based on the last 7000 years of human written history, the prognosis for “change” isn’t that great. Humans (currently) are (and have been) scumbags, and worship the smart amoral scumbag in the group (which pretty much sums-up human history).
I do think, however, you are onto something with “all politics is a moral idea”. In a society without a deity that punishes greed, it’s very tough to control the sociopaths. America’s favorite deity only appears to worry about “the fornicating harlots” and “the proper placement of the male 5th appendage” tho. Perhaps he needs to be reeducated about greed?
Say, what ever happened to Al Capone?
You might consider the ideas of Ken Wilber. His book “A Brief History of Everything” is a good place to start.
Yes and a new paradigm might get the world a 200 years of relative peace. Few would argue the benefit of peaceful technology marvels if malinvestment could always be thwarted.
Mankinds progress doesn’t move in a straight line. There is no perfect formula. Perhaps if we insert our intelligence itself into energy at that point we no longer have the need to hoard. Not all intent or result of supply side economics are bad. We will have to keep what works and at least with databases minimize the cost of the grand learning curve. The foundation needs completion and rushing it for growth is the reckless side of our human nature. After all, we only get 80 or so years here.
There are good reasons for the US economy becoming more finance-centric. After the cold-war the global economy was largely organized around Germany, Japan and the US; the rich countries. Over the last 15-20 years, new financial centers are springing up around the world in places like Sao Paulo and Shanghai. New wealth brings demand for investments and financial products. These create new, more intricate capital flows, and more opportunties for profitable financial intermediation. I have seen people make the claim that financial services are parasitic simply because they have grown as a percentage of the us economy. This argument simply shows that Americans are not paying attention to what happens outside of United States. The American financial system is thriving outside the United States, while the rest of the economy is being left behind because it is uncompetitive on the world stage.
1. Your comment simply ignores the key argument of this post, that what you call more “intricate” capital flows are not the result of activities that are socially beneficial, names, more efficient financial intermediation, but are instead the result of efforts to increase opacity and leverage and sift risk onto unsuspecting counterparties
2. This process has also witnessed larger financial bubbles and crashes, culminating in the global financial crisis of 2007-2008. That crisis ALONE destroyed value (via reduced economic growth) of 1-5 times global GDP. Anthony Haldane of the Bank of England therefore concludes that financial services as now practiced is value destroying.
To add insult to injury, the major dealer firms paid executives and employees record bonuses in 2009 after massive rescues, making clear their priorities, namely, continued rent extraction.