What Is Goldman Sachs Thinking?

By Simon Johnson

The next financial boom seems likely to be centered on lending to emerging markets.  Sam Finkelstein, head of emerging markets debt at Goldman Sachs Asset Management, summed up the prevailing market view – and no doubt talked up his own positions – with a prominent quote in Monday’s Financial Times (p.13, front of the Companies and Markets section):

“Debt-to-GDP ratios in the developed world are about double those in emerging markets and they’re growing.  This makes emerging markets interesting because you’re pick up incremental spread [higher interest rates compared with developed world rates], and in return you’re actually taking less macroeconomic risk.”

This is a dangerous view for three reasons.

First, against all historical evidence, it assumes that the only macroeconomic risks we should worry about – in general or for emerging markets – are related to standard measures of government fiscal policy.  “Less risk” and “more yield” was exactly what securitized subprime mortgages and their derivatives were purported to offer; this combination typically proves illusory.

Second, emerging markets got into serious trouble through private sector overborrowing both in the 1970s (Latin America, communist Poland and Romania) and in the 1990s (many parts of Asia).  In some crises, the government stepped in and ended up holding a great deal of debt – but this does not change the fact that the exuberance was all about private sector banks (in the US and Europe) lending to private sector corporations (financial and nonfinancial) in a mispricing of risk that started out at modest levels but grew over the cycle. 

Third, when your ability to borrow depends in part on the value of your collateral – see the academic work of Ben Bernanke and the experience of Japan in the late 1980s (e.g., the classic Hoshi-Kashyap volume) – then rising asset prices enable you to borrow more.  This does not necessarily have to go bad in a macroeconomic sense, but experience over the last 30 years is not encouraging.  Global moral hazard – the idea that someone will provide a bailout – does not mix well with free capital flows and this kind of financial accelerator.

Goldman Sachs knows all this, of course.  But, as they will tell you correctly, reforming incentives or even discouraging this kind of cycle is definitely not their job.  Their role is to make money, pure and pretty simple given their market share. 

It’s the responsibility of government to make the world financial system less dangerous.  Judging from the G20 summit (see my comments on the communique) this weekend, we are making no progress at all in that direction.

77 responses to “What Is Goldman Sachs Thinking?

  1. “Goldman Sachs knows all this, of course. But, as they will tell you correctly, reforming incentives or even discouraging this kind of cycle is definitely not their job. Their role is to make money, pure and pretty simple given their market share.”
    ================================================

    Goldman Sachs discourages “reforming incentives” and encourages “this kind of cycle”.

    Goldman is also fully aware that “It’s the responsibility of government to make the world financial system less dangerous”.

    Which is why Goldman owns the politicians who are in a position to discourage this type of cycle.

  2. Why would GS let a little thing like risky loans, that may never be paid, interfere with their ability to make a profit? Uncle Sam will always bail them out.

  3. Thus, you will have an ‘overspill’ of the Citigroup
    -type, unless something is done about it
    All these G-20 and so forth ‘institutions’ are loaded
    with references to systemic risks, systemic institutions.
    Then your President walks in the room, with a Fin-reg
    reform ( let’s hope it gets blocked in the voting ), with systemic risk alive and well to quote Yves Smith,
    what are the people representing the emerging markets or ‘countries’to think ?

    Maybe the FSB task forces should read your book before the matter rolls back on the conference table in Korea

  4. Reducing the debt to GDP ratio (or at least leveling it’s trajectory) is not dangerous – trying to pull forward more demand on credit is dangerous.

  5. A president for the people is what Americans believed they were electing. Instead, we have a president who choses his people from Wall Street, supports Wall Street, the big banks and Goldman Sachs and believes in the government controlling everything. We still have 10% unemployment in this country and I do not believe Americans will forget the campaign promises that were made that have not been kept. Intelligent, but unable to get a grip on what’s important to Americans at this stage in the game!

  6. I think I have to side with GS on this one, mostly – the key risk to lending in the 70s was US inflation. LatAm borrowed in dollars, thinking future dollars would be cheap to buy, then Volker happened.

    Many factors are different here – LatAm has less structural debt than we do (reverse of 70s), we’re already at low/negative inflation (so dollars are already pretty expensive), the population hourglass favors LatAm this time (the Boomers starting hitting the work force and the housing market in the 80s in force).

    US 30 years are under 4% today… That’s a lot of macro risk if the US starts to face a sovereign debt crisis. LatAm’s biggest risk is probably structural export dependency, but they’ve done a decent job of developing internal markets (unlike China).

    IMHO, the biggest risk to LatAm debt is that GS is advocating it.

  7. Back to business as usual… Since pretty much everyone has wizened up to the mortgage/home value loan fallacy, Goldman now needs a new patsy to co-opt into their little game of global financial destruction (while taking home the profits), and they apparently see the emerging markets as there next “mark” since the rest of the developed world is pretty much “tapped out” and still recovering from their loss to Goldman in the last round of this sick game. Goldman is thinking the same thing they are always thinking – Big bonuses and let somebody else pay the price. They are buying politicians and playing with the laws of different countries with on allegiance to anyone but themselves, not even the long term interests of their share-holders (who are also tax payers). It’s the same game it’s always been, back to business as usual for Goldman…

  8. The biggest problem with large capital inflows is that they get misallocated due to loose governance (or outright corruption) — a situation that GS seems to always be able to sniff out like a bloodhound.

    (BTW, I heard you get a shout-out on Russ Roberts’ “Econ Talk” last week. Kudos to you.)

  9. Lending to submerging markets? Does this mean taking the Fed’s free money and shoveling it into Thailand, Latvia, Chile, Uganda? Sounds like a good plan to me. Can’t wait for those loans to be securitized. Who will sell me CDS on Uganda?

  10. I’m a little amused that Simon J. is treating Finkelstein’s quote as though it came from serious economic analysis, versus being a cover story for the next bout of manipulation, excess, crisis, and bailout.

    Here’s a suggestion for the future: loans (and derivatives on the loans) financing plastic surgery for Chinese who want to look more like Europeans. A huge market for a service that does absolutly nothing constructive, and that can be counted on to create a crisis that the smart money use as a shorting opportunity, at the right time.

    Cover story: people who like how they look are more productive and creative.

  11. “That’s a lot of macro risk if the US starts to face a sovereign debt crisis.”

    Could you describe such a crisis for the U. S.? What are the odds? Thanks. :)

  12. G-20 instead of G-8 explains it. I guess they were really smart to drum up G-20 instead of focussing on G8, i.e. focus on next target while cleaning up of the current one started! Be ready for the next round of destruction.. When emerging countries also fail, definitely USD has to look better and rallies the argument for reserve status..

  13. You’re right. I’m going to go buy some 30yr JGB’s.

  14. Kliment Voroshilov

    A small contradiction here, Robbie? If “we have a president who choses his people from Wall Street, supports Wall Street, the big banks and Goldman Sachs” how could it be said that he “believes in the government controlling everything”? From the behavior, all we see is an absence of government control. Excoriate this weasily maggot all you wish – no argument there – but not on this account.

  15. Anyone serious will tell you that the 10% figure is as phony as the current President. Why don’t we redo the census so that that we can claim unemployment is declining? The actual figure is near 17% and rising.

  16. Kliment Voroshilov

    Obscene, isn’t it? And this prevaricating little eel has done zilch to address the problem and won’t until the streets of Washington are filled with a sea of angry faces.

  17. “Emerging market” economists read this blog too, the question is whether Goldman and company can corrupt them as they did the mortgage boys, Any bets?

  18. “IMHO, the biggest risk to LatAm debt is that GS is advocating it.”

    Whatever could you mean? When they helped out Greece it worked out great! ;-)

  19. I’m gonna have to say “Yes”. Human psychology really doesn’t change that much between societies. Greed is always present, and Goldman feeds on it. I expect the corruption is already in place, if they’re crowing about this market being the place to be already.

  20. China seriously worries about its investment for a good reason. I think that speaks for itself. How long will investors, consumers, and America’s creditors continue to have faith in the dollar? Nobody really knows how many sick banks and enrons there really are. We do know that there are many states on the verge of bankruptcy and that at a certain point the federal government is likely to bail them out (dollars from thin air again).

    http://theburningplatform.com/blog/2010/04/29/sovereign-debt-coming-to-theater-near-you/

  21. A lot of people over at ZeroHedge blog (most notably the host) are now referring to Goldman as a “contrary indicator”. They (Goldman) make verbal statements and written forecasts for clients which are the polar opposite to their investment actions for their own books or their own accounts. Goldman also drastically changes forecasts only days (not even a week having gone by) after vehemently making their stance on portfolio weightings.

    It’s not just Greece, Europe as a whole, or Latin America, Goldman Sachs have been incredibly destructive and cannibalistic here in America, domestically. I encourage all to read the following 2 links in relationship to the downfall of AIG. I especially recommend The New York Times link, as my blog link is only a highlighting of Gretchen Morgenson and Louise Story’s hard work.

    http://grahambrokethemold.blogspot.com/2010/02/crux-of-crisis-did-goldman-have.html

    http://www.nytimes.com/2010/02/07/business/07goldman.html?pagewanted=1&ref=business

  22. Martin wrote:

    “How long will investors, consumers, and America’s creditors continue to have faith in the dollar? ”

    2nd Half: Slowdown or Double-Dip?

    6/29/2010 04:00:00 PM – CalculatedRisk

    “No one has a crystal ball, but it appears the U.S. economy will slow in the 2nd half of 2010.”

    http://www.calculatedriskblog.com/

    Copper futures appear to have peaked and at risk of further declines suggesting a grimmer scenario. Copper prices are used by some as leading indicators, because of their use in automobile and home construction. Both western and eastern economies are linked and eventually impact on each other. This appears to be bad economic mojo. That is my best guess.

    China’s Pig Farmers Amass Copper, Nickel

    September 17, 2009 02:46 EDT – excerpts

    (Bloomberg) — “Private investors in China, the world’s largest metals user, have stockpiled “substantial” quantities of copper as the government ramps up stimulus spending to spur the economy, according to Sucden Financial Ltd.

    “Private stockpiles, built by many including the much- vaunted, pig-farming speculators, have clearly absorbed substantial quantities of metal,” Sucden’s Goldwyn said. “Much of this metal will remain out of the normal market place.”

    http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a1B_ZBQfii8Q

  23. No. No. Not for me. Too high tech–too complex.

  24. Bayard Waterbury

    All this as we now stand at the brink of the dreaded “double dip” chasm awaiting the developed worlds governments which are both scared and clueless, as clearly demonstrated by the happenings in Toronto last week. They are running in panic, wondering if the supremely fragile recovery can withstand a “double-whammy” of reduced spending and increased taxation. I have yet to see an economist who believes that this is the way out. It is certainly a huge gamble. Even China, formerly showing signs of resistance to recession, is looking weaker by the day, and is, perhaps a bellweather sign of things to come. Is it going to be a recession of “stag-deflation”?

    Goldman cares only about its ability to find arbitrage, between economies, currencies, and anywhere else, and take the “long” bets which produce the best chance of big profits, since they believe themselves and their TBTF cohorts to be bullet proof, and have the capture to back it up.

    Unfortunately, another bailout won’t happen. If the Congress even attempted it, there would be a literal and figurative bloodbath, and maybe even open revolution. Our representatives have had two major bites at the re-regulatory apple, and have choked on both. Now comes the aftermath, and it’s not pretty.

  25. Recently I’ve come across an interesting Australian group, their website is called the Renegade Economist

    Extemporizing here … perhaps the way to reign in the excesses of the rentier class is through taxation.

  26. Coyote Bill

    Here is something to leave everyone feeling violated.

    http://www.nytimes.com/2010/06/30/business/30aig.html?src=busln

  27. Emerging markets?

    “When the rents of nature are privatized, the public sector is starved of funds, and governments have to tax the working wages of people.

  28. the.Duke.of.URL

    @TedK

    Your NYT link to the Story and Morgenson piece seems to be broken for me – all I get is a blank page. And it doesn’t work within the NYT either – same result. Here is a link to a recent piece on AIG by Story and Morgenson.

    http://www.nytimes.com/2010/06/30/business/30aig.html?hp

  29. Wow. The economics in these videos are just a little left of Lenin and verging on fascist.

  30. Those 2 links I gave work for me when I double-checked them. The Morgenson/Story article I am referring to is February 7th of this year. I will read the one you gave also though, most likely it is also well written. Morgenson makes some small blunders, but generally she does a good job.

  31. @Jim

    I am not an economist. Can you explain what you mean when you say: The economics in these videos are “left of Lenin” and verging on “fascist”?

  32. Maybe crazy booms is the best we humans can manage. So, bring on the emerging markets boom, it’s better than sitting around scraping along the bottom hoping our ‘leaders’ develop the backbone and smarts to do something better.

  33. Stephen A. Boyko

    “Our representatives have had two major bites at the re-regulatory apple, and have choked on both.”

    Agreed! But let’s move beyond the losing card players grousing of deal the cards.

    Look at our “Champion’s Champion” proposal for a socio-economic Maginot line.

    Mr. Volcker is wrong! http://www.yorktownpatriot.com/article_659.shtml

    • Economically, the 1970s slayer of inflation now has to combat deleveraging and deflation—jobs and capital are going overseas via GS arbitrages.

    • Regulatory-wise, it is “uncertainty” that must be dealt with by segmenting one-size-fits-all deterministic governance into predictable, probabilistic, and uncertain regimes.

    • Politically, if you advocate for change, propose real change. Something other than revolutionary sloganeering or political “gotchas” expecting punishment for those evil campaign contributors rather than the results of real reform.

    Unfortunately for Mr. Simon, et.al., GS had a better hand and played it better.

  34. Maybe I can be of service:

    Anything left of this http://en.wikipedia.org/wiki/Milton_Friedman

    Is too far left for Jim.

  35. You hit the nail on the head.

  36. The stories in the news continue to validate the general perspective that the banksters are running the country. This is another one.

    The fact Obama selected and continues to support Timmy-the-tax-cheat Geithner as Treasury Secretary is surely indisputable evidence that Obama is a bankophile. From my perspective, if Obama’s selection of Timmy was actually an error in judgment it is too late to correct it.

    We really need to clean house of elected officials who do not support serious banking reform – including breaking up the TBTFs, auditing the Fed, ending the debt=money paradigm, implementing a North Dakota banking model, etc.

  37. I doubt even a sea of angry faces will make any difference. He’ll just call out the military and Nation Guard.

  38. Agreed x 1,000,000,000,000.

  39. May 25, 2010 – Market Watch

    “…. in “This Time Is Different: Eight Centuries of Financial Folly,” economists Carmen Reinhart and Kenneth Rogoff pinpoint the key signal that will blow the whistle and call the game: The “90% ratio of government debt to GDP is a tipping point in economic growth.” For 800 years “you increase it over and beyond a high threshold, and boom!”

    Warning, fans, the numbers on the game-clock are flashing wildly. America’s ratio is now 92%, thanks to Obama’s $1.7 trillion budget, future deficits, exploding debt. Soon, Ka-Booom! Another great nation bites the dust. Depression follows. Goodbye retirement.” – excerpt

    Tip of the hat to Coyote Bill.

    http://tinyurl.com/29z6vmw

  40. God has spoken to Blankfein, and Blankfein has spoken to his collegues:

    “Risk? Risk? Risk? We don’t care about no stinkin’ risk. We don’t have to. The con is in place.”

  41. Kliment Voroshilov

    And today the butt-boys and butt-girls at The New York Times, The Washington Post and PBS are asking us to believe that the new “consumer protection” agency authorized by the pending “financial reform” legislation will have real meaning when its enforcement arm will be the self-same Federal Reserve regulators that handled this AIG situation!

  42. Brad Thrasher

    Kinda sad when good ideas aren’t advanced and fall on deaf ears because the advocate is more interested in making a moral statement.

    You’d think by now these self-absorbed, high minded, ivory tower full of themselves types would know better. Sadly they don’t. They are what they are.

    Just a bunch of conceited a-holes more intent on securing credit for writing an 11th Commandment than advancing the economic cause.

    The video is appropriate for this site, so long as your intent is preaching to the converted.

  43. Brad Thrasher

    Doesn’t matter what Blankfein does or doesn’t do. We’re done like dinner anyway.

    One or all of bankrupt pension funds, popping debt bubbles, run from bonds, manipulation of the virtual (paper money) economy rather than investment in the real economy, war and/or environmental disasters can send us into a series of dips pushing the downward spiral ever further.

    Need proof? Look no further than the $24 trillion and rising Bush/Obama Administration bailout. TWENTY FOUR TRILLION DOLLARS has merely slowed and failed to reverse it.

    Secure yourselves. The time for saving the republic is passed.

    Goodbye & good luck.

  44. A great howl goes out to you for posting the link to an article that spells it all out without shyness or reservation. The view we will get from the MSM and the Propaganda Ministry will beg to differ, of course. Even as Berlin was being bombed, the Germans still believed that the ‘secret weapon’ would ultimately save Germany from defeat.

    http://blogs.cbn.com/hurdontheweb/archive/2010/06/29/are-the-markets-about-to-freefall-again.aspx

    http://peopleforfreedom.com/74865/warning-signals-of-a-double-dip-recession-flash-brightly-across-the-world-3/

    http://geraldcelentechannel.blogspot.com/2010/03/obama-armageddon-world-war-3-doomsday.html

  45. @ btraven

    Timing and sequencing are key to complex solutions.

    The same people who brought you “debt = money paradigm,” also gave you the TFTF break-up objective as being reform’s independent variable.

    I am curious why do you accept TBTF and reject the other given the same source.

    Consider “too-random-to-regulate” (i.e. conflation of risk and uncertainty) as the independent variable for the starting point of reform.

    If you advocate change, pursue strategic real change of governance rather than tactical rule-writing.

  46. Look, the good folks at Goldman Sachs have admitted to shorting $615 million of their own CDS and MBS securities they had underwritten themselves since 2006. The great “marketmakers” Goldman Sachs shorting the very same securities they were underwriting. I can’t believe it.

    http://www.marketwatch.com/story/goldman-shorted-615m-of-its-cdos-rmbs-2010-06-30

    I am so in shock. All this while Republicans behind closed doors have killed the bank tax to be used for bailouts. Apparently Republican Senator Judd Greg and Republican Senator Scott Brown of Massachusetts don’t want banks to pay for their own bankruptcies, Republicans Scott Brown and Judd Greg want the American taxpayers to pay for bank bailouts.

    http://www.marketwatch.com/story/dodd-frank-bill-loses-key-supporter-over-bank-tax-2010-06-29

    Democrats should hit back and hit back hard on this with direct dialogue to American voters over the next few weeks. But instead Dodd and Frank will fold. They want to name this legislation after Christopher Dodd. Great idea. The “Magnanimous Pussy Dodd” Bill sounds good to me.

  47. @ Anonymous — I’d be happy if we can just get one thing implemented that starts to address the problem of bankster control. I think there are various ways to get started, but none are being done, or even considered, in any serious measure. If I could wave a wand and end the debt-as-money paradigm, I’d do it in an instant. I’d also wave that wand to create a separation of wealth and political influence, end monopolies & monopolistic competition, mandate all businesses as privately owned or worker cooperatives, end the derivatives market, and bring serious competition back into our markets. Alas, I am not a wizard.

  48. By the way, after the softball interview Rachel Maddow did with Barney Frank this past week (June 25), maybe she’s trying to be the Fox News or Drudge News of the left. I like Rachel Maddow generally, but she deeply shamed herself for a long time with that June 25th Softball Question extravaganza with Barney Frank. It’ll take a year of real journalism (roughly the same time it will take Barney Frank to get Maddow’s adoring slobber off himself) for her to make up for that stunt.

  49. “At seven p.m. the main hatchway gave in’ He said Fellas, it’s been good to know ya.”
    Gordon Lightfoot,1975
    The Wreck of the Edmund Fitzgerald.
    The nature of “power corrupts” here is to make it legal.

  50. Anonymous is I who club-fingered the transmit button when typing.

    Not to worry, I hear being a wizard is rumored to be over-rated.

    The thrust of my comments are that regulators are ill-trained (almost exclusively deterministic accountants, attorneys, and economist) for indeterminate underlying investment environment and ill-positioned with two-dimensional metrics in a three-dimensional world. Regulators are using maps when they should be using GPS.

    The U.S. capital market regulatory structure is a hierarchical command-and-control process similar to the Soviet Union’s Gosplan. The Former Soviet Union lacked the information system to restructure. It was unable to address effectively global complexities. U.S. regulators find themselves in a similar situation. As long as reform is deterministically driven the regulated know how to game the system better than the regulators.

    Before you think outside the box, you need to think outside the square with iterative experiments that address effectiveness and efficiency experiments.

    Also, you need reflexive systemic treatment for the “banksters’” corporate cronyism and the “rent-seeking” GSEs that gave property rights to renters to make their bonuses.

    Stephen A. Boyko

    Author of “We’re All Screwed: How Toxic Regulation Will Crush the Free Market System” and a series of articles on capital market governance.

    http://w-apublishing.com/Shop/BookDetail.aspx?ID=D6575146-0B97-40A1-BFF7-1CD340424361

  51. The bailout was a scam, like the stimulus. Smoke and mirrors while the bandits and their government partners made off with the biggest heist in history.

    http://www.marketwatch.com/story/ex-aig-derivatives-chief-questions-bailout-2010-06-30?reflink=MW_news_stmp

  52. The time for saving the Gulf may have passed too. The oil disaster was handled just like the financial disaster. Afterall, with the government devoid of integrity and leadership, the public interest gets only lip service.

    http://www.reuters.com/article/idUSTRE65R5RC20100628

  53. Thanks RicoSauve,

    I am trying to understand what the Economic Renegade. Obviously, heterodox economics as opposed to the Chicago school orthodoxy.

    I like the opening sequence to Part One. What Fred Harrison claims is the original source of wealth is from the land and the natural world. He suggests third world poverty and the environmental degradation our planet is undergoing can be healed if we as human beings can reconnect with nature. He is saying when economic rents from the land are transferred into a globalized financial system people in Africa are impoverished and subject to economic colonization. For Harrison, taxing the economic rents to create public goods is natural law.

  54. Mike McMillen

    I assume that Jim lives in some miserable hole in the ground where he is deprived of any real world information. Don’t get me wrong. I am a capitalist and during a 40 year life as an investor the markets have treated me well. But I am wiling to acknowledge that the free markets have there limitations and even have feedback loops that can,from time to time, result in catastrophic excesses. We are in such a period now. One of the excesses we currently confront is the gross concentration of ownership of assets and income at the top 10% percent of the population.” What is wrong with the concentration of wealth?,” Jim might ask. The fundamental problem of such a circumstance is that it vitiates markets not only by reducing the number of players but also by centralizing the role of participants whose lives, for all intents and purposes, are insulated from the consequences of their activities. In other word, it transforms fundamental function into a mere game.

    The point of these films, it seems to me is that what is a game for the few is of mementos conseqence for the many. In the final analysis rich and poor are adversely affected by a concentration of wealth and power. Fewer dollars in the hands of the masses means less aggregate demand for owners. Even Henry Ford understood that, and he was now saint. But all of this real world stuff may be lost on Jim and others living in their idealogical holes.

    Mike

  55. Mike McMillen

    I assume that Jim lives in some miserable hole in the ground where he is deprived of any real world information. Don’t get me wrong. I am a capitalist and during a 40 year life as an investor the markets have treated me well. But I am wiling to acknowledge that the free markets have there limitations and even have feedback loops that can,from time to time, result in catastrophic excesses. We are in such a period now. One of the excesses we currently confront is the gross concentration of ownership of assets and income at the top 10% percent of the population.” What is wrong with the concentration of wealth?,” Jim might ask. The fundamental problem of such a circumstance is that it vitiates markets not only by reducing the number of players but also by centralizing the role of participants whose lives, for all intents and purposes, are insulated from the consequences of their activities. In other word, it transforms fundamental function into a mere game.

    The point of these films, it seems to me, is that what is a game for the few is of mementos consequence for the many. Sadly In the final analysis rich and poor are both adversely affected by a concentration of wealth and power. Fewer dollars in the hands of the masses means less aggregate demand for owners. Even Henry Ford understood that, and he was no saint. But all of this real world stuff may be lost on Jim and others living in their idealogical holes.

    Mike

  56. I wish this were truth. The sad fact is that we are in a big round of Game Theory. A race to the Bottom.

    If the population keeps growing the way that it is, and economies keep modernizing, we will demand more and more from the sphere we all live on.

    I believe that population growth is good for economies. Growing 50% from 6B to 9B in the next fifty years is going to be extremely taxing on limited resources. For example, water tables and the water cycle that we depend upon so greatly.

    The outcome is unavoidable, and only a global concerted effort to limit the growth rate of the planet is the solution. Hence the race to the Bottom.

    This said, there will always poverty, hunger, and environmental degradation. So I feel that while true, pretty this presentation is far from pragmatic and grounded.

  57. I am amazed at the many people I talk to who think that the prospect of depression and collapse is just crazy talk brought to us by people interested in exploiting fear for monetary gain or pessimists who tend to be extremely risk adverse. Many simply prefer to live in denial than to plan for disaster.

  58. @RicoSauve

    For some reason I am not worried about over population. Women in Europe and North America are considered by law equal to men. When women are educated and fully participate in society the birth rate declines. To the extent now where declining population in some countries (Canada, Northern Europe) is the concern. Not over population.

    As for over consumption of natural resources. People can put limits on their consumption. This is enlightened self-interest.

    Jane Goodall says that when people are dealing with poverty and the memory of poverty, understandably, their first concern is with acquiring material security. But their children are different. She is very hopeful about the generation who has grown up enjoying the prosperity created by their parents. In her view, the “second generation” are less obsessed with material security, and therefore more able to address the problems facing our planet.

    Limiting consumption does not necessarily mean diminishing the quality of our lives.

    For example, the fast food industry has apparently created an epidemic of obesity in North America. A question that came up at an international conference was: Why are North Americans so fat? While poor countries have much slimmer populations.

    So over-population and constant “modernization” does not have to be a given. This is forecasting based on factual evidence. But forecasting is not a perfect science and sometimes entirely off mark. (Financial risk models being a recent example.)

  59. Mike McMillen writes:

    “Fewer dollars in the hands of the masses means less aggregate demand for owners.”

    Labour in the province of British Columbia where I live says the minimum wage should be raised. It has been $8 and hour for more than a decade. Business having acquired the upper hand does not want to see the minimum wage increased.

    It seems obvious to me. If people are earning more they will spend more. This is good for the economy. How is hoarding by the alleged oligarchs good for the economy?

  60. What is Goldman Sachs thinking?

    Heterodox economics suggests the way to rein in excesses of the rentier class is with a progressive income tax. It has been done before.

  61. Off topic: The central issue for latest crisis is that people trusted the rating agencies to correctly assess the risk of certain instrument. If the CDO’s and CDS were rated as Junk, nobody, or pension fund would be willing to invest in them.
    There is no way to legislate morals. No matter how many agency or regulators we put in place, there is always a possiblity of corruptions or the use of backchannel politics that the bankers will use to decieve the public. Why don’t we the public set up multiple sites to assess those assets’s risk. Basically the idea is to pull the collective intelligence of the investment community to understand the risk of the assets that gs and other investment banks have underwritten.
    The world of financial instruments are too complicated for one average person to understand but if we all pull in our effect to understand the systematic risk wouldn’t be much lower? Two heads is better than one. Wouldn’t you think?
    Would anyone want to start a site like that?

  62. How about “terrorism” works…?

    Aren’t all your brain neurons singularly focused on not losing your “job” – and what better job security than daily inflicting psychological warfare?

    The math formula is deadly accurate – eternally – when the HUMAN NEEDS CONSTANT for life maintenance is thrown out:

    More misery for others =
    More money for ME ME ME

  63. @tippygolden

    While I appreciate that there are certain countries where underpopulation is more of a concern than overpopulation, in aggregate the population of Earth will continue to grow, will it not?

    People can exercise enlightened self interest, but it is still their choice and as we can see clearly from OPEC agreements, collusion tends to fall apart when regular self interest is involved. In this case its the most primal of self interests: reproduction.

    Your anecdote about poverty is baseless. Even people who have escaped from poverty can be greedy. Remember, poverty is relative. In Manhattan, poverty might mean making $100k a year.

    Limiting consumption is hard when one lives on a $1 a day. There are some 1.2B who do so in the world. Of course purchasing power parity is skewed but the basis is the same. When you spend a majority of your day procuring the daily water needs of your family, you cannot limit consumption without heavily diminishing the quality of your life.

    Americans may be fat, but even in aggregate they enjoy and get utility from the goods they consume. It will be hard to drive food from them to the poor when Americans have the ability to pay. Of course they could choose to donate, but then again that relies on key word choice.

    I think on the aggregate level, using the anology of OPEC, and the theories of Darwin can help come to more pragmatic understanding of the problem and thus a more feasible solution. Ask whats possible and impossible and eliminate that which is impossible. Controlling population of 6B and their reproduction habits will be all but impossible.

    Overpopulation is a given. Modernization will not be able to keep up. I’m sorry but thinking positive thoughts about what could be if people choose a sustainable path is rather absurd when the entirety of the human condition is considered.

    I know that Malthus was wrong repeatedly, but there is a limit at which when we approach it, as we constantly have been, there will be poverty and overreaching of our resources.

    I find it hard to understand why everyone is so concerned with Global Warming and Environmentalism aimed at consumption without getting down to the core of what drives the consumption–an ever expanding population.

  64. @RicoSauve

    If women in developing countries have access to education and can fully participate in society the birth rate will fall. The reason North America and Europe have declining population is precisely for this reason. So in my non-expert opinion there is a way to deal with over-population.

  65. @RicoSauve

    Of course I don’t people living on $1 a day should be limiting their consumption. Rather that North Americans could live with less and not diminish their quality of life.

  66. Anger Management

    Is there any way, legally, that you can line up a bunch of investment bankers/traders and kick their asses?

    Is it wrong to think like this? It’s just that they have done so much wrong. They practically have ruined the economy, while pursuing their bonuses. Really wrong thinking, moral hazard, etc.

    If I could have a go a them, it would really help me boost my morale. After they appologize and promise not to do it again, we can be friends again.

  67. “If” and “could” sound like possibilities and not probabilities. By the time the entire planet has access to the kind of education that you speak of… that will be 50 years from now if ever. How large will the population be then?

    I agree. Americans are investing capital into their fat stores and smoking cigarettes that would have a higher long run ROI for everyone on the planet if invested in the stock market. But the problem is that if American consumers did stop eating too much and smoking and drinking, where would their hard earned cash go? They COULD choose to donate it, but in essence its their CHOICE again.

    American consumers having bargaining power that people in poverty do not. So yes there is enough food to over feed the US population, but it because they own the capital and choose what they do with it that is what makes the difference. So it not about American’s over consuming. It is because modern capitalism has put them in this position of bargaining that they are able to do crowd out the other consumers.

    I’m all for education. And I’m all for getting rid of poverty. Its just that I firmly believe that pragmatism is necessary to move closer to these goals.

    Technology will slowly allow us all to have access more education, its just that its going to take time for that to happen. Its that time during which the population will continue to grow, and as we continue to grow, there are those among us that will continue to starve.

    A sustainable solution is limiting our growth to coincide with the ability to nourish ourselves.

  68. The Lying Liars at Goldman Sachs

    July 1, 2010 05:46 PM – Huff Post – excerpts

    “Today, Goldman Sachs sent its second-highest-ranking officer to Washington, D.C. to tell the Financial Crisis Inquiry Commission that his company is staffed and managed by complete idiots.

    In an effort to evade investigation, Goldman Sachs Chief Financial Officer David Viniar claimed that his company really just doesn’t know how to do basic bookkeeping. It was a silly and transparent lie, but if it were true, every investor the world over would be pulling its money from Goldman as fast as possible…

    “We don’t have a derivatives business.”

    Viniar actually said that, and he said it to FCIC Commissioner Brooksley Born, one of the world’s most seasoned experts on derivatives. Her response, somewhat incredulous, was to point out that Goldman has well over $40 trillion worth of derivatives housed at its commercial bank. That’s a lot of money for a business that doesn’t exist.

    Viniar backed off a bit, saying that, sure Goldman does do derivatives operations, but they don’t separate those businesses from other activities…

    If Goldman Sachs is truly not technologically capable of simply adding up the values of its derivatives contracts, every investor in the world should run screaming from the firm. Fundamentally, Viniar is claiming that Goldman Sachs cannot do basic bookkeeping.”

    http://www.huffingtonpost.com/zach-carter/the-lying-liars-at-goldma_b_632992.html

  69. Self-fulfilling prophecy? Panel pushes Goldman on AIG collapse

    Thursday, 07.01.10 – MCCLATCHY NEWSPAPERS

    WASHINGTON — “Goldman Sachs executives first threatened to stop making exotic trades with the American International Group in July 2007 unless the insurance giant posted $1.8 billion in cash collateral to compensate for a slide in the mortgage securities market, internal AIG e-mails show.
    When AIG refused to meet its demands, Goldman began betting hundreds of millions of dollars on the insurer’s collapse, ramping up those wagers to $3.2 billion over the next 10 months in a strategy that put AIG under huge financial pressure, a congressional commission found.”

    http://www.miamiherald.com/2010/07/01/1711378/self-fulfilling-prophecy-panel.html

  70. Stephen A. Boyko

    Stock brokers whose clients have recieved a margin call or who have failed to deliver stock in settlement of a sale have used put options to protect the brokers’ exposure to potential liability.

    Having been there, a couple of $$$ thousand put cost vs 100x stock exposure is a hedge that lets you sleep alot better at night.

    You may even make money on the hedge if you are lucky.

  71. I wrote: “Recently I’ve come across an interesting Australian [?] group, their website is called the Renegade Economist.” They appear to be influenced by a 19th century American economist Henry George. So the concept of taxing “economic rents” derived from the land and natural resources is associated with George.

  72. Simon,

    Interesting idea, but maybe not correct in my view. I think in a way we all can be victims of the “markets make opinions” problem. If we are skeptical of ‘emerging markets’ because of past political unrest etc or current volatility, we should at least recognize that they contain few economic raw ingredients of future troubles. Conversely, the fireproof houses of the G8 are all levered to the gills and populated by financial advisors and real estate agents who still must retool themselves to participate in a different global economy.

    Could EM be the next bubble? Perhaps, if Goldman is able to cram enough leverage that way. But it also appears possible that Goldman happens to be on the right side of history this time out.