Comments on: The Nature of Modern Finance

By: Tucker

Tucker — Fri, 11 Sep 2009 20:45:13 +0000

Can we make comparisons of junk food to financial products then? And kinds of finance are like new kinds of junk food! That works really well. I’m going to say that CDOs are the KFC ‘famous bowls’ of the finance world, all of the unhealthy things that banks and investors shouldn’t really be consuming piled into one bowl. And I think that financial innovation provides similar benefits to those provided innovation in processed food- most of it is recycled ideas from before in order to sell more unhealthy products, some of it is actually useful.

By: Silke

Silke — Sun, 06 Sep 2009 16:53:01 +0000

I seem to remember that the ancient Romans already liked it and why not?
once you name it collecting tax via representation it seems to be appropriate for a parliamentary democracy ;-)))

By: lambert strether

lambert strether — Sun, 06 Sep 2009 16:32:33 +0000

Thanks, Mr. Taylor.

1. Early civilizations? You mean like, say, France in the 1780s?

2. I’ve considered “private tax” as the popularization.

By: notabanker

notabanker — Fri, 04 Sep 2009 00:18:25 +0000

On Mondays – like electricity.
On Fridays – like junk food.

By: John Davis

John Davis — Thu, 03 Sep 2009 16:09:09 +0000

Methinks, as one earlier comment suggested, that you are too kind by several orders of magnitude. The system, sadly, seems broken. There was a time one had to DO or MAKE something in order to receive a wage or profit. Now it seems the mere shuffling of papers or the click of a few computer keys is deemed sufficient to be called productivity.
It often seems all the finance industry does is feed on itself to create growth; something akin to using credit card A to make payments on credit card B. There is no product made, no good produced here. It is a pure and simple shell game using a stacked deck that favors an elite few at the cost of the many. Wasn’t there something about that written in the opening lines of that U.S. Constitution thing?
We need a return to the ideas of thinking folks who are committed to the promotion of the General Welfare as opposed to the Corporate Welfare. I’d nominate folks like Schumacher with his “Buddhist Economics,” and Marjorie Kelly with her “Divine Right of Capital.”
Who knows? It might even be time to bring out the pitchforks again.

By: Gaute Solheim

Gaute Solheim — Thu, 03 Sep 2009 15:17:02 +0000

Simon should have paid more attention in his science classes. He would then have understood that money is the electricity and the financial institutions makes up a grid for funds to flow on. If he had paid even closer attention, he might have remembered that the longer the conductor is, the more loss you will have from A to B. If he had chosen science instead of economics, he would also know that if you do a lot of change of the voltage on the way, and changing back and forth between AC and DC, every such action will cause a loss of energy.

Very similar to when you are advised, for a small percentage, to put your money in fund of funds X (charging 2/20) who place it in hedge fund Y (charging 2/20) who buys some CDOs created by bank Z to the cost of 1,5% of the underlying assets, which again is handed down through some originaters/banks what ever and finally ends up in the hands of a house buyer who promise to pay 7% interest on the money. (I know it ends up slightly wrong telling the story that way).

Transformed to electricity: How big loss of energy do you have in the grid from A to B? In the physical world it ends up like heat in the air. In the financial world it ends up as revenue for the middle men.

So why do we do it this way? Probably because then it will be someone else and not me who is to blame for the losses. After all, I was careful and hired an expert.

By: Charles R. Williams

Charles R. Williams — Thu, 03 Sep 2009 10:45:55 +0000

Hypertrophy in the financial sector is the result of 1) high levels of marginal taxation 2) the constant threat/reality of inflation in a fiat currency regime 3) complexity in the tax code 4) off-balance sheet financial activities by government and 5) a financial regulatory scheme that creates opportunities to profit from leverage by generating moral hazard and simultaneously under-regulating schemes to profit from moral hazand.

Part of the growth in the financial sector represents real value and part of it is a response to government policy.

By: Dan Palanza

Dan Palanza — Thu, 03 Sep 2009 10:23:32 +0000

Most people are honest. The leaders of Enron and many in Arthur Anderson were not honest and decided to take advantage of poor control integrity that exists in our software driven financial system. I would add that the confusion that poor control software has created in today’s culture is making it difficult for the honest to maintain their individual integrity.

By: Silke

Silke — Thu, 03 Sep 2009 09:55:43 +0000

“This is standard fare in the prescription for good health.”

if you show me one person just one single person alive who is actually living that balanced life you are describing and that I cannot show to be a chimera with very little effort I will undergo training to be able to stand on my head. A lot of good health if not most of it is a gift from nature and it is not becoming for those who were lucky enough to have gotten it to lecture the less fortunate ones

Balance is an impossiblity, even dancers on a rope keep their balance by constantly swaying from one side to the other – the only thing one can do is hoping for the counter forces being able to keep the victors in check and vice versa – if one group gets the chance to make off with too much of the goodies it has to be brought back down or at least to sustainable levels
- it will never ever voluntarily do so, trying to make them is called appeasement and rightfully has acquired a bad odour
- a lot of those implicated in the mess have justified their exorbitant incomes by promising hugely beneficial incomes for all of us. They didn’t deliver and they should be treated like all businessman who have sold stuff that didn’t match its promised features

By: Silke

Silke — Thu, 03 Sep 2009 09:13:18 +0000

Charles,
it probably HAD to be abandonned because not too long after the mini-skirt craze when we had reduced length to the width of belts was followed by a short period of the extreme maxi-skirt we forever fickle women decided to wear all kinds of lengths – no couturier after those extremes has ever been able to dominate women’s preference for the length of her skirts again. I doubt that today you’ll find many women who have not all kind of lenths in their wardrobe (something unthinkable in the 70s) – maybe this is as telling on the formerly perceivable correlation as the times of pretty uniform lengths were

By: Silke

Silke — Thu, 03 Sep 2009 09:05:37 +0000

getting to know the finances of American expats of the department head level and higher in detail in the 70s I concluded that the dollar was the equivalent of 2 DM (and not the 4 DM of a long time after WW2) which today figures as 1 €.
If I read about incomes of “normal” people in the US and what you seem to consider necessities for a decent life I still conclude that the dollar in everyday life should equal 1 €. Is there an explanation (comprehensible on the pencil and paper level) why it doesn’t?
… and does this imbalance between value of the dollar in relation to cost of life in the US and its value in international trade explain why your Bonds are still so much in demand … because they are a bargain for the holders of (overvalued?) currencies?

By: kosmik

kosmik — Thu, 03 Sep 2009 08:31:02 +0000

Simon, what would you say on an argument that US financial sector serves client world-wide, so measuring its as a percentage of US GDP would be underestimation of this international operations?

By: TonyForesta

TonyForesta — Thu, 03 Sep 2009 08:30:48 +0000

Outstanding commentary, – as always Bayard. You articulate in far more eloquant terms exactly what I and many Americans are feeling and wanting. The haunting problem however is that many of us, are not so balanced and reasonable, or patient. Many of us are facing dire circumstances. There is no-one representing our interests. The only constituency that recieves any recognition is the predatorclass.

Push enough people to the bitter brink (exactly what is happening now despite all the rosy babble of bottoms and greenshoots, and recovery around the corner) and – well – desperate people do desperate things. The “inevitability” you speak of, is much closer than anyone may care to recognize, and this is perhaps the next “Black Swan”, the predatorclass is missing – because I promise you – some of us will never go peacefully or silently to the flame of those Homelandsecurity detention centers, – there will be blood, and predatorclass blood, and the day of reckoning is fast approaching.

By: Roy Bland

Roy Bland — Thu, 03 Sep 2009 08:05:10 +0000

Of course it is possible to find oneself reliant on credit then find access to credit withdrawn. But it is also possible to be prudently debt funded. I agree lots of businesses were too vulnerable. But otherwise, I think we are talking at cross purposes. You talk about there being “sufficient revenue to meet costs” – if there wasn’t, you’d be loss making, and if you are loss making, how are you servicing your debt? All I am saying that it can make sense for a profitable company to choose not to pay down its debt but to be debt financed on an ongoing basis, paying interest. A firm generates profits, and it can choose to use this profit to pay down its debts, to re-invest in the business or to distribute to shareholders. I interpret you as saying a firm should always pay down debt because being debt financed on an ongoing basis is “unproductive”; I am saying this is not so, and that putting profits to other uses may be preferable. I think the choice you present of funding a business from revenues or funding it from debt is a false choice – revenue is a flow of income into of business, nobody is suggesting that a business ought to try and survive on a flow of funds from additional borrowing – by “debt funded” I simply mean maintaining a stock of debt, which is serviced.

By: Bayard

Bayard — Thu, 03 Sep 2009 07:58:54 +0000

I view a healthy economy in much the same terms as I view human health. Enough of most things proportionally as a diet or lifestyle; the secret is balanced living (i.e. enough food in the right proportions and amounts, enough sleep, enough exercise, etc.) to keep a person in peak health and the ability to perform. If one overdoes anything to spite other things (i.e., over or under eating, sleeping, working, etc.) then that imbalance will create problems, usually both physical and psychological. This is standard fare in the prescription for good health.

Economies are much the same. America has at least two major parts of its economy that are far out of balance: finance and health care. There is too much of the GDP represented in each, and the benefits of the overage are not distributed to the broader economy in any rational way, but tend to serve the interests of a very small minority. I would note that the other side is represented by the shrinkage of “real” productivity in that manufacturing has shrunk to an all time low as a percentage of GDP. What this means to me that wealth is not being generated in such an imbalanced economy by creating value, but rather in “churning.” That is by leveraging financial assets against the rest of the economy, and thereby soaking up money without creating productivity in the traditional sense.

The unfortunate fact is that the wealth has become so focused that it has the power to control its own destiny, for now. The greater unfortunate fact is that sooner or later what is in the interest of the moneyed few, if it continues in ever growing concentration, will act to the detriment of all, because such an economy will collapse eventually if not brought back to equilibrium. The final result will be actual revolution and social collapse. It is an inevitability.

I was in hopes that the new President might have a strong enough mandate to coax the powerful to participate in a social and economic rebalancing. I now think that this is not possible. I hope that I am wrong.