While efficient capital markets types lack the philosophical tools to question any hustle that arises from the markets, those who have taken a step back from the mortgage backed securities and credit default swap scandals notice something amiss. Essentially, an elaborate series of hustles, frauds, and money-transferring (rather than wealth-creating) “innovations” have emerged in recent years that are not necessary under free market principles, create great instability, and damage the federally insured commercial banking system.
Jeremy Grantham, a gifted fund manager and very coherent writer, shows why the apologists at the Journal and CNBC don’t know squat:
Clients can’t easily distinguish talent from luck or risk taking. It’s an unfair contest, nothing like the fair fight assumed by standard Economics. As we add new products, options, futures, CDOs, hedge funds, and private equity,aggregate fees per dollar rise. As the layers of fees and layers of agents increase, so too products become more complicated and opaque, causing clients to need us more. As total fees in the past grew by 0.5%, we agents basically reached into the clients’ balance sheets, snatched the 0.5%, and turned it into income and GDP. Magic! But in doing so, we lowered the savings and investment rate by 0.5%. So, we got a short-term GDP kick at the expense of lower long-term growth.
This is true with the whole financial system. Let us say that by 1965 – the middle of one of the best decades in U.S. history – we had perfectly adequate financial services. Of course, adequate tools are vital. That is not the issue here. We’re debating the razzmatazz of the last 10 to 15 years. Finance was 3% of GDP in 1965; now it is 7.5%. This is an extra 4.5% load that the real economy carries. The financial system is overfeeding on and slowing down the real economy. It is like running with a large, heavy, and growing bloodsucker on your back. It slows you down.
As yours truly said last year:
I have no problem with people making lots of money, particularly folks that develop, invent, manage, or otherwise run a productive business or invest in the same. I’m glad someone like Henry Ford or Bill Gates made it big. I do however have problems with people making lots of money in an industry whose benefit for the rest of the society is dubious, whose chief productive activity in recent years has been making impenetrable instruments that defy honest valuation, and who have now come hat in hand to beg for public funds, even though they’re balk when they’re told they might have to cut expenses like every other person and every other business in America. It’s a ridiculous, insulting, crony capitalist style of behavior that is more reminiscent of Mexico or Indonesia. It should not be defended by those who purport to believe in free markets.
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When Brooksly Born told the Senate back in the late 90’s what derivatives would do to the financial world, and the boys on the beltway laughed her off, the crisis was set in stone. Hindsight is always – well, usually – correct, and in that particular case, it was dead on.
That many who laughed her off (Greenspan, Bernanke, Paulson) are still unable to bring themselves to do what’s right astounds me. With the banks borrowing money at near zero percent, and using it to gamble with, supported by the likes of Bernanke, is an insult to main street. It would be nice if we had honest people, not blinded by the almighty buck, to oversee and regulate the financial institution, but I’m afraid that’s nothing more than a pipe dream.
Bill Gates chief talent is as a monopolist.