By Sell on News, a macro equities analyst. Originally posted at MacroBusiness.
Europe, Japan and America are printing money at an extraordinary rate. It has reduced the cost of debt to negligible levels. Usually this is explained with reference to what is happening in the conventional economy, but I suspect there may be another explanation. The systemic effects of the bizarre financial system that we have created, which is based on leverage. That leverage, which is thought of as debt, is not really what we mean by debt.
One of the features of the explosion of derivatives in the last 15 years, the rise of “meta money”, is that it was achieved through the creation of massive amounts of leverage. When Long Term Capital Management nearly destroyed the world financial system in 1998, it was done through a highly leveraged play on the rouble. LTCM was brought undone when Russia defaulted on its bonds.
Nothing was learned, and the creation of this meta money was encouraged rather than stopped. Derivatives are now more than twice the capital stock of the world. Oh what fools these mortals be.
The reason so much leverage is used is that the investment plays can be quite small, based on fairly incremental changes in price. But those small changes can be amplified using huge levels of debt/leverage.
Leverage is technically debt, but it is very different from, for want of a better phrase, “normal” forms of debt. The shortest type of debt in the money markets is the overnight cash rate, a period of 24 hours. That is an aeon in the current financial markets. Leverage games, especially in the high frequency trading arena, can occur in micro-seconds, perhaps even nano-seconds.
This means that the interest rate on the debt is rendered fairly meaningless. If the debt has, say, a 7% interest rate, that is the return over a year. If you incur that debt for only a few minutes, or even a day, the interest costs are so negligible as to be unimportant. All that matters is what happens to the price of the asset that is the subject of the investment play.
There is thus a crucial difference between conventional debt, such as a mortgage on a house that takes decades to pay off, and leverage in the meta money markets. Conventional debt is subject to the tyranny of compound interest. Meta money leverage is not. They are very different types of transactions.
It occurs to me that the evaporation of interest rates across the major developed economies, which represents the disappearance of the cost of capital, may be the consequence of the “meta money” leverage becoming so dominant. This new form of debt-like transaction in the meta money markets, in which interest rates are largely redundant, is having an effect on what is happening to interest rates in the more customary forms of debt.
The situation is certainly very strange, even bizarre. The threat in the developed world, especially in Japan, seems to be deflation. Central banks are printing money with furious intensity, which seems to imply a shortage of money.
Yet when we look at the world of meta money, there is definitely no shortage of capital, indeed quite the opposite. Derivatives are twice the capital stock of the world. Admittedly this is not “money” in the conventional way, it is gambles that net out to much smaller amounts. But it is a type of transaction, and money in the end is only transactions.
They are meant to be parallel universes, “real” markets at one level and “meta money” markets at another. But as we saw in 2008 when the meta money nearly destroyed the US banking system, they are not parallel, they intersect. Meta money is increasingly affecting what is happening in the more familiar capital markets: bonds, bank debt, equities. That is the price of the recklessness of allowing these crazy markets to emerge.
Banking crises are not new, but usually it is bankers working within government stipulated rules to exploit everyone else, and that exploitation has wreaked damage on the overall system.
This time it is different. Governments have given over the rule making to private actors. Unsurprisingly, those private actors have invented a myriad of rules to benefit themselves. And equally unsurprisingly that is creating a chaotic system that governments are struggling to manage in any way. I am reminded of Keynes’s comment:
“Capitalism is the astounding belief that the most wickedest of men will do the most wickedest of things for the greatest good of everyone.”
I am also reminded of Goya’s famous image of Saturn devouring his children, a massive painting depicting self destruction. Capitalism, I suspect, is doing its best to follow communism into the grave yard. Its strength was that it was not an ideology, just a practice – markets, after all, have been around for thousands of years. But the capitalist ideology of “financial deregulation” whose fruits are now so evident, the worship of markets as the solution to everything, is threatening the system itself.
Lambert here: The Goya painting mentioned by the author:
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Outstanding article, except for the conclusion.
Analysis is rock solid.
The ideological worship of “markets” is, in fact threatening their value as a mechanism for optimal sorting of goods and services throughout our society.
That is not an incorrect conclusion. Today’s excessively reverent worship of “markets” extends beyond the idea of “free enterprise” itself. Now, altogether too many scam artists in suits are also revered – beyond reason.
They invoke the “free markets!” mantra……. and blam! The audience’s common sense and savvy go out the window. Because they react to that invocation in an emotional, worshipful manner.
They go out the window because there is no such thing as a free market other than as something you can create on a computer model–it’s an ideal not a fact. All markets must have a political system that sustains it. So from the start we are talking fantasy. The question is who controls the market? Like all “economic” issues it is a political matter.
special “k”,
how is the conclusion inaccurate? Please show your work…? (real life examples, and documentation of)
Here again, is conclusion:
Remember that Rand herself postulated equal access and knowledge of markets, as her basis of market balance…specific, real economic world examples given in work show secrecy and insider knowledge is more prevalent than open-equal access to all.
High frequency trading also includes “front running”, which is ostensibly illegal; though not enforced..?
sorry, conclusion appears to have vanished-here again, is conclusion (hopefully):
(“But the capitalist ideology of “financial deregulation” whose fruits are now so evident, the worship of markets as the solution to everything, is threatening the system itself.”)
I guess we’d have full employment if we policed every single rule we instituted.
Thank you for the ‘special k’.
I’ve lived in communism in Albania. Born in 1972 in Tirana. Then experienced wild capitalism in Albania after the fall of communism in 1990.
Then experienced socialism in Canada since 1999 until know.
I have experienced every system one can experience.
According to my experience, there is no such a thing as a good system.
Leninism, Neoliberal Capitalism, and Social Democracy hardly constitute “every system”.
Communism 1972-1990 in Tirana, Albania
– Good community life, but we ran out of food.
– All eastern europe + soviet union ran out of food.
– Few people were working
Wild Capitalism 1990-1999 in Tirana, Albania
– Everybody on its own. Friendships were lost gradually
– However, one learns life skills
Socialism 1999 – now in Toronto, Canada
– Boring
– More and more people want to work for the government
– I see a slide back to totalitarianism
– Propaganda is coming back like in communism.
I have no conclusions. I enjoy life day by day.
Canada is socialist? Only for the benefit of its depraved capitalists, like every other Western “democracy,” where, like corporations, dollars vote, not people. The term “kleptocracy” is about right. Canada is collective in that the majority altruistically votes for politicians that benefit the minority at the expense of the majority. An oilgarchy, like most petro states. And like the Republicans in the US, the Conservative Party consists solely of sadistic knaves and fools who get their jollies from the suffering of others. And, even when belittled by the whole world, won’t leave office. Like conservatives everywhere, they have to be forced from public office.
Everything is ‘compared to what’.
I do not live in the world of absolutism.
Compared to USA, Canada is socialist.
Apart from heatlh care and mat leave, Canada is essentially the same as the US in terms of socialism. US government probably intereferes in the system more than Canada in many areas… that probably explains why Americans hate theirs and Candians revere it. LOL!
For example, the average Cdn retiree receives maybe 500$ from CPP at age 65. If they take it at 60, it’s cut by 30%. PLus they get a nice 7200$ annually starting at age 65. I’m pretty sure SS is much more generous. Canada’s retirement system is ultra cheap!
When real estate craters in Canada, people are going to finally see the wealth divide that has built up over the last 2-3 decades.
However, house prices are still up in the stratosphere so people here Canada think that those living in 1 million $ houses with BMWs levered to their eyeballs are richer than the next door neigbor with a paid off house and 10-year old Camry.
Medical Care (it is not health care) is about 40% of Ontario’s budget as far as I remember.
I have my OHIP card which is health insurance for health services.
In the US, they pretend to have it private while it is highly government controlled… they have huge government intervention but to make it look private they pass the incentives through the corporations. Then they have more government intervention for those not working so they create medicare, medicaid and medic-whatever else. It’s convoluted socialism if you ask me. Everything to appease the people and not make it look like they are commies.
I am convinced that one of the major reasons the US is in dire straits is because they are running socialist programs while trying to make it appear like capitalism. This has led to all kinds of contortions.
Moneta
Hm, interesting perspective as far as USA.
Excellent comments. We are now in a post-everything world. No ideology or system based on ideology makes any sense. What we have, ideologically, is utter confusion. On the left people are confused and sense it, on the right they are too stupid to know they are confused thus following Ayn Rand and Jesus Christ seem to be the same thing. Maybe I should be harsher and just call it completely psychotic.
As far as systems go, our own system is just right for where we are now in the U.S. at least. We are in a very flexible position. Anybody reasonably sane realizes that government in this country doesn’t work even if you think it should. People also are increasingly aware that maybe greed is not so good and it could lead to a selfish society and do we want that for our children? All our institutions, if you look closely enough are impossibly corrupt and immune to reform because they’ve been gamed by one or another constituency across the political spectrum.
What’s left? Personal emergent networks. With the growth of social media and the now identified need for connection, belongingness, meaning that all humans need and are hard-wired to want that will open up something new that may not be clear yet. In a way it is a version of classical anarchy which is based on an optimistic view of humanity. The negative view many of us have is of a humanity perverted by oligarchs and fed by fear and artificial desires.
Thank you, sir
Kris:
Thanks for sharing your experiences.
It seems like people, particularly powerful groups, can corrupt any system.
In communism, man uses man.
In capitalism, it is the opposite.
Don Levit
LOL, quite funny.
I hear a lot of people talking theoretically. It’s ok as long as one is open to discussion.
Personally, I read stuff only from people who have experienced something.
So, Yves Smith has worked in banking, worked with unions, hence she’s got experience, not theorizing.
I disagree with what she wants to achieve, but hey, free will is free will.
This website is a fantastic bonafide left wing non violent one.
” . . . [Capitalism’s] strength was that it was not an ideology, just a practice . . .” _NOT_ an ideology? That is, I regret to say, a completely ahistorical assertion. Tell that to the late medieval commentators watching their society get its face eaten of by nascent modern captialism.
Of _course_ capitalism was, and is, an ideology. It was an ideology FIRST, and only gradullay developed a methodology. Capitalism is an ideology about private property; about gain without labor (if not without risk); about token wealth in supremacy to any personal bond or social ordering role; about contracts rather than physical looting or sale; about the equality of liquid capital rather than the exclusivity of societal standing. Capitalism is an ideology about so much else as well.
It took centuries—first in China, then in the Levant, finally in Europe, though significantly independently in each case—for modern capitalism to develop the methods to effectively materialize this ideology, in part because the liquid assets required to make capitalism work were scant. In China, food production was the modality which above all drove the emergence of liquid capitalism. In Europe, it was slave trafficking, the principal medium of high value exchange there for millennia prior. It is a very modern assertion, part of the blindness of modernity, to consider an abstract notion such as ‘the market’ as a human behavior _autonomous_ of an ideology: this is the great self-deception of our time. If one actually reads Graeber’s recent text, as just one counter-instance, it is glaringly evident that debt is an ideology, a set of behaviors individuals and societies assume and accept as valid quite independently of any substantive mechanisms or structures _external to behavior and belief_ which compel that validity.
One cannot even began to _conceive_ modern society without understanding that capitalism is an ideology, an idea of how to behave which is accepted as right and just and society-defining. We are imprisoned by gossamer filaments of Spider-Mammon’s meta-money just at present exactly because capitalism is such a profoundly believed ideology that most in the West would rather lose everything they posses including family and freedom than shake the glamour of ‘capital’ from their eyes for as much as an hour in the course of their lives. *Sheesh*
If anyone would like to know more about this, I can’t recommend “The Invention of Capitalism” by Michael Perelman
http://exiledonline.com/recovered-economic-history-everyone-but-an-idiot-knows-that-the-lower-classes-must-be-kept-poor-or-they-will-never-be-industrious/ There’s an excerpt here
Seems interesting, although I wouldn’t say that capitalism was “invented” at the time of the industrial revolution, but centuries before.
Here’s a great summmary quote:
Well, when you put it like that…
So many sad examples. Native Hawaiians preferred a fish-and-poi lifestyle to plantation life.
Richard Kline says:
Yep. My jaw dropped upon reading that zinger too. In theory, capitalism has always been about small government. In practice, however, it has always been about big government that favors capital. The Grand Canyon could easily fit between the talk and the walk of capitalism, which makes it a first class ideology, and of the most contrived and manipulative sort.
I really like SoN’s observation that derivatives are merely a type of debt (or money), the same as T-bills, currency or bank loans.
Something conspicuously missing from his post, however, is any mention of the fact that with great leverage also comes great risk, and that this risk has systematically been layed off on the public.
…which is reason for “Senate”-2 reps from each state-“representation” for smallest population equivalent to “representation” for largest…
It’s both.
Ideology feeds Practice. Practice relies on ideology to keep going.
This is particularly true now. We are truly in a world based on fiction. We had the “information” age, now we are in the fictional age.
So from, agreed on SoN’s remarks on meta-debt as of interest. I shaped some comments on that below without getting far on the issue.
I think the author may have simply made a poor word choice.
The important part of the author’s conclusion, I thought, was the contrast between capitalism and ‘financial deregulation’. The argument is essentially that the financial industry is destroying capitalism.
In capitalism ‘creative destruction’ is a good thing that advances society as new technology is discovered and implemented. The author sees the unregulated use of ‘financial technology’ as something that has become vile and self-serving: like Saturn eating his children.
Yep. Since when is an ideology not a practice?
As a further remark, conservatives and aristocrats *hated* emergent capitalism exactly because it destroyed the social institutions which embedded their own power; liberals of course loved capitalism exactly for that reason: _this_ was the ideological struggle which defined Europe 900-1700, for example. The peasantry didn’t have an ideology separate from magical Christianity until a wage work force was developed _by capitalists_ to produce to engendered demand. It is symptomatic of the complete supremacy of liberal political economy at present that the ideology of the liberal middle can be proclaimed as an ‘environmental fact’ independent of ideological support, as in the usage of this post. Gift exchange, hunter-gatherer environmentally adapted sufficiency, kin-based communalism: these are all socio-economic alternatives, all presently existing still, _without ‘the marked’ nor the ideology of capitalism generally_ which that ideology cannot even recognize as alternatives lived by many; that is practically definitional of the function of an ideology
This would be a god time for everyone to read Karl Polanyi’s classic The Great Transformation (1944). It’s all there.
http://en.wikipedia.org/wiki/The_Great_Transformation_%28book%29
It’s all there—except for the most important 85% on society and capital he left out, writing his text to exclude the terms of debate of the left and the working class. Look, friend, Polanyi’s text is meaningful, and worth the read; he’s not a dope. But what he excludes is more important than what he includes. Schumpeter and Braudel said better and in context anything he got around to, for two broadly centrist social modelers with an economic grounding. Throw in Kropatkin, Gramsci, Wallerstein, and Harvey just to begin to get some parallax on the issues involved. Then spend five years of study. _No one_ has a complete take on anything, the issues are too large . . . .
“The situation is certainly very strange, even bizarre.”
I’m intrigued by that characterization. To find something strange or bizarre suggests that one has a predetermined point of reference/experience and the world being observed operates differently. It speaks of the observer, not the observed.
It actually seems pretty simple what has been happening. Gamblers made some bets (derivatives, shadow banking, whatever). The bets went bad (like they do). Normally, the story would end there – the perpetrators bankrupt and discredited and perhaps imprisoned.
But if the government is your friend, you can get them to tell scary campfire ghost stories about bankruptcy being terrible horrible deflation. Instead of bankruptcy, we should use the public commons to make them whole. Fire up the printing presses, full speed ahead!
washunate,
WHILE blaming-scapegoating the VICTIMS of-state and local governments, unions, teachers, schools, social security, medicare, immigrants, etc, etc…all of whom had nothing to do with Wall $treet economic disaster…
The wage decline in the private sector and the actions of our Central Bank over the last 24 years has more to do with the stresses you mention than the “Wall $treet economic disaster”. If anything, the economic bubble postponed this eventuality by creating a false sense of revenue while the true economic conditions were deteriorating. State and Local governments need to acknowledge what has been promise cannot be sustained or delivered. Their ability to extract tax money from people whose wages are falling and from corporations who are globalizing is diminishing rapidly. You can only paper over this situation with debt for so long.
“wave”, blithely at the victims…insinuating they “have more to do” with economic disaster-pure purient “free market should regulate itself” manichean
historical revisionism…
designed, lest I miss my guess, to continue to blame those who had nothing, nothing to do with Wall $treet economic disaster…
We all know who perpetrated economic disaster, and how they did so-can follow the $$$$ to conclusive definition…
which Wave, will avoid accomplishing, as he can’t follow the $$$$ to blame VICTIMS…
For the last decade, I have been telling average Joes up here in Canada to not gorge on debt and not get house horny but to no avail. They laugh at me and pity my “pessimism”.
It takes 2 to tango.
I think TheWave has a good point that wage stagnation predates the particular Wall Street mess of the last few years.
I would also echo Moneta that it takes two to tango. What has really gone wrong in our system is the systematic, low-key corruption and careerism across our society. If local governments and unions and media and higher education and doctors and the legal system and religious leaders and so forth had stood their ground as credible professionals, much of what has happened would not have been possible. But one by one, people made choices to protect their little piece of the pie rather than protect the credibility of the larger system. The human social mechanism of shunning psychopaths requires sacrifice to work – you have to actually ostracize them, from ancient times of beheadings and hangings to our more modern notions about due process and incarceration.
Credibility is now so compromised across the board that one set of actors can’t hold another set accountable, because they themselves are also complicit. It’s a classic game theory problem – ‘selling out’ only works when nobody else does it.
If we’re being honest in meta discussion, I think this is the true challenge of our system. The problem isn’t the predatory elite themselves or the modern GOP. The problem is the lack of opposition to them.
A lot of educated and comfortable liberals have benefited from their attachment to systems that produce little actual value, from bloated universities to bloated hospital chains to legal systems that prosecute the powerless rather than the powerful to tax policies that disproportionately benefit groups that are wealthier (like housing tax credits and the deductibility of employer health insurance and real estate development tax credits). There is no broad liberal outrage against drones or torture or the drug war or sanctions or an out of control military budget or sticking hands down people’s pants at airports. Nobody has been willing to rock the boat, or even defend others who are willing to take the heat. The response to the Occupy protests perhaps showed this most vividly as Democratic mayors in Democratic cities left absolutely no wiggle room to blame this on Republicans or rural America or the Christian Right or any of that nonsense.
So, with those types of avenues blocked, change will come from more fundamental turmoil in society as the number of Americans on the outside looking in starts dwarfing those with government supported compensation and wealth.
..don’t play the anti-people’s representative government game of blaming government for Wall $treet economic disaster…certainly government DEregulation is implicit…and fact government has set itself up (largely by the anti-government crowd, when THEY “govern”) to be bought and sold..to the degree now DLC has instituted same process within democratic political party..
bushbama has absolutely avoided transparency, oversight, accountability FOR Wall $treet economic disaster…which does NOT mean government is responsible for Wall $treet economic disaster…
But it is government’s fault. This fobbing off of responsibility onto others is exactly why we’re in this predicament.
Democrats have mastered the art of blaming Somebody Else when it is precisely their enabling of the system that is key to its continuation.
@washunate: I love your comments above. Thank you!
“Gamblers made some bets (derivatives, shadow banking, whatever). The bets went bad (like they do).”
I wouldn’t call them gamblers. It cannot be gambling when there is no downside potential.
It took time for the bets to go bad. From origination to default (and through default), the they profited handsomely. By passing the risk off to third parties, it created incentives to not measure risk. For them, personally, there was only upside. What happened to their firm or investors in these products afterwards was immaterial.
Very interesting point. I would agree if one could know the outcome in advance. But I don’t think bailouts were guaranteed; likely, but I would argue, not certain. Just a decade ago, George Bush couldn’t save his personal friend at Enron, and he couldn’t get another personal friend appointed to the Supreme Court. I would also offer a semantic perspective that one can be engaging in gambling even if one is not aware of the risk.
Of course, upon personal reflection, this is where my own perspective was not nearly cynical enough early on. I found it strange and bizarre how Democrats reacted after the 2000 election, because I was still operating under the (now obviously false) premise that there was a Democratic wing of the Democratic Party.
I have since been disabused of that notion and find our leadership neither strange nor surprising. They have been doing exactly as expected for some time now as we have moved from general theft through wage stagnation to more blatant transfer of wealth from the public commons to private interests.
The interesting question, while we’re in meta mode, is what happens next, after the window of bailouts and cover ups and so forth shuts and we start running into much broader mathematical and social difficulties caused by debt and inequality. My magic eight ball is hazier in that arena.
I wasn’t referring to the bailouts. The people who profited couldn’t care if their firm was bailed out or not (and went bankrupt). They extracted millions in bonuses long before then and that is all that mattered. They were set for life and so were their future generations. That was their upside, and it was guaranteed before it all imploded.
As for a crystal ball, I don’t know. I believe Europe, in particular Ireland and Greece, are experiments in austerity. Exactly how far can you push a population before it cracks. For all the talk of austerity failing and the need for debt forgiveness, I don’t buy it. The system is purposefully lowering living standards in advanced countries and an ant-austerity movement or debt jubilee would go against that.
Okay, I fundamentally disagree with that premise. The notion that a fraudulent conveyance is protected by the system is one of the key mechanisms of the bailout.
Governments seize assets all the time.
And they can always be taxed, too.
“Governments seize assets all the time.”
Very true, it didn’t have to be the way it turned out and they had no way of knowing in advance the degree in which they would be prosecuted. I agree with your point.
wave..
you appear unable to follow the $$$$ to “City of London”, Wall $treet parallel universe, whereby 6 U.S. investment banks have stashed over 80% of $600 trillion in “derivatives”, which they own 95% of…
a valid treatise is Shaxton’s, “Treasure Islands”…to comprehend how an out of control financial sector has reversed history of Pecora Commission regulation, which held Wall $treet fraudsters in check for over 50 years…
and it WAS FRAUD-check your William K Black-investigator, S & L scandal, who set up prosecution jailing over 1000 such fraudsters…
then check your Satyajit Das, “Extreme Money”, who directly defines what-how Wall $treet fraudsters accomplished such…
wave can keep his training wheels on while peddling around here…
http://demonocracy.info/infographics/usa/derivatives/bank_exposure.html
I fail to see your point.
Last time I saw figures, the debt market was 110 trillion and the derivatives market was 1.2 quadrillion. I see the growth in these markets as a reflection of our trade agreements. Both have increased in size since Dodd-Frank.
We chose to enact NAFTA and other trade agreements, and watched labor intensive industries get slaughtered and moved to low cost geographies. The financial services industry was deregulated to expand its size and global reach at about the same time. Coincidence? Capitalists found that selling debt, derivatives, futures, options, or whatever financial vehicle was simply more profitable than physically making something.
Was there fraud? Tons. No one complained when tax revenues exploded as a result of that growth.
But now that growth cannot be sustained unless the Central banks around the world step in and prop up those markets. The point is the debt and derivative markets, and the financial services industry for that matter, need to shrink relative to the size of the rest of the economy.
But there is nothing to replace it, we’ve hollowed out whole industries in this country with our trade agreements. The US is by far the worlds leading manufacturer but if you look behind the numbers creating financial service products is considered “manufacturing” and these “products” are our #1 export. What is going to replace it? Government jobs? Green energy jobs?
In order to shrink these markets our economy has to deflate which the Central bank is fighting. A deflation will bring the consequences of our trade agreements to the forefront, which is a good thing. It will also cause asset values to drop and State and Local government revenues to fall.
We are in an age that is demonstrably different (thus strange) and considering what we know about human beings from a century and half of psychology, sociology and neuro-science I think our social and individual arrangements could be described very well as “bizarre.”
So Macrobusiness, notwithstanding my separate remarks just above, I find interesting your remarks about the transformative potentials of interest free meta-debt. Your distinction between meta-debt and real debt is further something to ponder; the two quanta do not seem to behave in quite the same manner, yes.
Just amongst many considerations to flow from this, interest rate actions by central bankers will have very little traction on the behavior of meta-debt. Or for another, secondary consideration, the supply of matter upon which to base derivatives matters far more than what that matter is. Hmmmm.
Richard said: (“the supply of matter upon which to base derivatives matters far more than what that matter is. Hmmmm.”)
hmmnnnn, indeed….and Satyajit Das exposes (“Extreme Money”) all manner of devices used…
so…in a finite economy
$100 currency, 100 goods, =$1/good
$110 currency, 100 goods, =$1.10/good or 10% inflation
but
$1 currency + $99 debt, 100 goods = $1/good
$2 currency + $98 debt, 100 goods =…$1/good
doubled the currency but no inflation IF the debt level is decreased OR if the extra currency is used to manage the same debt level such that
$2 current + $99 debt – $1 interest/derivatives, 100 goods = $1/good
Debt becomes another ‘good’ in the market, more and more needed to act as a leverage to chase return.
You could print 10, 20 even 30 times more currency and not see inflation, only debt levels climbing.
Is that what the leverage is, debt as a good?
Well … gee … there are no free markets. Moral hazard doesn’t exist.
We don’t have a regulation problem … we have an enforcement problem.
Capitalism has a feedback loop. What we have today are markets controlled by sociopaths and national security nuts.
AA,
you might think of “national security nuts”, et al, as “distraction”…
still, no transparency, oversight, accountability….but how many newspapers did you read thorough, investigative reporting on building 7 in, following 911, 2001?
How many concerning 911, 1973?
Cogent comment @microbiz~
Ronin8317 June 1, 2013 at 3:36 pm
The financial market is the mechanism that allows the West to obtain goods and resources from the rest of the world. One upon a time, to exploit a country requires invasion and enslaving the population. With global finance, you only have to show them numbers on a computer screen!! Don’t look at the “numbers”. Instead, look at the flow of goods and services, and you’ll get a better picture of how the world functions today.
In general, investment is a ‘black box’ with an unknown content to be delivered in the future. What is inside may be very valuable, or it may be rubbish, but you won’t know until the time to open it. The role of the financial market is to find and sell those ‘black boxes’ to investors. As long as the total value inside those ‘black boxes’ exceed the losses incurred, society in general will benefit.
After a while, the financial market got so good at selling, they ran out of investments opportunities. So the first ‘meta-money’ is invented (CDS). They created a casino so people can bet on ‘what is in the box’. To prevent themselves from ‘losing their shirt’, each bet is matched by a counter-bet to limit the losses. The insanity occur when hedgefunds decide to borrow vast amount of money (at 30:1 leverage) to gamble, because their mathematics model says they can win. LCTM is a case where a hedge fund run by Nobel Prize winning economists borrowed a lot of money to gamble, and lost. Still, when one side loses, the ‘counterparty’ would win, so the net effect is zero. You have to question the sanity of banks who are willing to lend at 30:1 ratio though.
The bigger problem occur after 2000. As gambling creates winner and losers, the financial market contorted a scheme where they will always win. They will place the bet, then put the ‘betting slips’ into a ‘black box’ (CDO) and call it an ‘investments’. Betting is never an investment, and it’s the rating agency’s role to prevent this, but all 3 major global agency got bought off, so the ‘betting slips’ are assigned a ‘AAA’ ratings. This allowed the financial market to create artificial ‘AAA CDO’ on demand, even when the original ‘investment’ consist of lending money to people with no income, job or asset (NINJA loans). When those loan went sour, all the “AAA rated CDO” imploded, which caused investors to lose faith in all ‘black boxes’. The financial market won, the general public lost.
An investment should creates wealth instead of shifting wealth between parties. Gambling shifts money from one party to another, so it’s not an investment. Buying/selling a house is similar (as oppose to building a house, which does create value). When it gets to the point where buying/selling “meta-money” generates a better return than producing goods and services, the system is no longer functioning. -snip
Skippy… alternatively: Sesame Street: Kermit And Cookie Monster And The Mystery Box
http://www.youtube.com/watch?v=shbgRyColvE
Call it the Paradox of Schroedinger’s Quid. Put a pound note (or equivalent) inside a black box. When you open the box, it is either wealth or ashes. There is no way to be certain which will result. Opening the box influences the outcome, but you can’t tell which way. The Uncertainty Finagle, that’s what it is, hey!
On a differnt cant, investment _never_ ‘creates’ wealth; investment facilitates design and production meeting demand. Wealth is focused thereby, and investment takes it’s cut off the top. A transaction which shifts wealth between parties isn’t investment: it is speculation. There is nothing new in this, speculation is ancient. Security speculation has a history already in excess of 300 years. More like 400. The capitalist system has, up until now, managed to function in spite of speculation. What is different about contemporary speculation . . . well _one_ of the things different about contemporary speculation is its sheer scale. Speculation is being manipulated [yes, that word] in valuations in excess of the entire real economy. In excess of the entire capital base. Now, the speculation putatively nets out, so nothing like that volume of value stands to roll over, change hands, or be transmogrified bricks of gold-plutonium amalagam. Unless those bricks are ABSs which are effectively of such substance, tying up ‘wealth’ into financially radioactive chunks able to kill the holding party. Hmmm, interesting experiment in political economy we’ve been embarked upon, strapped to a gurney in the trading theater while a few universal masters sew our alimentary canal to a gale force Hoover, and flip on the switch . . . .
“Call it the Paradox of Schroedinger’s Quid. Put a pound note (or equivalent) inside a black box. When you open the box, it is either wealth or ashes. There is no way to be certain which will result.”
more like one of Piero Manzoni’s 90 tins of “Artist Shit” (1961). It may be “Comceptual” Art but it’s obvious what it really is.
But to many it doesn’t matter: the Greed to believe is too strong.
CDO’s can be a device for hiding risk. But the bigger problem was more fundamental.
Underwriting standards fell dramatically because Bank’s didn’t retain any risk of the mortgages that they underwrote.
This fact is what makes the Sub-prime debacle so maddening. The failure was not in some arcane Wall Street product but in highly-regulated basic banking and there were plenty of warnings.
…the “failure” was-is, in “derivatives”, which were utilized AS THEY ARE UNregulated…yet again, Wall $treet banks fomented “derivatives”, against “products” they created, and (certain parties) knowing full well they were toxic,
realized they could “bet” against their own created products…which were used prior to leverage-borrow against, to drive-manipulate markets all over world…
They used derivatives to take advantage of the failure of regulators to regulate.
We need to redefine “investment” I think. Of course you’re right in spirit but the current term also includes derivatives, futures, index stocks etc. etc. What we are missing is the notion that we live in society and business entities ought to exist with the proviso that they help society not just accumulate wealth and power for oligarchs.
Skippy…even better to “bet” thousands of times on the same house “burning”;
then assure it does so…
A thought provoking article indeed.
I could see a high frequency trading system that could go billions in debt for a second or two, just to get the transaction volume that much higher.
Why buy only a million of something you are only going to hold for a short period, when you can leverage up and buy several millions. the leverage then acts as a straight up profit multiplier.
digi_owl says:
Or straight up loss multiplier?
The trick is to make it where when the dice comes up craps, the public picks up the loss.
The banks and hedge funds have been amazingly successful at achieving this end. The billions they have spent on buying politicians and university professors have paid off many fold.
“could see” has already been perpetrated…
I think Lambert is on to something about the high frequency of loan “turnover” and the low interest rates.
Who cares if the pawn shop charges 150% annual interest, if you pay it off in a week?
What I am wondering is…
Whatever happened to principal? Did it “roll over” “and play dead?”
Don Levit
Capitalism in the USA was handled by a frame work of Regulation, Collateral and Bankruptcy court. What has been going on in the US since trickle down and bail outs was implemented is not Capitalism. Excessive leverage produces real profits and losses and when they fail they get a bail out “Corzine”. True Capitalism comes with accountability for losses with out that it is not Capitalism.
“True Capitalism,” however, is like Erewhon. It is nowhere.
What really gets me is when some of these people come on here and call this mess Capitalism, it is like they are trying to brain wash us into thinking the on going problem is Capitalism when it’s not. Now don’t get me wrong a lot of people lost a lot of wealth in 2006 but that is the way it works in a capitalist system.
If capitalism was allowed to play out risk takers would have been folded out of the system and a new wave of entrepreneurs would have come out in time. That is where the problem is, they don’t want to see a new wave of people come up the ladder while they have to get rid of their little mansions and move into a 1970 ranch style track home if they were lucky. Our biggest problem in the US is damn near all of the people in charge were invested in Wall St. and they are betraying us all God and Country.
Well again, you’re just whistling Dixie.
“True capitalism” never existed, and it never will. It was never anything but a Never-never Land conjured up to dupe the proles. And this is so for a very simple reason: economic power is all too easily converted into political power.
From Mexico:
Will someone please define capitalism before we start arguing about about?
The biggest issue with today’s global economic system is debt based currency issuance. This is what skews the “fruits” of capitalism so disproportionately. It literally turns “money” into a god.
debt based currency issuance (fractional reserve banking) also compels us to seek economic growth any ANY cost since the entire global banking system will collapse with increasing currency supply.
This problem was resolved by Clifford H. Douglas in his “Social Credit” ideas.
see more at:
http://aquinums-razor.blogspot.com/2013/02/the-banking-system-and-economic-growth.html
mansooor h. khan
From Mexico; If you could find some of the bankers and Wall st investors who were alive during the depression I think they would beg to differ with you. Your slap shot comment Never was is BS.
@ Hal Roberts
You truly do live in a make-believe world.
Here’s a little history lesson for those interested in living in the real world:
Here’s a more detailed description of the RFC under Roosevelt:
Yep. I think one of the important pillars of the propaganda has been to try to bury market-based alternatives. If the arena of debate can be narrowed to central planning ideas, then the authoritarians have already won – they’ve made it an ideological belief battle rather than an evidence-based analysis of what works.
The key battle is surrendering individual rights. Once that’s accomplished, the liberal part of the authoritarianism can be gutted over time.
The key part about capitalism is that it’s not magical – it’s not a belief in the infallibility of anything, private or governmental. It’s just a belief that the individual is the basic building block of society – every person matters; no one may be thrown under the bus for the ‘greater good’ or ‘their own good’. Sometimes individuals function well with little government oversight, in other areas, more government is beneficial. The specific market failures are what should drive that discussion, not broad dismissal of markets in general.
From Mejico has a point, as usual-even Rand’s “free market should regulate itself” dogma is completely ideological…never was. It relies upon fantasy ALL can actuate complete information in transparent “market”, which never was…is reason anti-trust exists…now never applied…
Libertarians advance “free market” theory, with no consideration of access realities…
washunate says:
So all that talk about an “invisible hand” that miraculously produces a rational distribution of goods and services isn’t magical? You coulda fooled me.
We never got capitalism or communism as we got government intervention in both.
I agree Moneta. What we got was a bunch of Centrist (Elitist ) gone wild, feathering their bed with what ever it takes to get what they want.
Hal,
simple answer-get all political contribution out of “the people’s representative government”…we all know this is the answer-Canada did so 5 years ago…but of course fundamentalists will not agree this is the problem…as they need maintain corporate influence…and so theirs is simply more anti-“people’s representative government” hogwash…
German treasury secretary, asked how Germany could advance solar power in 2 years, what they had forecast to take 10 years, said simply, “We have publicly financed elections….” (no corporate influence)
Problem in the USA is Those Corporations are owned by Stock holders ,for the most part baby boomer’s which also have the controlling vote and control of most of the leadership positions. As far as they are concerned whats good for Corporations is good for them now that they are in their retirement years looking for income.
Rates are low because there is not differentiation of good and bad debt. Bailouts have priced out the risks.
If investment bankers and other speculators had their own skin in the game, we would not be in this predicament.
Capitalism is just another form of control. Those with power against those without. Those with power preventing those without from getting power.
Call it the pharaohs, the roman empire, king Arthur, etc. etc. it’s all the same.
I forgot the final important piece, which defines it. It’s slavery. Financially enslavement by those with power
Ep3 says:
Exactly. It’s all about power and control, but with a novel twist: making it appear as if it’s not about power and control.
In capitalism necessity replaces the whip. But as labor quickly learned in the late 18th and early 19th centuries, necessity is a far more effecte slave master than the whip ever was.
Hmmm,
You guys are pretty depressing!
So Is there no practical/viable/implementable/doable better way forward?
Are we truly screwed? What keeps us wanting to live from one day to the next? hunger? pain? What keeps us pro-creating? are having kids just accidents?
Why then are humans so creative (art, science, engineering, literature, etc.)?
Mansoor H. Khan
Mansoor,
your contributions here are wonderful…I love your website on $$$$…
but you are already avowed religious “follower”…your questions border on “meaning” of life…
As I have prior, I would admonish that you have no more “meaning” in life than any other species on planet, with whom we all share genetic code…
you are aware, I assume of dolphins throwing themselves into fishing nets, to reduce anxiety of their children, not yet sophisticated enough to avoid nets…?
I think we all know what this means…
nonclassical,
There is dual purpose/intention to my contributions here (dual intentions are allowed in Islam). I want to make this world a better place (thus my ideas on reforming the economic system to be more just and sane) but also to bring you the good news that a perfect place (heaven) exists beyond death!
Mansoor H. Khan
I think you are ready for some serious contemplation, seriously.
It seems like whatever system we can think of, they all eventually fail if…
God is taken out of the picture.
In His stead, is substituted infinite money, infinite promises, too good to be true proposals, and a group of people who want God-like powers and control.
As a psychological tool, the proper use of “subservience” to God, keeps us honest, humble, and on the level.
Shalom,
Don Levit
The TINA mind is a wonder to behold.
It’s either feudalism or capitalism. There Is No Alternative!
“Capitalism: because employees are cheaper than slaves”
I just remembered this bumper sticker image from a post (iirc) by Lambert not long ago. Should be on all our cars/bikes/wagons/carts.
Eugen Weber’s ‘the Western Tradition’ series on PBS, a fascinating history of the changes in western society over the millenia, is not only a good antidote to Niall Ferguson’s facile bs, it gives excellent perspective on how the ruling classes got that way, and windows into the change from exploiting the populace with a horse and armor (knights and the kings that gave them legitimacy) to doing so via markets; episodes such as the one on the Feudal order are especially apt.
The series is available on TV in a kind of perpetuity, and for sale on dvd’s (which I should get so I don’t have to rely on the whim of my affiliate’s schedule) or for viewing online, for free:
http://www.learner.org/resources/series58.html
After the financial crisis and the reactions to it by various governments I came to the conclusion, without really understanding it, that capitalism is dead and we now live a post-capitalist society. I tentatively called it a “fictional” system–where everything is not how it seems. All the language of capitalism is there but the reality is utterly different and everyone on all sides of the political spectrum act as if the conditions of the past few centuries was unchanged.
We live in illusions–much of our time is spent living in fantasies, i.e., entertainments of various kinds. Doesn’t that tell us something? We get together and if we listen to music it is recorded music–not the music we could be making–I’m not including the art of the DJ who mixes recorder music and helps us savor it in new ways–that is real art.
When I look at our cultural and political discourse it is based on fiction. The mainstream narratives are all bullsh!t there’s some truth here and there but the narrative is, from the assumptions to the “facts” just fiction. When they said Assad would fall at any moment for the past two years–that wasn’t true but that is what intel operatives told the press who uncritically pass on anything the CIA tells them as coming from Mt. Sinai, for example.
Banger,
read your history of last 50 years-try “Killing Hope”, by William Blum, and “Confessions of an Economic Hit Man”, by Perkins, and Klein’s, “The Shock Doctrine-rise of disaster capitalism”…this has been with “us” for periods defined..but prior, it didn’t affect OUR lives…it exploited OTHERS…capitalism is
little different than imperialism…it must exploit free, or cheap “resources”…now
those “resources” constitute our own children-people….
I have read history–my only problem is that people today don’t admit the truth even to themselves. The gangsters acted like gangsters not PR people.
banger says:
After the financial crisis?
Well, you’re getting there.
The reality is that capitalism was never anything but a fairytale created by the ruling class to scam the little people.
Kevin Phillips gives us the lowdown on capitalism in Wealth and Democracy: A Political History of the American Rich. What we find is a 237-year-long history of lavish government subsidies for the politically well-connected.
If one prefers the same history lesson from the other side of the political aisle, there’s this from Noam Chomsky:
http://www.youtube.com/watch?v=b1J9ybfRWSk&feature=player_detailpage#t=1645s
Well, I certainly knew capitalism has always been that way–I remembered doing papers on some of that. But I factored that in–but capitalism worked because it furthered in some strange way human development and I think Marx agreed. But that era is over over–we are moving into a non-ideological era of networking and emergent rather than deterministic systems–this is a slow process.
You are correct, and I stand corrected.
Capitalism is an ideology, just like Christianity, that worked, until it didn’t. It informed a social organization and a social order that existed in its time and its place.
Nietzsche probably said it first, but David Sloan Wilson also came to a similar conclusion:
Found the Nietzsche stuff:
Mr Smith’s Invisible Hand has been picking my pocket for years.
yessss
Free markets?! Do you forget that the banks depend on massive government privileges such as a legal tender of last resort and government deposit insurance?
Common stock is an ethical form of private money that requires no borrowing (much less usury), no reserves and no government privileges.
But why “share” when the current system of usury for stolen purchasing power has worked so well?
To create a bulwark against Capitalism, we would have to stop buying all the goods that create capital for the Capitalists. That would include computers, ipads, banks, credit cards, the stock market, and all the brand names that you see on TV (all car, hygienic products, etc.), in fact, everything that we have begun to treat as indispensible to our happiness and comfort. Yes, THAT is the illusion and the fantasy that we live in and that is the fantasy that will eventually either be forcibly taken away or discarded voluntarity.
Let the corporations and banks have as much money as they want and let the rest of us learn how to live without much money except for food, clothing and shelter. That is what will happen if the inequality continues along present lines. We can choose to turn our backs on Capitalism or we can let Capitalism create the world IT wants.
At present, of course, the crisis has not been of our choosing but we are being forced to live with austerity and that will probably continue.
Learn to go into the woods and look there for the only things that are precious and worth saving–our environment and all the creatures that inhabit it, including ourselves.
I very much appreciate the thought the author has put into this piece and the very insightful comments by others, especially about the now dominant values in our society. “Sell on News” has given us much to think about in terms of manufactured systemic risk and the nature of the system itself.
A minor point is that while the volume of systemic leverage is staggering, I disagree with the premise that interest rates are completely irrelevant in high frequency trading or derivatives speculation due to the short time duration of the underlying trades. Many of the speculative derivatives bets themselves are either explicitly or indirectly about the direction interest rates will take over some time period. Further, with respect to high frequency trading, transaction profit margins are generally tiny (absent an engineered “Flash Crash” or “Spike”) and those margins are constantly being eroded by financially and IT-sophisticated speculators who often have the implicit backing of the public purse. In this regard, it is similar to the high turnover/low profit margin model in retailing where new market entrants are constantly pressuring margins of pre-established players. To make the levels of return their investors desire requires that HFTs maintain an ongoing presence in the market over time. That to some extent subjects them to the law of compound interest IMO.
I also disagree with the author’s premise that these transactions are themselves “Money”. IMO money is not a transaction. Rather, without dwelling on the specific basis for a particular form of money (whether the money should be debt-based, asset-based, or have no basis at all other than government issuance and being required for payment of taxes, etc.), it is my view that money is a medium of exchange to facilitate transactions, not the transaction itself. To give you an idea of my level of sophistication about all this, though, I think about this in the context of buying groceries.
I feel that what the author terms “Meta-Money” are “Meta-risk-transfer/speculation” vehicles, not money, although the payment stream or settlement amount under the terms of these instruments are denominated in money. (And ultimately, as the shareholders and employees of LTCM found in 1998 and many others also found in 2008, risk equals truth when the sea of illusion “banger” mentioned is parted, money is required to “settle up”, and linkages are found severely wanting. Perhaps that is one of the key reasons behind QE and the creation of ~$2 trillion in Excess Reserves at the Fed? Is the Fed today’s RFC described above by “from Mexico”?)
Again, thank you for a thought-provoking post.
“Further, with respect to high frequency trading, transaction profit margins are generally tiny (absent an engineered “Flash Crash” or “Spike”) … To make the levels of return their investors desire requires that HFTs maintain an ongoing presence in the market over time. That to some extent subjects them to the law of compound interest IMO.”
I think this is an important point. If you are performing massive numbers of these transactions over an extended period of time then you aren’t avoiding the cost of money over the long run, are you? Its the flip side of the profit you are making in that you are dicing it up into a massive number of seemingly insignificant individual transactions.
b>Leverage Versus Debt
Sounds like the theme is $Power versus the Lack thereof, as “Leverage” clearly sniffs of “Power”.
99.999999999999% of humanity, did not live their lives for money or power, as the end all be all, they were forced to make money so they and their loved ones did not live in agony.
How about a post about human beings versus the Vampire$ who now hold $way over all, the demented vampire$ who assign stunningly demeaning price tags, to their fellow humans?
Diane,
Kubler-Ross is a difficult traverse in this time and place. I feel this young man was transcendent and an inspiration: http://www.youtube.com/watch?v=sDC97j6lfyc&feature=youtu.be
I’m so sorry, I initially missed your kind post Chauncy, I’m just getting back to reading responses to June 3rd posts. I either never knew, or have ‘cancer fog’/THIS CURRENT LIFE brain burped on Kubler/Ross, but I feel your tenderness.
thank you dear, you glow with what is so very special about human beings, all mammals, in fact: they actually know how to nurture and they understand the need for it.
(Dear Chauncy,
jeez the ‘time flies’ (Judy Collins, Nina Simone put her own fine touch on that one: who knows where the time goes), I meant, June 2nd. Yes that was an effort to leave my, directly above post, showing longer, so you might see it, Chauncy. ;o) )
I would also add, humans will risk their lives to save another they don’t even know, they do it every day, every hour, every minute, every second. …It is something quite profound and special … they come alive to fullest extent, when nurturing another. …It is not only self centered, never has been.
People do EVERYTHING to get something for nothing, ALWAYS have, ALWAYS will.
Capitalism is the astounding belief that the most wickedest of men will do the most wickedest of things for the greatest good of everyone.
It’s worse than that. It is the astounding belief that the most wicked of men will do the most wicked of things for their own benefit, but that the greatest good of everyone will miraculously emerge from this orgy of self-interest.