November 24, 2008
The Value of the Financial Industry
Yves Smith has some good remarks on how Finance Has Lost Sight of Its Role
In 1980, financial firms accounted for 8% of S&P earnings. During the peak of our last stock market cycle, their profits were over 40% of the total.
Now consider: finance is a necessary function, but is represents a tax, a drain on the productive economy, just as defense and lawyers do ...
Instead being a utility that supports the real productive industry, the financial industry has turned into a cult.
Willem Buiter has chastised the Fed for what he calls "cognitive regulatory capture," that is, that they identify far too strongly with the values and world view of their charges. But it isn't just the Fed. The media. and to a lesser degree, society at large has bought into the construct of the importance, value, and virtue of the financial sector, even as it is coming violently apart before our eyes. Why, for instance, the vituperative reaction against a GM bailout, while we assume Citi has to be rescued?
Why indeed? Why this?
The U.S. government is prepared to lend more than $7.4 trillion on behalf of American taxpayers, or half the value of everything produced in the nation last year, to rescue the financial system since the credit markets seized up 15 months ago.
As I wrote last month:
Where is the social benefit?
Can we please have a plan for a financial system that is a service to the economy and not a drag - not a monster that depends on over-leveraged quant strategies nobody really understands?
While now bank after bank gets nationalized, possibly all of them within the next 12 month, we get the once in a lifetime chance to cut the financial system back to the boring utility service that it should be: Collecting savings and distributing them as loans for productive means while maybe making a small profit.
That is the only social and economic value the financial industry has. Everything else is obfuscation of robbery driven by greed.
Posted by b on November 24, 2008 at 09:56 AM | Permalink
You have your answer right there.
As long as there is any single person on this planet who doesn't consider greed to be a dirty word, a sin, a mistake and an evil, we'll be fucked, again and again.
Posted by: CluelessJoe | Nov 24, 2008 10:39:35 AM | 1
B, thanks so much for keeping yr attention so well focused on this issue of the vast DIS-utility to society of the vast bulk of what the financial sector (I hate to call it even an industry) does... and on the associated problem of the cognitive capture (= brainwashing) of so many sectors of society by the get-rich-quick, casino capitalists known as "financiers."
Back in September my 23-year-old, who works in a different field but is pretty smart, admitted she didn't quite understand what it was that all these financiers actually DO, and therefore what the present crisis is really about. Her question was a truly important one... Maybe she was like the small boy who asks why the emperor isn't wearing any clothes. So I tried to answer her...
I think we should all stress the 'Emperor's New Clothes' aspect of the whole question of finance (=, nowadays, casino) capitalism.
Btw, talking of cognitive capture, this post from Calculated Risk gives some really good background re the principal US 'regulatory' agencies. Plus in the CalRisk version he provides the very informative photo that's not in the WaPo original.
Posted by: Helena Cobban | Nov 24, 2008 10:44:17 AM | 2
Through The Big Picture I came across this post which agrees with b on the need to get rid of the CDSs.
Posted by: Sgt Dan | Nov 24, 2008 11:55:59 AM | 3
This finacialization of the US economy that began back in the
1980's was what happened before the Great Depression but on a
scale far greater than what happened during the 1920's. During
the 1980's we had Paper Entrepreneurialism,a term I believe was
coined by Robert Reich and used to describe the LBO's, hostile
takeovers, corporate raiding, junk bonds and all the other so called finacial innovations that defined that era and that led
to the S&L collapse and bailout.
But instead of reigning in Wall St greed and recklessness, Wall St wanted more deregulation and
during the 1990's they got it culminating in the repeal of Glass-Steagall Act and the Commodity Futures Modernization Act.
After 20 yrs of this new era of financial deregulation, we are finally re-learning the mistakes of the past.
Posted by: ecoli | Nov 24, 2008 1:36:52 PM | 4
http://www.eurotrib.com/story/2008/2/3/10253/66655>Jerome Guillet has a series of diaries on this at European Tribune.
He calls it The Anglo Disease.
In the 70s, the Economist coined the label "Dutch Disease" to describe the economic travails of the Netherlands as the country's export-oriented industrial sector struggled with the increased exchange rates caused by the rapid growth in gas exports that followed the discovery and development of the massive Groningen field. The extractive sector was so profitable that it captured a large share of new investment, and its export volume was large enough to alter the trade balance and boost the currency, further rendering other activities less attractive.
Today, we can observe a similar phenomenon on a large scale around the financial industry, whose high profitability for many years has also caused weakness for other sectors of the economy. As this has developed around the money centers in New York and, in an even more concentrated way, London, I would propose to label this the "Anglo Disease."
Posted by: Bruce | Nov 24, 2008 1:57:01 PM | 5
Harry Shutt pointed out several years ago that the financialization of the economy was part of a long process that started in the seventies in which profitable investment opportunities, and profit levels generally, became harder to achieve, forcing capital to turn to privatization and de-regulation, labor-bashing and outsourcing, successive bubble economies, and finally to simply gambling on its own activities (CDS, hedge funds, etc). The dynamic that drove all this was an excess of capital, a shortage of traditional investment outlets, and a fear among fund managers and financial insitutions of losing market share (and their jobs) to more aggressive competitors.
Capital isnt just about greed, it's about fear.
Posted by: seneca | Nov 24, 2008 2:24:04 PM | 6
Report: Government prepared to lend $7.4 trillion
Nov. 24, 2008, 11:46AM
The U.S. government is prepared to lend more than $7.4 trillion on behalf of American taxpayers, or half the value of everything produced in the nation last year, to rescue the financial system since the credit markets seized up 15 months ago.
The unprecedented pledge of funds includes $2.8 trillion already tapped by financial institutions in the biggest response to an economic emergency since the New Deal of the 1930s, according to data compiled by Bloomberg. The commitment dwarfs the only plan approved by lawmakers, the Treasury Department’s $700 billion Troubled Asset Relief Program. Federal Reserve lending last week was 1,900 times the weekly average for the three years before the crisis.
When Congress approved the TARP on Oct. 3, Fed Chairman Ben S. Bernanke and Treasury Secretary Henry Paulson acknowledged the need for transparency and oversight. Now, as regulators commit far more money while refusing to disclose loan recipients or reveal the collateral they are taking in return, some Congress members are calling for the Fed to be reined in.
“Whether it’s lending or spending, it’s tax dollars that are going out the window and we end up holding collateral we don’t know anything about,” said Congressman Scott Garrett, a New Jersey Republican who serves on the House Financial Services Committee. “The time has come that we consider what sort of limitations we should be placing on the Fed so that authority returns to elected officials as opposed to appointed ones.”
Bloomberg News tabulated data from the Fed, Treasury and Federal Deposit Insurance Corp. and interviewed regulatory officials, economists and academic researchers to gauge the full extent of the government’s rescue effort.
A million seconds is 12 days, a billion seconds is 32 years, I can't be bothered to even calculate a trillion...
Posted by: Uncle $cam | Nov 24, 2008 2:34:17 PM | 7
Greed my ass, greed is when you don't have something, but will go to any means to get it.
They have it already.
It's power they want, complete domination, complete control.
Full spectrum dominance.
CIA conference next month, titled: Preparing for Martial Law: Through the Eyes of Col. Ryszard Kuklinski
CIA Martial Law Symposium—Agenda
CIA HQs Auditorium
Thursday, December 11, 2008 from 3:00 p.m. - 7:00 p.m.
PLEASE NOTE: Conference includes conference, reception, EAA satellite store table for gift items,
but does NOT include tour of CIA Museum.
Security rules apply: No cellphones, PDAs, recorders, nor Cameras.
To apply to attend this conference, complete the form here.
CIA-MARTIAL LAW Symposium covers the Cold War tensions, risks, and heroism 'running Ryszard Kuklinski,' and a few of the continuing mysteries surrounding this case. Kuklinski conducted nine years of nerve-wracking espionage; first, for Poland’s independence and, second, for victory of the West over the USSR. A world where the daily routine of espionage demanded flawless counter-surveillance, dead drops, surreptitious hand-offs, L-pills, invisible ink and miniature transmitters, and still resulted in moments of panic and constant subterfuge, knowing that detection meant death.
Program features: Michael Hayden, Director of CIA; Zbigniew Brzezinski, former National Security Advisor 1977-81; many others. Includes several Agency case experts, Polish dignitaries, and academic subject specialists. Includes new Documentary on the Kuklinski case. Each attendee receives large number of pages of newly declassified documents, supplied as a DVD, and a printed program. Event includes interviews of Agency, Polish and Soviet personnel on the Warsaw Pact, Martial Law and Colonel Ryszard Kuklinski case.
DATE: Thursday, 11 December 2008
LOCATION: CIA Headquarters, Langley, VA
In conjunction with this event, the CIA’s Historical Collections Division, Office of Information Management Services is declassifying and releasing a body of documents (about 1,500 pages)—including official histories, National Intelligence Estimates, intelligence reports, and internal memos—that highlight Kuklinski’s unique role in Cold War and Agency history. This is part of the CIA’s ongoing effort to make historically significant collections of Agency records available to the academic community and the public at large. Each attendee will receive a DVD containing all of the released material, along with a booklet that will feature samples of key documents from the DVD, background material on OSI, photographs, and a detailed index.
3:00 - Presentations by panels, speakers, and Polish Documentary Filmmakers
7:00 Reception. Does NOT include tour of Museum.
7:30 - Bus departs CIA to return attendees to pick-up points.
AFIO CIA-MARTIAL LAW Conference 2008
6723 Whittier Ave Ste 200
McLean VA 22101-4582
Posted by: Uncle $cam | Nov 24, 2008 2:51:46 PM | 8
Posted by: Uncle $cam | Nov 24, 2008 2:58:29 PM | 9
In my mind, this had its seeds in the Reaganite movement toward a "service" economy rather than a manufacturing one--fancy words for thinking stuff up instead of actually making it. Manufacturing in the US has been eroding at a steady pace since then.
The road back out of this mess means that we'll have to train a new crop of technicians, scientists and engineers and provide the startup-friendly infrastructure that we used to have.
It's not going to be easy, particularly when the people controlling the money and power don't believe it.
Posted by: Obelix | Nov 24, 2008 4:48:14 PM | 10
This self-centric view of the universe is not unique to the financial sector, politicians are the exact same way (e.g. President-elect Obama saying today "... a consensus exists ... that we need a big stimulus package that will jolt the economy back into shape and is focused on the two point five million jobs that I intend to create during the first part of my administration...")
Both of these groups strive mightily to have the masses/public bow to their "masters of the universe" role, the media go along because they know which side their bread is buttered!
Posted by: Tosk | Nov 24, 2008 10:46:28 PM | 11
OB10) all the service profession 'thinkers' (and their 'handlers') that i know are all busy either: figuring out how to get on the pentagon hog trough, stay on the pentagon hog trough, find some overseas service they can pipeline back into the states after skimming a hand-off fee from it and still be below american service rates, or find some banana republic security tender for uav's, night vision goggles or detonators they can trans-ship through a friendly nato country without getting caught. meanwhile those pesky chindians are happily 'thinking' and 'manufacturing' their way into our soft usa underbelly, as the american manufacturers and patent holders i know are screaming bloody murder at their naked dumping and ipr theft.
so what'r ya' gonna do?
taking heart that our present demise is no worse than, say, lithuania's, and that indentured sharecroppers only got to keep 20% of their produce, so middle class americans are still marginally better off than, say, saracen jub-jub farmers under pope nicholas v in the 1400's, and certainly less likely to lose our children to the state for crusades and indentured slavery. at least we can still have as many children as we want to tide us through old age transition to warehousing in some frankenpharm.
keep on the sunny side of life!
Posted by: Yellow Tiber | Nov 25, 2008 12:31:47 AM | 13
Speaking of jub-jub farming:
The Kpelle people of Liberia, to name one, scarcely make the distinction at all, allowing for a difference between arduous "forest work" and lighter "town work" but generally avoiding all work that can't be done playfully, amid song and dance and jest. It's not that they're slackers. On the contrary: Diligent rice farmers, they organize their lives around the constant activity of cultivation. But when government advisors pressured them to switch from dry rice farming to more productive paddy-based methods, they resisted--not because they had no interest in making more money, but because they had no interest in working joylessly. The techniques of paddy-rice farming might be more efficient, the anthropologist David Lancy has explained, but they would reduce the Kpelle's daily activity to "just plain work", bereft of "the vital leavening of gossip, singing and dance" that makes Kpelle work worth doing.
Posted by: Kali Spell | Nov 25, 2008 12:36:45 AM | 14
KS 14) Which would explain the strong attraction of 'working' for the Welfare State and their Papal Pentagonal dark side ... all that 'gossip, singing and dance', I mean.
At least that way you can boast, ""How small a thought it takes to fill a whole life!"
Posted by: Katarina Wittgenstein | Nov 25, 2008 1:06:18 AM | 15
Bloomberg: Paulson May Ask for Remaining $350 Billion of TARP
Paulson may ask Congress for the remaining $350 billion from the Troubled Asset Relief Program as he puts together plans to boost consumer credit. Treasury and Federal Reserve officials are working on an effort to buttress the market for securities backed by auto, student and credit-card loans, Paulson said last week. He’s also assembling an office to address mortgage foreclosures.
MoA on Nov. 12:
Now here is my prediction. Paulson will spend full TARP.
As the first tranche of the $700 billion is nearly gone, the Treasury will tell Congress that help to Detroit through the TARP program can only be given if Congress immediately and unconditionally hands over the full second tranche. Of those $350 billion maybe $50 billion will then be handed to Detroit and on January 21 a new administration will discover that Paulson has given the rest down to the last dollar to his friends.
Why would he not do so?
Posted by: b | Nov 25, 2008 2:01:31 AM | 16
YT 13: "...Lithuania's..."
Both sets of grandparents emigrated from Lithuania ca. 1911-1920. As the offspring, I'm entitled to Lithuanian citizenship--if only I renounce my current allegiance. Doesn't sound like a good deal to me--to live in the suicide capital of Eastern Europe.
So, yeah, things could be a lot worse...
Posted by: Obelix | Nov 25, 2008 2:29:42 AM | 17
Well I was interested by Mike Whitney's comments on the seeming dissonance on the support the banks and financials are getting and the complete lack of support for the Auto Industry bailout.
Yeah yeah I know the amerikan auto industry is a basket case completely captured by the myth of infinite and cheap hydrocarbons, their inability to change has stranded them on the beach like an old whale who doesn't realise he will die before a tide big enough to float him off comes again.
But the same can be said of the banks and all the rest of Wall St. They used outmoded inflexible solutions to an ever-changing environment and consequently got beached too.
Whitney maintains that the auto industry will be bailed out alright but not until the big two have been chapter 11'd and the unions broken along with worker's entitlements:
So why would GMAC want to become a bank holding company if General Motors is headed for the chopping block? Could it be that the government is working out a secret deal with management to put the company through Chapter 11 (reorganization) just so it can crush the union and eliminate their pension and health care benefits in one fell swoop?
You bet. Car workers will be reduced to slave wages just like they are in sunny Alabama where sharecropping has moved indoors. And--no surprise--the Democrats are right on board with this labor-busting charade. The auto industry isn't going to be shut down. That's just more fear-mongering like the blather about martial law and WMD. Detroit is going to be transformed into a workers gulag; Siberia on Lake Michigan, which is why Paulson is withholding the $25 billion. It's plain old class warfare.
The ultimate sellout by the dems. Those of us who live in nations where a 'leftist' party finally won government during the great depression where government then introduced the safety nets and Keynsian economics and a more friendly attitude towards labour unions; are probably unaware of the horrors introduced by the likes of Ramsay McDonald as a labour PM in england when the depression hit.
A roundabout way of saying many of us have been brought up to believe that the pale pink leftish political parties that appeared to be aligned with ordinary workers during the depression, only became so aligned against their natural instincts. After they had seen ersatz socialist political parties like the english labour party crack down on workers just as bad if not worse than the right wing conservative parties, but the great recovery promised by the capitalist mouthpieces never eventuated. So the likes of FDR and Mickey Savage had no choice but to go left, as much as it went against their natural instincts.
Barak Obama and Joe Biden are not the workers' friends. Neither are any of the other pseudo working class champions in Congress. They may have come from the working class although really both Biden and Obama are products of the bourgeoisie, and even those dem pols who did come outta housing projects or other extreme poverty, couldn't wait to get away from it.
They wear the title "champions of the ordinary people" simply because the sort of petite bourgeois scaredy cats who hang round the lower echelons of the rethug party would have chased them off had the 'working class heroes' tried to get ahead with the party of one man against the world (ie extreme selfishness) that more properly suited their personal ethos, the rethugs. Sure the rethugs do let a few tokens in but only if the tokens touch their forelocks and don't scare them, and don't try and push Johnny Governorson offa his reserved spot.
Shit sorry bout the digression - the dem party hacks mostly have the values of the class enemy and will destroy amerikan workers' entitlements in a heartbeat while claiming this is necessary to keep the auto industry 'globally competitive'.
Complete lies- utter bullshit - total distortion - check out how well car company employees are looked after in Germany or Japan. Even Korea where auto industry wages rose an average of 15% a year for the 15 years between 87 and 02 and where Kia attempted the same sort of Chapter 11 scam, the auto workers are much better looked after than other similar industries. They have strong unions in the other car manufacturing nations too. Why? Because these fork tongued under snakes belly high jumpers will never admit it but the success of such a complex industry such as vehicle manufacturing depends upon a good working relationship between management and workers. A good formalised relationship. Formalised by using the democratic structure of the labour union to facilitate effective consultation.
The lack of competitive car products outta detroit has nothing to do with pension plans or dental benefits and everything to do with shit-house management.
The auto industry executives and their lackeys in Congress along with old school chums in treasury, figure if they can scare the workers, then slice and dice their working conditions, while paying off key unionists with cash or political favours to ensure the auto industry unions have the balls of a gelded racehorse, then management will be able to stay in it's nice little comfort zone safe from the exigencies of peak oil reality because amerikan auto industry workers will be the cheapest on the planet.
Who cares if Detroit can only make 'yank tanks' if the much lower labour costs mean the ignorant can justify the relatively high cost of gas due to inefficient energy usage by offsetting it against the cheaper purchase price.
Everyday we see items that have a much higher running cost outsell far cheaper to maintain items. This by citizens who consider themselves value oriented, because the initial upfront cost of the expensive to run item is lower than that of the more efficient product.
That is the 'niche' the marketers hope to be steering detroit product into.
Only if ordinary amerikans, particularly ordinary members of the dem party, let their representative 'freckle punch' them.
Posted by: Debs is dead | Nov 25, 2008 3:15:33 AM | 18
Greed and power, yes.
But there is also this: Because of resource depletion in general and the peaking of oil production in particular, there is no longer any productive place to invest that will give a good return. Hence the change-over to Ponzi schemes.
The US began the change-over in 1980 a few years after its own oil production peaked and industrial production became unprofitable. A general looting out of the economy began, reflected and in fact managed by the hypertrophy of the financial sector. The world followed suit as the 21st century turned and now, with global peak oil, industrial civilization has hit the end of the road. The banking and monetary systems (which include built-in usury) require endless growth, yet continued growth is now physically impossible. All that is left to do is to clean out the former middle classes in a few last Ponzi schemes.
So, our civilization stumbles cluelessly to its demise.
Posted by: Gaianne | Nov 25, 2008 3:29:13 AM | 19
its been known for a long time that the growing manufacturing dominance of the Asian Tigers, namely China was going to force major re-alignments in Western economies. And for some, a shift to financial services as a replacement for diminishing manufacturing competitiveness seemed to make a lot of sense. It was never a good idea but the implementation made it a hundred times worse that it could have been
Posted by: jony_b_cool | Nov 25, 2008 3:43:15 AM | 20
I think that's about right Gaianne, the capitalist impulse always needs to grow, and when its no longer possible to actually grow through the production to wealth, they simply invented wealth without production. Creating an enormous false economy, that has finally collapsed by its own sheer weight. The choice now is whether to throw more money, from real productive wealth economy, into the false economy to shore it up, thereby undermining even further, the former. Sort of like setting your house on fire to stay warm on a cold night.
Posted by: anna missed | Nov 25, 2008 4:02:04 AM | 21
Yet, Dr. Doom said on CNBC live this morning that this guy was an excellent choice.
Excellent for who?
Posted by: Rick | Nov 25, 2008 4:57:48 AM | 22
"The banking and monetary systems (which include built-in usury) require endless growth, yet continued growth..."
Indeed Gaianne, and in medical terms, 'endless growth', is called, CANCER. Which in a tangential way reminds me, the etymology root of a corporation comes from Middle English corps, from Latin corpus or corpse;A dead body.
A corporation is a non-living legal entity.
Does it disturb anyone else here, as it does me, that we are governed by the dead?
We re all governed by dead ideas, but when it comes to party programmes, such as the blurring of lines in opposition parties (read rethugs and demorats) an idea, platform, ideology or doctrine has not merely to be dead, but to have lost all original meaning, thereby my hypothesis is, once you take two separate entities and join them together, you no longer have two autonomous parties, but a third entity is born, in this case, stillborn; if word usage in context is reality, then they should rightly be called, Necrocons. The new political party of America, the Necrocons! Lieberman was their test case in their closed dead system...
Posted by: Uncle $cam | Nov 25, 2008 9:48:22 AM | 24
Posted by: Al | Nov 25, 2008 11:23:37 AM | 25
The only ‘solution’ in the sense of vaguely reasonable action, is to nationalize the financial sector, immediately.
Probably what will happen anyway *going forward*, to use nov-speak.
Successive bail-outs to save clapped out banks, defunct businesses, or to prop up the stock market will not work.
Look at France, the US, and China, the world, who all agree to Keynes type stimulating the economy is a good thing...or at least pretend to that in public.
All the junky propagandist discourse about different models, principles - communism, social democracy, the free market, etc. - is quickly thrashed in favor of protectionism and throwing money into black holes to support defunct institutions, attempt to continue business as usual, save the global economy, blah blah blah.
(Russia a bit behind the times, Germany still hesitant, and even Switz. saying we need a bail-out to Europe for solidarity as they buy Swiss products!)
The underlying reason is that growth is no longer possible.
The ‘economy’ can no longer bloom and flower, there is no longer a margin to skim off the top (for the bankers, mutual funds, etc.) , it limped along on fanciful expectations, debt, mirages, fraud, redistribution and nov-control, at present subsisting, actually dying, on hopeless life-support. The Iraq ‘war’ - neo-colonialist enterprise dressed up in humanitarian garb, failed.
Growth is finished because the environment can no longer furnish the resources. Grabbing the last dregs of oil or nat gas etc. is very expensive, not realistic. Upping debt (eg. subprime mortgages) to keep the whirlwind churning over has a inevitable end when everyone defaults.
Joe 6 defaults on his mini-mac-mansion, Lehman bros, or Citi, even if propped up temporarily default (fail, etc.) as well.
Kicking the debt upstairs changes nothing.
Posted by: Tangerine | Nov 25, 2008 1:38:26 PM | 26
"cognitive regulatory capture"
What a ridiculous euphemism for a simple concept: knowing complicity. By which I mean, the notions of legal and regulatory enforcement are implemented only after asking the regulated person or entity how the regulation should be done. That's practical to a certain extent because the substance of regulation should be logically tied to its underlying purpose(s) -- it would make no sense, for example, to demand that wood-burning stoves produce no exhaust of any type. The regulation needs to be tailored to its subject. But in the present American sociopolitical organizational processes, the point of making regulations "practical" has become distorted to where there is too much deference to those being regulated. Foxes guard henhouses.
"Deregulation" is another triumph of the von Mises gang. We can thank Paul Craig Roberts and company for that nonsense. For all of PCR's semi-legitimate criticisms of Bush/Cheney, he still is arguing for that ridiculous minarchist system of a type which cannot work in a society as large and complicated as America's. It works only in a small "Galt's Gulch" system where everyone agrees with core principles and works in socially benign ways.
Posted by: micah pyre | Nov 27, 2008 1:51:53 PM | 28