Wall Street Isn’t Worth It

You might want to provide a link. Current it’s easily found on the front pafe., but that might not last…

Kudos for the piece. All sounds reasonable to the point of obviousness, but I don’t think I’ve ever seen it put down this clear, this direct.

“the expansion of the financial sector has made the majority of people worse off”

OMG you are literally insane.

Fundamental theorems of welfare economics.

End of discussion.

Frankly, the issue isn’t whether or not the banks should be smaller, more socially focused. The issue is that their business model as it exists today is simply unsustainable. Witness 2008 crash. Witness the extraordinary welfare programs set up by nations throughout the world to “rescue” the sector from collapse, from itself.

I’m sure you’ve all seen the #AskJPM debacle on twitter. If not, here’s a peek: http://nyti.ms/1bEXDGY

Another JPM story covered in the NY Times is about their work “expanding their influence in China” – by paying off relatives of those in power: http://nyti.ms/17tAapK

What the financial sector is doing is abhorrently corrupt – and yet they seem to ride the surf unscathed and over-bonused. Who’s been arrested for the flagrant mortgage fraud that led up to the crash? Financial sector offers a despicable business model, unless you’re an Ivy League grad eager for the big bucks…

(And please, let’s not ignore the Ivy League’s role in preparing these MBAs for the high-life on Wall Street.)

I know what you mean about Twitter not being ideal, but my experience of financial debates with me in them in CT comments is substantially worse, so I’ll try to do a storify or something to rearrange our discussion into some sort of logical order.

Other than to say that whoever “Ben” is at #4, if you were in any position to lecture John Quiggin on the fundamental theorems of welfare economics, you would know why it would be a bad idea to lecture John Quiggin on the fundamental theorems of welfare economics. So thanks for ending your part of the discussion.

A thirty-year experiment with financial liberalization has proved, beyond any reasonable doubt, that the growth of Wall Street has come at the expense of society as a whole, and that the earnings it generates are not justified by a contribution to social value. The Left needs to recognize that fact and embrace rhetoric and policies that reflect it.

Which part of “the Left” hasn’t recognized that fact nor embraced anti-Finance, anti-neoliberal rhetoric? I didn’t liberalize Finance or deregulate Wall Street, and the people who did aren’t “the Left”, aren’t listening to you, and likely never will.

The politics of this is about allying with the existing “Left” to attack, without mercy or kindness, the center. Which to your credit, by posting at Jacobin, you appear to have accepted.

How does this work? Whatever Warren or Obama or Dodd or Krugman or Delong or the centre-left in Europe wants or says will help is utterly unacceptable and a sellout to Wall Street. You stake a position left of center, and you move left when the center does.

As one who considers the expansion of the financial sector to have been disastrous, do you have anything like proof of that assertion? At this point I have nothing to throw at skeptics that will work. It simply becomes my assertion versus their ideology.

That’s a really great piece, and extremely helpful for this non-economist. Thanks.

(Surely Ben was being facetious? “OMG”?)

“As one who considers the expansion of the financial sector to have been disastrous, do you have anything like proof of that assertion? At this point I have nothing to throw at skeptics that will work. It simply becomes my assertion versus their ideology.”

Omega Centuri – explain to me how the crash of 2008 and the subsequent bailout does not indicate disastrous expansion of the financial sector.

A sector that requires trillions of dollars in support is extremely ill. (TARP was just a drop in the bucket of what banks got to help them through the recession.) Ask any businessman how a “healthy” company in a “healthy” sector must receive such drastic assistance from the federal government in order to survive – in order for the global economy not to collapse entirely. It is simply not possible to be healthy and require such welfare from the US government.

Except bob mcmanus @12 that this is not the position of the mainstream left at all. Warren, Krugman, et. al. may want to regulate The Street (and The City) to limit its depredations, but neither is proposing to raze it back to useful size. Obama comes from the same DLC mold as the Clintons and fundamentally believes those institutions to be useful and productive allies. What JQ is talking about is born from old-school, labor progressivism.

That may be left of the current center, but that goal post has been moved rightward for the past 35 years, taking the median wage and household net worth with it.

ZM: JQ was talking about Ben’s comment I imagine (@4), which others have also commented on.

You have, I think, made a strong pragmatic, perhaps technocratic, case against the current system, and for a more regulated model. But how do we get from here to there?

One problem, I think, is that we do not seem to have party platforms that support the day-in day-out work of governance. We need better stories. The old union movement had ideas like solidarity, struggle, and so on. Capitalism has, to this day, its Horatio Alger stories. Steve Jobs! Bill Gates! Even fascism had—has—the folk, the empire, the greatness of our people, anti-terrorism, and so on. But what stirring speeches can you make about banking regulation? Or for that matter routine trash pickups, building roads, and the like? “Make no little plans…” But little plans, and many of them, are exactly what we need.

Governments the world over are derived from associations of the wealthy and powerful. All attempted alternatives have so far failed. Given that, we somehow need to be able to find competent and compassionate leaders and rulers and put them in charge and our current governmental and property forms seem to be failing the task.

Two specific points on the article:
1. I think Mitt Romney belongs on the list of destroyers. He made his fortune dismantling US industry and sending it to China.
2. Exchange rates and, indeed, all large-scale markets, do not seem to have equilibria. Thus a need for governance.

All those I’lls were meant to be ills – autocorrect!

“Make no little plans…” But little plans, and many of them, are exactly what we need.”

If you are going to denounce town planners as well, at the very least you could share with us your favourites. For myself I am rather fond of Howard and Olmsted, I may think of some others given time.

For yourself?

Separating useless financial institutions from the useful ones and letting them fail still seems dangerous. Even if a financial institution is engaged in utterly useless frivolities, it still contains money and if money suddenly ceases to exist, then that is a shock to the economy all the same. If the money is still available to be spent, then losing the money causes a drop in spending.

ZM@29: You seem unacquainted with the basics of fascism. If he had used ‘volk’ you would be more sympathetic?

TheRaven@26: You have correctly stated the problem, that humans are moved by stories not hard facts. The story of some friend’s friend’s Canadian cousin coming to the states for surgery trumps the hard data of lifespan, infant mortality, and per-capita expense. So let’s write the new story, something grounded in the American mythology of self-made bootstraps.

Thoughts without organization: money has to go to productive industry not get hoovered up by middle men; finance is a middle man; real americans build tangible things not 15 syllable financial instruments. Mitt Romney is clearly the poster child, we can contrast him against engineers, researchers, people that start small companies which actually build things and extend lives. We can contrast William Boeing with James McNerney, perhaps? Just some ideas.

One thing I’m not sure on, is the ‘bank bashing’ meant to primarily be a political tactic to rejuvenate the left? Or is it meant to have results in rolling back (for want of a better term) the financial sector?
If the second, I’m wondering about this line:

“The real transformation has been in corporate and international finance ”

I guess what I’m wondering is how do you actually roll back the financial sector, in any meaningful way, if (one of ) the main factors driving its growth has been international finance?
And by extension how do you create a manageable financial system domestically, and enable growth/access to capital in developing countries? (Or is there really any link between the two)
In other words, I’m not sure what the alternative is (beyond relatively minor regulatory changes)

I really wish the Labour Party (UK) would take your advice. In the particular circumstances of he UK, it seems to me that going on the offensive against the financial sector is necessary if it is to neutralise the Tory propaganda which claims that Labour left the country in a (studiedly ill-defined) mess, leaving the Cons have to ‘deal with the deficit’.

What is needed is to put Labour’s responsibility in proper perspective: a failure to rein in financial speculators (as here: http://www.theguardian.com/politics/2011/sep/26/ed-balls-sorry-labour-failures but without the implied sop to deficit hawks). Then proposing serious action against banksters, which will put the Cons on the back foot and highlight the fact that they themselves were and are utterly committed to deregulation. If that can be carried through then the Cons’ constant references to Labour ‘having got us into this mess’, mumble deficit, can be to some extent neutralised – yes we did, but it’s a Banker Mess, not a Deficit Mess.

Meanwhile Cameron has announced that, as some of us thought obvious since before the election, he wants to cut back or privatise public services as an end in itself: http://www.theguardian.com/politics/2013/nov/11/david-cameron-policy-shift-leaner-efficient-state – and Labour should be shouting about this and pointing out that this explains why the Cons have been cutting ‘too far and too fast’ as Lab’s rather mealy-mouthed protests would put it.

The third prong of this attack should then really be the rather more uphill struggle of trying to point out that the exact size of the deficit was never that important, still less urgent, an issue. I’d favour some sort of ritual sacking of Liam Byrne, explicitly for bringing the party into disrepute with his “I’m afraid there is no money” note, but it’s too late for that.

(Veering wildly O/T now but I should have thought Labour should be trying to publicise the fact that the Cons appear to be being pushed around by the big 6 energy companies, who are demanding that ‘green levies’ be removed ‘from bills’ (all of the media, as well as ConDem pols, seem to describe the situation in these terms) as a condition of not increasing bills by as much as they are threatening to. (This arrangement suits the Tories anyway for a number of reasonably obvious reasons and was probably stage-managed by agreement, but they won’t admit to that, obviously.)

I liked the Jacobin piece very much, including its matter-of-fact tone and reliance on conventional frames.

The establishment left in the U.S. and Europe generally chose, in the surprise of crisis, preservationism, chose to join in the rescues and in a policy of preserving the financial sector. It’s proven to be bad rhetoric, bad policy and poisonous politics.

Getting out of “me, too” rhetoric legitimizing a deficit fetish and “free market” models of institutional reform isn’t going to be easy for any part of the establishment Left. There’s no reliable means of commitment, which cannot be undone after election, by promises of speaking fees or other favors or threats from the banksters and their corporate allies, short of a blood oath to carry forward lethal measures, followed by immediate action.

I think a case can be made that a large part of bankster wealth is extractive and fraudulent. That’s why it makes so much sense to attack the sector with electric pruning shears set at max power. But, the case would have to be made, and against strong headwinds of counter-propaganda. And, it would have to include a rationalization for accepting a substantial economic setback and disruption, as the price of justice, because these psychopaths are not likely to go gently into night, and even if they did, the disruption would still be substantial. Politically, I doubt there’s ever likely to be a chance for rational reform outside of serious crisis, and crisis reaching the doors of the elite — it’s only when the economic setback is already a given, and no longer a choice, that it makes sense to grab for justice at such a price. But, the left would have to ready, mentally and tactically, to seize the moment, in a way the establishment left was decidedly not, in 2007 and since.

Well, perhaps the effects of globalization need to be added to the story. It’s not easy to “attack the sector” when it’s not really your country’s sector, but a supranational institution that is fluid, and largely outside of the control of any political entity. The attack would have to come with a dose of nationalism, and that makes the left-right dichotomy problematic.

Bruce Wilder, I am sure many people are working on alternatives, both *theoretically* and *practically*, such as the author of this paper to take one example:

“Degrowth Implies Voluntary Simplicity: Overcoming Barriers to Sustainable Consumption”
Samuel Alexander
University of Melbourne – Office for Environmental Programs; Simplicity Institute
February 23, 2012
Abstract:
This paper explores how consumer societies are structurally set up to oppose practices of sustainable consumption and how those structural obstacles could be overcome.

Our lifestyle decisions, especially our consumption decisions, are not made in a vacuum. Instead, they are made within social, economic, and political structures of constraint, and those structures make some lifestyle decisions easy or necessary and other lifestyle decisions difficult or impossible. Change the social, economic, and political structures, however, and different consumption practices would or could emerge. With a practical focus, this paper examines the extent to which people in consumer societies are ‘locked in’ to high consumption, energy-intensive lifestyles, and it explores ways that structural changes could facilitate a societal transition to practices of more sustainable consumption.

This subject should be of interest to all those broadly engaged in work on sustainability. But it should be of particular interest to those who have been convinced that the richest nations, if indeed they are serious about realising a sustainable world, ought to be initiating a degrowth process of planned economic contraction, with the aim of moving toward a socially desirable, ecologically sustainable, steady state economy. A degrowth or steady state economy will never emerge voluntarily within societies that are generally comprised of individuals seeking ever-higher levels of income and consumption. It follows that any transition to such an economy will depend upon people in those societies transitioning away from consumer lifestyles and embracing lifestyles of reduced and restrained consumption.”

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2009698

SoU @ 45

Is it so impractical to ask people to look around, and correctly interpret aspects of their everyday lives?

Student loans, charter schools, payday lenders, the escalation of medical costs, the crappiness of health insurance, the high price of anything with intellectual property attached, businesses destroyed by equity capital vampires, . . . etc.

There are real costs to the extreme dispersion of incomes, but “inequality” is not de-natured abstraction, it is real oppression and real extraction on a day to day basis. There’s plenty of evidence in everyday headlines to be really, really angry about.

We’re already having a major problem keeping poor Americans in the financial system. Increasing minimum accounts would force more of them out. I also don’t see what is surprising about Wall Street doing well right now: interest rates are low, while corporate profits are high. To the extent Wall Street borrows short term and loans long-term, it should be very profitable right now.

As for the broader question of neoliberalism in the developed nation welfare states, the financial capital gaining over non-financial capital thesis lacks a mechanism. Varying exchange rates introduce costs split between exporters and importers: countries shouldn’t experience a gross cost without a major trade imbalance, but the way the trade imbalances are the US has experienced a huge gain from them. What I think is more likely is that the financial firms of the developed countries are more international than the manufacturing ones, hence the profit shift. Exporting money is easier than trains.

The “Great Risk Shift” ignores what employees are discovering today: pensions had risks that were not priced in when they were issued, concerning the solvency of the promiser. With defined contribution plans these risks vanish.

The post-1973 shift is really about capital and labor, with labor suddenly getting the short end of the stick more than in the preceding era. This has a lot to do with unionization and the loss of support from the government, redistribution of tax money, the failure of the US to reform its retirement system from the regressive, wasteful one we have now, cuts in spending on education at the secondary and tertiary level, probably marginal tax rates, and many other reasons. But decreased regulation of finance or fluctuating exchange rates aren’t large enough to explain this broad shift.

Bruce Wilder, thanks sister :)

Watson says: “I also don’t see what is surprising about Wall Street doing well right now: interest rates are low, while corporate profits are high. To the extent Wall Street borrows short term and loans long-term, it should be very profitable right now.”

And there’s nothing surprising about corporate profits being high while interest rates are low? That’s just the way it is, nothing to see, keep walking?

“As Ingrid says, Pareto improvements aren’t as self-evidently desirable as Mankiw assumes.”

One big problem is in assuming that the choice is between only doing a Pareto improvement and doing nothing. Then, yes, Pareto improvement is better; we should do it. But we have more choices, like between doing a Pareto improvement and a total societal utils improvement. We can choose between a Pareto option that makes the ultra-rich richer and leaves everyone else the same, or a choice that leaves the almost everyone higher utility and a tiny rich minority lower utility, for far greater total societal utils.

Plus, Pareto improvements are a fantasy in the real world. With 7 billion people in an ultra-complicated messy, emotional, positional externalities world, there is no substantial societal change will not make even one person worse off in utility.

Perhaps the most profound and immensely powerful libertarian/plutocrat bias in academic economics is the extreme focus on Pareto optimality as opposed to total societal utils optimality. I had a post on this that was in Mark Thoma’s links. It’s at:

http://richardhserlin.blogspot.com/2012/05/perhaps-biggest-libertarian-bias-in.html

John, you might want to put Mirowski’s “Never Let a Serious Crisis Go To Waste” on your reading list. Mirowski has nice things to say about Zombie Economics at first. Then later he is quite critical. I think he says, among other things, that you cannot imagine microeconomics is in trouble too; it’s not just macroeconomics. (He obviously wrote his book before reading your recent post.)

His style is even more maximalist than usual.

Well it’s an odd and extemely cold comfort to think of the oceans being bequeathed to the jellyfish once all the sons and daughters of your son’s sons and your daughter’s daughters and your son’s daughters and daughter’s sons all run to some kind of peaceless end.

Watson Ladd 11.15.13 at 6:37 am

” We’re already having a major problem keeping poor Americans in the financial system. Increasing minimum accounts would force more of them out. I also don’t see what is surprising about Wall Street doing well right now: interest rates are low, while corporate profits are high. To the extent Wall Street borrows short term and loans long-term, it should be very profitable right now.”

John didn’t state it in absolutely clear terms, but it was quite clear to me that he meant this to apply to the ‘casino’ end of the financial world. Hint – when he said no government guarantee, did you think that he meant this for the entire retail banking system?

ZM,

What in particular is confounding about my wording?

You have gotten a fair amount of feedback concerning your posting style. Have you been able to hear it?

The content, not to mention the location of the Jacobin article made me smile; the tone made me laugh out loud — rather like the Paul Krugman is tired of trying to reason with you people poster did. I remember long debates in SDS workshops almost 50 years ago about how to mobilize the poor and the working class. There were fewer debates about the former after Tom Hayden and NCUP ran afoul of Amiri Baraka in Newark, and fewer about the latter after Richard Nixon proved that he was more on top of the subject than we were.

Managing the dynamics of discontent and the mechanisms of revolution is more like riding a tiger than a horse, and no one so far has demonstrated that it can be done at all, let alone with justice uppermost in everyone’s mind while we’re doing it. Still, if the thoughtful John Quiggin thinks that nothing short of mass mobilization, etc., can save us, I’d be the last one here (excepting maybe halasz, mcmanus, and Wilder) to say him nay.

A rather one sided piece, IMO, but it doesn’t mean the views are entirely without merit. It does however reflect a deeply populist view of what ‘Wall Street’ is as portrayed in the media, rather than what it is by those who show up to work each day.

One particular chafe in point- pointing out salaries of the the likes of Jamie Diamond and Dick Fuld as though that is somehow representative of the industry is about the same as pointing at George Clooney and Angelina Jolie as indicative of the entire film industry. Its an easy mark for rhetoric, but is indicative of little as many industries produce high individual earners.

I’m not going to take on the point of whether these men deserve what they get – most would agree its hard to justify. But in the glorious “contracted” Wall Street that’s described it wouldn’t be these guys that get reduced – instead it would be the literally millions who work in the engine-rooms of the industry, earn good white color money, but don’t define themselves as “1%” or even “10%” ers. These would be the victims of a smaller Wall Street.

There’s other points that could be made, but that would be my initial reaction and again one that is separate and apart from the individual merits of some of the underlying points which could be debated.

The Marxists have several stories about the Post-War, one of which involves rising wages, labour complacency, declining profits (not necessarily related to wages), capital resurgence and wage depression, overaccumulation and overconfidence, great moderation direct cause of great recession. Minsky can work here, if we take him seriously.

I won’t go so far as to say right now that the New Deal was a disaster, but moderates and liberals to me always catastrophically underestimate what is at stake, how bad it can get if we let capital run free or try to regulate capital. It can give us WWII. It can destroy the human race.

Capital has no heart and really doesn’t care if we all die. Don’t try to reason with it.

Kill it first.

“Profits – bankers keep. Losses, we pay for. A horrible nod to socialism in our capitalist society.”

That’s not a node to socialism, it’s just the powerful taking all they can. Works the same way in every system. Reminds me of a scene in Bertolucci’s Novecento where a storm destroys half of the harvest and the Padrone informs the peasants that their wages will be cut in half. “When we harvest double we don’t get double pay”,one of the peasants says.

“You have gotten a fair amount of feedback concerning your posting style. Have you been able to hear it?”

In terms of complaints against my wording by commenters such as “talk less, say more” (I’m understanding that as a substitute for stop your gabbing BTW and if it’s not i think it’s somewhat weird to be told to affect a laconic attitude to suit another commenter). I’m actually not sure what they’re exactly talking about b/c i think my English is perfectly fine and readable, so I am not sure if the couple of commenters who have been outraged enough to suggest I write differently have trouble understanding words or would like me to shut up or would actually prefer me to bring another meaning to the table?

“earn good white color money”

Would love to know what you consider good white collar money Joe. Bet it is more than I make in 2 or 3 years.

Ronan(rf) @ 73: “the changing face of global financial capitalism”

The commentary in the linked essay seems like so much gobblygook to me, but the wild gyrations, which they, apparently, cannot explain, look to me like the wobbles of a spinning top, which is slowing to stop.

I don’t know what it would mean to “kill Capital”.

How about a Mega-Jubilee. Burn all paper, void all contracts. Stocks bonds mortgages credit card bills student loans all the fictitious capital, all the re-ification of social relationships. Maybe ID’s and courthouse records. Burn it all. Make the social real.

Your neighbors agree you live there, you keep your house and the Van Gogh on the wall. In any case, have a meeting and talk.

So what happens to the factory with its assembly line and parts? By me, it isn’t as if the stockholders can claim it. Maybe syndicalism, maybe something else. But the means of production survives. Is the drill press still “capital” without any paper?

(I bet the second day workers get bored, go to the factory, tire of the endless discussion, turn a few bolts. Shopkeeper will open his doors. Somebody will truck food.)

Gov’t can print to get a flow going.

Something close to this has happened, in countries that lose wars badly. Production comes back. Maybe we get the same old hierarchies. Maybe not.

What happens after a natural disaster? Do people get all selfish and unhelpful?

When the paper is everything, controls everything, matters infinitely more than what you can touch and hold and build and assemble…burn the paper. But has to be all of it.

“The prosperity of plutocratic Manhatten entailed destroying Detroit and Akron and much of the manufacturing midwest — did anyone worry about those cogs, as their jobs, pensions and homes were taken from them. ”

Interesting given the cheap “volk” jabs up thread … what did liberals in the west doto improve the living standards in China, Vietnam, and Indonesia at the expense of the rich in the west, and if not, why not?

What does low skilled, undifferentiated labor deserve to be paid in Detroit or Chengdu? Why should people who live in Michigan earn 10-30x those who live in Sichuan? Love it or hate it, globalization and the global movement of capital have done a tremendous amount to lower inequality across countries, even as inequality increases within countries.

This is a good example of #86

http://blogs.ft.com/off-message/2013/10/25/the-one-chart-that-explains-the-world/

John, I liked the piece a lot. I hope you don’t mind, but I put up a link to the Jacobin site of it on FB. I should have asked first; so if you do, just tell me, and I’ll remove it.

My thoughts.

(1) JQ uses financial sector to mean financing activity. Fair enough. But lots of the stats include jobs like management accounting, which produce value through the management of more efficient industrial processes. There doesn’t seem to be much distinction between finance in the broad sense and financiers.

(2) JQ says the set of retail banking hasn’t changed much. Trueish (there’s greater range of loans and insurance products than there was), but there’s greater penetration, more of the population have bank accounts, mortgages, credit, etc. and that’s useful.

(3) Is the real transformation in corporate and international finance? Wealth and asset management has also seen expansion. The increase in share trading volumes isn’t driven by corporate holdings – m&a activity or investment holdings by real estate or insurance firms – they’re long term decisions. It’s private wealth management behind the trading. Real corporates don’t churn their assets like that.

(4) Has the financial sector maximised growth? Well no, but why should it. The rich are more risk adverse than the poor. As people/society gets richer they use finance to protect against risk, this will reduce return and society as a whole will be poorer than if they didn’t. I agree that fraud and diversion of assets are harmful and have happened. But some of this just legitimate risk preference.

(5) Moaning about fx volatity AND moaning about derivatives separately seems confused. Corporates use derivatives to remove fx risk, investments that are crazy when unexposed are a great idea when hedged. If there is genuinely large risk you can’t blame people when they try and hedge.

(6) Discussing finances role in investment through managers vs shareholders perspective is a bit odd. The major constraint on investment decisions is and has always been the extensive and binding conditions and convenants that come with any form of debt financing.

There is at least one clear thing to do, then: fix the mass media. Isn’t that one of the huge sources of our current problem? Abrogation of the anti-authoritarian media concentration laws is one of the, if not the main, sources of our problems.

Watson Ladd 11.15.13 at 6:37 am

you wrote:
The “Great Risk Shift” ignores what employees are discovering today: pensions had risks that were not priced in when they were issued, concerning the solvency of the promiser. With defined contribution plans these risks vanish.

Now since I was not sure about defined contribution I looked a little and found:

Q&A: Should you be worried about defined contribution pensions?
http://www.bbc.co.uk/news/business-24159233

What is a defined contribution (DC) scheme?

This is a scheme where both the employee and the employer pay contributions each month. Those contributions are usually invested into shares or bonds.

The ultimate size of the pension pot depends on how well those shares and bonds perform, and on the amount of charges that are deducted for management fees every year. When they retire, savers use that pension pot to buy an annuity, which will pay them an income for the rest of their lives.

Under DC schemes, workers carry the investment risk, and there is no certainty about what they will receive in retirement.

So yes, to the corporations, “With defined contribution plans these risks vanish.” because “Workers carry the investment risk.” I do not find that really interesting for workers.

Antoni, would you rather loan your life savings to one business or many? Put it that way and it is clear that defined benefit pensions are an enormously troublesome instrument.
Sure, the stock market is volatile, but it isn’t as though 20-somethings don’t have the time to make up losses, and 60-year olds can always buy bonds and sell stocks, like just about every investment advisor ever has recommended. But there is no way to shed the exposure to the agency guaranteeing a pension. And if you make the assets bankruptcy remote, why not just give them to the people who will benefit?

@Trader Joe: I’m sure they can find other jobs in the NYC area that pay well if the proposed policy changes are welfare enhancing.

I’m in very broad agreement with JQ that the financial sector needs to be down-sized with respect the the rest of the global economy. And I’m fairly sure that JQ is well aware of the changes that have occurred over the years in the way that the banking and financial system “works”, (though it’s not clear to me how familiar he,- or many other working macro-economists,- are with the specific operational details of the current set-up, else they might have be a good deal less surprised by the crisis it wrought). But still, there’s no simple going back to the simpler world of ordinary, “traditional” commercial banking and tightly regulated financial “markets”. The brave new world of structured securitizations and derivatives, together with vast international financial flows won’t easily be stuffed back into its bottle. (And not because it is somehow more “efficient”). There’s nowhere to go but forward, “sublating” that system rather than restoring some fictional status quo ante. After all, just stripping away the financial economy might just serve to reveal the bare, forked workings of the so-called “real” economy and its deficiencies.

Which is why the “historical” diagnosis of the problem matters to any prognosis, let alone “cure”. In the past, JQ has subscribed to a conventional NK account of the 1970’s stagflationary crisis, which gave rise to the neo-liberal “solution”, whereby it was due to cost-push inflation, with the prime “cost” being excessive wages. (In addition, poor monetary policy is often blamed, ignoring the fact that with the sudden switch from a fixed to a floating FX system, the conditions under which monetary policy would have operated were likewise suddenly changed). But I suspect that there were “deeper” causes at work having to do with the dissolution of the Bretton Woods arrangements,- (and it was European resentment against the unilateral U.S. action that lies at the root of the ill-fated Euro project),- and that the subsequent rise of financialization goes together with the increase in corporate globalization, as a means of restoring and maintaining the rate-of-profit, above all else. The Bretton Woods arrangement was meant to allow each country to adopt its own policy regime, while balancing out the “structural” imbalances that might result with regulated FX adjustments, while limiting the effects of international financial flows through capital controls. Without such a coordinated international system, financial flows came to rule the roost and policy ineffectiveness was not just an abstract critique, but a real problem. Since what amounts to FX arbitrage came to outweigh investment in real productive capital. How that problem is to be remedied, (in a world without any hegemon), amounts to the question going forward.

As to claims that the neo-liberal era led to decreasing global inequality, if rising intra-national inequality: 1) such claims rest upon disaggregating the global population into a set of individuals and then re-combining the results, as if that were how economies actually operate; 2) much of the claim rests on the case of China, and to a lesser extent India, as well as the raw commodities boom of the naughties, when both China and to a lesser extent India were, “free riding” on the “Washington Consensus” through maintaining capital controls and a greater degree of domestic regulation; 3) there is no evidence that the wage share of global output has risen and the profit share has fallen and, since S=I is a short-run accounting identity, there is no evidence of a “global savings glut” as opposed to huge CA imbalances, since both S and I have been declining marginally; and 4) counterfactually, what would have been the case under a different global trade and FX regime, since one would expect rapid productivity catch-up in developing countries anyway, without requiring declining developed country productivity or incomes?

Also Andrew Halbane’s paper on the “doom loop” of our current global financial system. Google it, ya’ll!

Tax financial profits enough to pay for healthcare reform. The taxpayers bailed-out finance to the tune of about US$7 trillion. Yet they never thanked us.

This slightly puzzles me:

“Overall, it seems reasonable to conclude that Wall Street in its various forms accounts for around 20 percent of total US income, a share comparable to that of the US government.”

Seems like a very high number. Willem Buiter has said that The City is around 4% of UK GDP. And it’s difficult to think of the US as being more reliant on Wall Street than the UK is on The City.

What is it that I’m missing between these two numbers? Something definitional I assume….

There’s also an interesting snippet about the effects of shrinking the financial sector. The EU ran the numbers on the imposition of a financial transactions tax. The aim of which is to remove some of that speculative froth from the sector, to shrink the sector.

Their finding was that doing so would shrink the economy as a whole by 1.8% compared to an economy in which the tax was not imposed (and thus the sector shrinks). The mechanism was, at least as I recall it, a rise in the cost of capital to corporates.

That particular method, at least, of reducing the size of the financial sector would seem to be not all that desirable.

Tim: “Seems like a very high number. Willem Buiter has said that The City is around 4% of UK GDP. And it’s difficult to think of the US as being more reliant on Wall Street than the UK is on The City.”

This is probably the FIRE sector, as opposed to The City.

“As to claims that the neo-liberal era led to decreasing global inequality, if rising intra-national inequality: 1) such claims rest upon disaggregating the global population into a set of individuals and then re-combining the results, as if that were how economies actually operate; 2) much of the claim rests on the case of China, and to a lesser extent India..”

(1) Regardless, that still doesn’t dispute the fact that it has led to an increase in living standards for a huge amount of people globally.
(2) There has also been sustained growth throughout Latin America, East Asia and (more recently) Africa. Much of it might rest on China and India, but their size shouldnt dwarf the fact that it has happened throughout the world, in a number of differing contexts

“4) counterfactually, what would have been the case under a different global trade and FX regime, since one would expect rapid productivity catch-up in developing countries anyway, without requiring declining developed country productivity or incomes?”

What is the hypothetical? I’m more than happy for there to be an alternative but never see it spelled out. BW wasn’t going to last or allow that kind of development outside the West (afaict) so what are the other options?

There is a large and growing literature on the causes and consequences of financialization. Much of it is referenced in this paper, which analyzes the mechanisms of financialization in Brazil and South Korea: http://researchonmoneyandfinance.org/media/papers/RMF-38-Painceira.pdf

Ronan(rf) 109, “Regardless, that still doesn’t dispute the fact that it has led to an increase in living standards for a huge amount of people globally.”

This is a different claim than “decreasing global inequality”. A subsistence farmer in China becomes factory worker, producing a hell of a lot more and having a slightly higher living standard; that doesn’t sound like a decrease in inequality.

I would argue that subsistence farmers don’t participate in the national (let alone global) economy, and therefore (in a certain sense) they are not a part of any calculations of equality/inequality. They consume exactly as much as they produce. Once they become factory workers, the pattern of distribution of the value of their labor could easily increase inequality, even as their living standards go up.

Btw Concern about the constraints and ramifications
Of today’s global financial markets is not mis placed in this context
Yes
Amerika the great exploiter nation
has the potential in a flash
To execute a system of full national financial autonomy

However I recall Thors’ battle with ocean

The serpent’s head is wall street and like Thor we can throw a rope around its neck and pull like hell
but it’s body encircles the globe

The cry “Kill capital ” must rise from the throats tens of millions of raw footed
Job class battered plebeians
Before we can imagine concretely
A structual reformist agenda like the progressives – socialists
Developed at the turn of the last century

Now let us concentrate on fomentation of rage

The professional bridge enthusiast (ugh) isn’t interested in having a discussion with Cam’ron – I’ll introduce what motivates Cam’ron later. The professional economist or academic, of any bent, is generally not adept – often not even interested – in adapting their language to that of the person on the street, in addition to not changing their research focus.

I think the major question isn’t how social media shape the discussion, so much as that the participants are insulated (and insulate themselves) from having an audience with people who are contrary-minded. Twitter – yeah, that’d be an interesting study, but it’s such a thin platform. I think analyzing that would bias the result towards blaming poor people for having to keep hustlin’ and the resulting low engagement rate with economics, rather than shifting to economists working at relative leisure on topics that interest them actually searching out topics of interest to the average folk. (This may be a distortion of what was intended, but I hope it stands as an avenue of related commentary.)

There’s another aspect to this – “political correctness” for conservatives. Perhaps respecting the new, distorted, form of the classic Bowlesian (?) “smaller piece of a bigger pie is still a larger piece” argument, which is apparently displaced by “larger financial markets are good for everyone,” is a sacred cow for the right and intended to be respected as a form of political correctness towards conservatives, without engagement with the truth of the statement. The correct approach is to take this right-wing replacement for the old New Dealer optimism at face value (to be reasonable that old view isn’t obviously completely accurate – full employment vs. inflation doesn’t seem to have been, if what I have read is accurate, a major concern weighing on New Dealer optimism, though it is now).

What was Cam’ron’s concern? Something that isn’t covered by Mankiw’s fatuous pleasantries about kidneys:

“you’re supposed to go to f’n high school, go to college, get out of college, make 30,000, after that, they gon’ take taxes; after taxes you down to 20,000; you gotta give 10% of that for your student loans, that you been goin’ to f’n school payin’ for, now you down to f’n 12,000 a year, you’ve rent is 500 a month, now you down to f’n 5000 a year, you’ve gotta eat; HOW YOU GON’ GET FRESH?” – Flea

(You can see the scene online – warning: Language!) https://www.youtube.com/watch?v=imrz3Nsnhw8

Extra credit for putting the head of a “too big to prosecute” bank in Flea’s place giving the narration. “We aren’t making real social progress here, man!”

As a final comment I wanted to note that I am not totally despairing about the role of capital holders to shape markets positively – bringing order through agreements and standards (not on the order of cartels, but things like computer industry agreements, or standardized shipping containers, at the very least) but then people demand you don’t make a distinction between that and clear examples of egalitarian-free moves like profit hoarding strategies against inflation (gold standard fanatics) and rent seekers. Anyway that’s more than enough from me for now.

“neoliberal plutoracy vs social democratic workers Utopia”

well, according to the classical doctrine that’s the narrative for the developed, industrial world. For China, India, and the rest of the pre-industrial world (although I suppose China might already be out of it) the narrative is still “capitalism is a progressive historical stage”. I guess this has gotta be one of those ‘unity of the opposites’, or ‘negation of negation’ things.

There’s no quantification here of how big, exactly, the US financial system is, or what percentage of US assets are devoted to purely financial activities, however you want to define that. To simply throw around percentage of GDP is not helpful, because that’s a bit of a made up number, as it measures value added, whatever that is. We know that roughly $15T of US capital is productive capital, excluding structures. So how much is dedicated to the financial sector? My guess is that the total tangible book value of US banks is somewhere in the neighborhood of $1.5T, but that could be off by plus or minus $.5T. Of that amount, I’d say $200-$250B is dedicated to investment banks. That means that the financial transactions sector is roughly 1/60th the size of the productive economy, measured by net assets. So does that capital earn an excess return? Most banks report that their broker-dealer divisions earn about 5% on capital. To put that in perspective, avg return on capital amoung US corporations is currently at aboutt 15%. So the amount of capital devoted to financial intermediation is not that large, and the profits are sub-par.

Ronan(rf): This is the narrative we’re stuck in

Indeed.

I was reading The Eighteenth Brumaire of Louis Napoleon yesterday — Marx’s essay, which featured the thesis that history repeats itself, first as tragedy, then as farce. The essay is remarkable for its bitterness and for its many insights into ideology as a narrative rationalization, drawn from a vocabulary of half-remembered past events, for the self-interested motives of what Marx labeled class action. Marx was thirty years old, a German Hegelian in 1848, the year of revolutions, and four years later, he had been exiled to London, capital of the industrial revolution — what a way to spell irony!

I’ve always been drawn to history, and to the notion shimmering behind all the narratives of history’s cycles, and their seeming inevitable course, that there’s some predictive power there. If you live through an episode, when some seemingly permanent feature(s) of the world around you shakes and falls in some earthquake, and you are paying attention and placing hope and fear in the sequence of events, which are dramatic, and maybe surprising, but also logical in some way, you cannot help but want to grab the power promised by grasping the nature of that progression. The Greeks, I’m told, invented history, amidst the tumultuous politics of their numerous city-states, and gave us the theory of anacyclosis, which isn’t half bad as political science, two millenia later. Hegel could talk seriously of world-historical figures, because he had quite literally seen a man-on-horseback bring down a thousand-year reich in an instant, and Marx — well, 1848 was a quite a year!

Humans are story-telling animals. We organize society and civilization by fictions. Money and finance — the means by which we keep score in the economic games we play — is an elaborate set of fictions. We can’t escape fictions; they are in our nature. The call to tell the truth is just a rally for a better fiction, to wake from one dream in order to fall into another trance. Every effective political argument is more of an hypnotic trance induction — or an attempt to wake the sleeper, as the case may be — than any sort of Aristotelian ideal of valid arguments strung together in rhetorical proof for the rationally critical listener.

Flooded as we, today, are, by narrative fictions — all of us consume orders of magnitude more drama as entertainment than generations past — I keep thinking that we might become more critical of the competing narratives we are offered (More John Holbo, please!), and that our consciousness might be raised, that we, collectively, might adapt better, faster to our circumstances. We seem to be losing an arm’s race with the purveyors of rich man’s propaganda, but that just makes neoliberalism an overripe target of opportunity for Jacobins, no?

The other thing I read yesterday was a blogpost by the eminent historian, David Kaiser. He wrote:

Seventeen years ago I reviewed William Strauss and Neil Howe’s new book, The Fourth Turning, for the Boston Globe. As most of my readers here are well aware, they had divided American history into 80-year cycles in their earlier book, Generations, and in 1996 they predicted that a great national crisis would develop sometime in the next ten to fifteen years. In one paragraph, I discussed their tentative speculations about what the crisis might look like, and added another thought of my own.

“The Fourth Turning is weakest on the point of greatest practical interest: what, exactly, the new crisis is likely to involve. The authors present a series of scenarios combining, in various ways, a financial crisis, a collapse of federal authority, a racial or regional civil war, or an international crisis perhaps involving terrorism — but none of them seems completely convincing. Yet here, too, history is on their side. No one in the 1760s would have predicted the American Revolution; almost no one in 1928 would have foreseen either depression or world war. Only in the 1850s was the shape of the coming crisis fairly clear, and even then few if any would have predicted war on such a scale, fought to such a drastic conclusion. We must watch, perhaps, for problems that fashionable solutions can only make worse, since these are the ones most likely to spin out of control.”

I added the emphasis, above.

One of five headlines, with Doris Lessing and Airbus crash, on Yahoo:Thor Box Office $38 million.

Why do we care? When we make the cheeseburgers and then walk to the ticket booth, is our contribution to a studio’s surplus as or more important than the quality of the movie?
Do we ourselves now view our consumption as a factor of production?

re financialisation of the US economy

This might be of interest

http://cas.umkc.edu/econ/economics/faculty/wray/631Wray/Week%207/Krippner.pdf

and Krippners book whih builds on this

Krippner’s good

Re:Financialisation. Marxism 301: The productive base and the ruling social relations create and reflect each other. We have financialisation because our social relations needed it. Most of us aren’t farmers or assembly-line workers anymore. There is no backwards or reversals in historical materialism.

From Varoufakis Modern Political Economics, which is the long version of <i.Global Minotaur

The rulers’ social power was, therefore, as much a result of their soldiers’ spears as it was founded on the consent of the powerless to their rulers’ authority. It is for this simple reason that social theory matters so much: our way of under standing our social order, our social theory in other words, is the primary input into the ways in which our social order is pre­served and reproduced. Dynamic societies built their success on two production processes unfolding in parallel: manufacturing surplus and manufacturing consent regarding its distribution. The ‘mind forg’d manacles’, as William Blake called them, are as real as the hand forged ones.

We could say the Fordist era was about using consumption to manufacture production to manufacture consent.

In a post-Fordist post-capitalist post-scarcity society the distributable surplus will be extracted almost entirely from the manufactured consent. We with our labour will manufacture our own consent, by managing our IRAs and HSAs we legitimate Wall Street.

Marx’s essay, which featured the thesis that history repeats itself, first as tragedy, then as farce.

There goes a social scientist who can’t tell the difference between events of history and his feelings about such, no?

The Greeks, I’m told, invented history

Thucydides, I think, had a clarity of vision far surpassing Marx:

Of the gods we believe, and of men we know, that by a necessary law of their nature they rule wherever they can.

We organize society and civilization by fictions. Money and finance — the means by which we keep score in the economic games we play — is an elaborate set of fictions. We can’t escape fictions; they are in our nature.

Yes, we organize society with myths. NO, money and finance are not that sort of fiction! Money is neutral. Law, that is another matter entirely, and where our focus should be.

As smart as you are, Bruce, can’t you see the perversity that results from Leftism taken to extremes? bob mcmanus is a living, breathing Reductio. Oy vey.

An inherent error of quantification economics, like saying electricity production is a tiny part of GDP, so we needn’t worry about it.

mcmanus cribbing from Larry Summers. Vintage CT moments.

@ 137

What is your point, roy? Of course money depends on people’s faith in it. I said it is neutral, which means there isn’t any inherent bias in it. It is an extremely useful social convention. Do you deny this? Do you have a theory of a better world without money in it? If you do, why don’t you spill it?

138-
Yes, we organize society with myths. NO, money and finance are not that sort of fiction! Money is neutral.
It appeared to me you were using “neutral” to describe money in the context of myth and fiction; clearly, ahem, that was not your intended meaning.
As to what I now take to be your point, I’d still quibble with full-stop no-bias inherent neutrality, because I don’t think that exists in any human artifact.
Within a really limited transactional economic setting, sure, it’s just a neutral symbol of labor and value etc. But in the wider field, the whole human thing whatever you want to call it, money’s got all kinds of bias.
The things it requires to exist and be useful aren’t universal or even universally necessary for human survival, until money itself becomes necessary for survival.
It facilitates certain kinds of activities, excludes others, benefits some users vastly disproportionately to other users, and eventually creates the necessity for itself, which is a bias.
Money is inherently biased toward itself.
Anything like a “theory of a better world” that I might have wouldn’t replace or discard money, so much as transcend it somehow.
Briefly, in light of present conditions, where skillful manipulation of finance by a minority of users has led to a kind of social cannibalism – and God knows what else is coming – almost anything, any world.
Barter economies, for one, would probably not have broken the sky.

It’s interesting, in this context, to watch Carl Icahn putting the squeeze on Tim Cook for an enlarged Apple share buyback. Hard to see the old bastard as anything but an extortionist — like Smaug, he simply can’t resist the smell of gold. Of course Apple is sitting on a huge pile of it, but in all the stories surrounding Icahn’s bullying, nowhere have I seen the idea expressed that the money would be better off invested in more productive capacity than in returning it to the shareholders — who, as I read things, aren’t going to invest it in anything productive either. They just want it, ’cause they consider it theirs.

Hell of a way to run a society…. And mattski, seeing this kind of psychodrama played out over the corpse of our common patrimony for what it is is exactly what makes BW a smart guy, and mcmanus not a reductionist. What not seeing it makes you is hard to judge without further evidence — not that I’m all that eager to collect any.

As far as to charges of reductionism or economism, I would say that for me, to the degree I can separate them, social theory precedes and generates economic theory. And God knows I am not able to totalize or reduce social theory. Cause people/society are indeterminate and non-ergodic, unpredictable.

Marxism, feminism, anti-racism. Currently reading into Goffman and symbolic interactionism. I try on theories and tools like t-shirts. Curse of the auto-didact.

Peter T,

What do I mean when I say money has no inherent bias? I mean that it is a very simple and effective tool created by humans to facilitate trade. I mean that anyone can use money, money doesn’t care who is using it! Yes, there is an illusory aspect to money, which Bruce Wilder pointed to, sloppily in my view, to try and tie it to more injurious fictions which actually do have adverse consequences. For example, the idea that you, and you alone, are responsible for your fate, good or ill. Or–a cruder example–the idea that there is a supreme being judging our actions in accordance with some instructions laid out in a dusty book somewhere.

Money, per se, isn’t the reason for inequality or any of the other social ills we find so offensive. Money is perfectly compatible with a (much more) just society- at least I see no reason to doubt that. If we try to imagine a world without money… What does that look like? A barter economy as roy offers? Do you know what would happen in a barter economy? People would invent money because the obstacles to trade without it are so onerous. (!)

@ 142

William, I can’t make out what you are saying other than something along the lines of, “can’t you see what a horrible mess our society is in?” Well, yes. Yes I can. I just don’t see the utility of blaming ‘money’.

And, for goodness sake, I didn’t refer to mcmanus as a reductionist! Yikes.

Money’s neutrality in your sense, mattski, depends on it being a merely a unit of account, and not the weapon of mass destruction that we all know it is. Carl Icahn is a piker compared to the Structural Adjustment Programs of the IMF and World Bank, or the depredations of the IMF and its troika partners in Greece. Can the powerful employ other weapons? Yes, of course they can — and have — but once they’ve discovered money, they rarely have to reach any deeper into their armory.

147 11.18.13 at 11:30 pm-
What activities does money exclude?
Complete exclusion, you win, money doesn’t give a shit what its non-users do. Marginalization to de facto exclusion, point me, the list is near endless.

…are you sure that money is the reason for the disproportion?
No, I’m not. Money is the thing that enables the reason for the disproportion. The reason for the disproportion is unfettered selfishness directed at the accumulation of money, or, in the common speech, greed. Without money the 1% would have to live in huge granaries, and there would be rats and disproportionate transportation costs and stuff. Not that I’m all about the barter, like I said, anything, any world.
Roads:
That is, people use them. A lot. And come to rely on them. Is there some crime against nature occurring here. (Besides the related, although not logically, ecological crime of climate change.)
If you’d said automobiles use them, or even people-in-automobiles use them, maybe, sort of, but then I’d win that one too, because cars have necessitated the use of cars in order to use the road.
It’s biologically terrifying to be on foot for any length of time on a busy highway, 3000 pedestrians died in traffic in Spain in 2012, etc.
Cars rule the roadway, necessitating the use of cars, to use the roadway. With the exception of motorcycles, a few, public transport, a little, some bicycles here and there, and I did once see a guy with a mule-drawn cart on the Pacific Coast Highway.
The parenthetical is incoherent to me, illogical relation being something I’m unfamiliar with.
You may not believe this true fact, but I live without hot showers, have no refrigerator, and use my idiot phone maybe 5-6 times a month. Just got back to the in-home-internet a few weeks ago, after 5 years without.
Not to mention a steadily growing number of people are quite willing to forego consumer luxuries, which have come to seem but aren’t real necessities, if it would mean their grandchildren were not going to be barbecued or drowned.

ah, mattski means “neutral” as in inches or kilos are neutral. It’s just a measurement. Kind of as in grey is just a colour even when it’s an elephant treading on your foot.