Can the Buy Side Take on the Sell Side?

By James Kwak

The Economist did not like 13 Bankers: “A broader perspective would have led to more nuanced conclusions. The origins of America’s financial ‘oligarchy’, for instance, might have more to do with campaign-finance rules and political appointees than banks’ size. The faith that Messrs Johnson and Kwak put in merely capping the size of banks is misplaced.”*

But a reader pointed us to the Economist columnist who goes by the name of Buttonwood (the site of the founding of the New York Stock Exchange), who seems a bit more favorable. In a recent column criticizing the rent-seeking of the financial sector, Buttonwood seems to tell broadly the same story:

“Something has clearly changed within the past 40 years. Banking and asset management used to be perceived as fairly dull jobs, which did not attract a significant wage premium. But after 1980, financial wages started to climb much more quickly than those of engineers, another profession that ought to have benefited from technological complexity.

“Around the same time, banks became more profitable.”

He even nods toward breaking up the banks:

“At the moment, governments are wading in with all kinds of levies and regulations, which will probably have unintended consequences. Rather than tackle the big problem (for example, by breaking up the banks), they waste their time on populist measures like banning short-selling.”

In the end, though, Buttonwood endorses a different solution: getting the buy side (investment funds) to take a stand against the sell side (investment banks):

“Paul Woolley . . . has published a manifesto which he believes should be adopted by the world’s biggest public, pension and charitable investment funds. Among other things, he proposes that the funds should adopt a long-term investment approach, cap annual portfolio turnover at 30%, refuse to pay performance fees or invest in alternative assets such as hedge funds and private equity, and invest only in securities traded on a public exchange.”

In other words, the buy side should realize that its getting screwed by the sell side and start looking after its own interests.

I would love it if this were to work. But I’m not optimistic. Because while the institutions that make up the buy side and the sell side have different economic interests, they are populated by the same set of people who believe the same things. Pension fund managers are not suddenly going to acknowledge that they can’t beat the market in the short term and shift to low-turnover, long-term investing, because that would undermine their own claim on a piece of the action. You become a manager of a big fund by beating the market, and you beat the market by taking on extra risk and getting lucky. You’re willing to put money into fancy hedge funds and private equity funds because it’s not your money, so you get a chunk of the upside (a better job, more funds to manage, more money) and none of the downside (no one will blame you for putting money into Goldman’s hedge fund, even if it doesn’t do well). The people whose retirements depend on the pension fund’s returns have one set of interests. But the people managing that fund very often have another.

* For the record, we did discuss both campaign finance and especially the problem of political appointees who are friendly to Wall Street at some length — a lot of Chapter 4 and a chunk of Chapter 6.

42 responses to “Can the Buy Side Take on the Sell Side?

  1. “The Economist did not like 13 Bankers: ‘A broader perspective would have led to more nuanced conclusions. The origins of America’s financial ‘oligarchy’, for instance, might have more to do with campaign-finance rules and political appointees than banks’ size. The faith that Messrs Johnson and Kwak put in merely capping the size of banks is misplaced.'”

    Well, whoever wrote that review/editorial for The Economist must have skimmed 13 Bankers. I spent many years on Capital Hill, in Treasury and in the lobby (I confess), and one of the strengths of the book is the interweaving of the role of campaign and lobby money with the group-think ideology of laizze-faire economics in laying the foundation for the Crash of 2008.

    All this is a replay of the 1830s when the 2nd National Bank made huge “contributions” to politicians or put them directly on the payroll to protect the financial oligopoly of the day–until Jackson threw the moneychangers out of the temple.

  2. There is no substitute for breaking up the financial institutions so that no single insitution has more than 3% of the domestic market, and all those with more than 1% are prevented from growing through acquisitions and mergers. Also, government insured deposits must be completely separated from risky investments.

    The size limits will enable a sufficient degree of competition so that survival depends on performance rather than market dominance. Size limits would also enable an apoptosis (orderly dispersal of assets and liabilities) process for dissolving all institutions that fail. Right now the FDIC serves that function for smaller banks, but is unable to handle the larger ones. Thus, a large institution threatens a necrosis process to the market as a whole…. spreading its illness throughout the system and sickening the economy.

    The second problem facing larger, older institutions is their parasitic loads…. bloated salaries, bonuses and golden parachutes that suck the resources out of the institution to feed the bellies and egos of the executive parasites. Nature limits parasitic loads by limiting lifetimes of hosts; we have mistakenly enabled corporations to have unlimited legal lives.

  3. “The people whose retirements depend on the pension fund’s returns have one set of interests. But the people managing that fund very often have another.”

    You might want to tell our esteemed policymakers about this; they seem to think having a fiduciary duty is the solution to everything.

  4. as The Economist is owned by the oligarchy, it seems hardly worth lending any credence or effort at rebutal whatsoever to its sheeple advert ‘review’.

  5. FYI, Justin Fox at his new HBS blog has a quickie “new literature” review looking at a similar question re corporate governance.

    There’s evidence that firms took greater risk if they had concentrated institutional investor ownership that should have meant the shareholders were minding the store. Looks like instead the investors cheered on the risk-taking executives and their big compensation packages. So relying on investors and corporate governance to serve the watchdog function doesn’t look too promising. Probably for the reasons you cite re perverse incentives.

  6. The financial markets are awash with sociopaths, they’ve really found their niche in the world, and, as long as they employ smart CFA’s with a ‘yes Sir, yes Sir, three bags full’ approach to life then all the hard work is fobbed off to them – bonuses are paid in up years and there’s a no liability mentality in the down years, after all the law of OPM is alive and well, ie. other people’s money !

  7. Bruce E. Woych

    There were some biting comments that followed that (unsigned?) critique from the ECONOMIST. Of course the ECONOMIST has some serious explaing to do for its neglegent exposure rate to this crisis fomation and perhaps earlier ones cross borders. It does not bite the hand that feeds it and apparently is implying inter alia…that the banks WERE not Too Big and were not bailed out because they threatened the entire economic structure of the National economy (and perhaps still the entire world order as we once knew it…so this minor stop loss isn’t realistic ???

    ARE THEY KIDDING? I have just picked up a copy of Nomi Prins 2009 IT TAKES A PILLAGE: Behind the Bailouts, bBonuses and Backroom Deals from Washington to Wall Street (John Wiley & Sons) and perhaps they might get a real heart attack over those revelations.
    The initial reverse engineering of this problem would have to reorganize separations as well as break ups in restructuring the consolidated theft of the neopower brokers that constitute the new self appointed Central Planning consortium for US capitalism through monetarian rationalism andcreative destruction.

    Conspiracy theory my foot, The Economist has done a massive disservice to the discussions involving correction and wasted its time and resources to inadvertantly kiss up to the financial “Central Planning Committee” now in power. I hope they get what they deserve. Media bankruptcy is not too far away in this trickle down collapse.

  8. Bayard Waterbury

    Of course, breaking up the huge financial behemoths is the appropriate solution, but not the only thing that must happen. The prudent barriers of Glass-Steagall must be resurrected, and total transparency of all markets is paramount. The world was a far safer place for investors when banks were not casinos. Now, the huge financial oligarchs are rapidly become the most severe terrorists in our society (perhaps with the exception of the BP’s of the world). Because of oversized financial sectors in all of the developed nations which exert unrivalled control over the plutocratic leadership of each, billions are now being driven to poverty and millions will die of starvation, lack of medical treatment and the woes of massive social displacement. We tend to talk about Jihadists and other terroristic radicals, but the banks, in the end, are a far greater threat to life and global stability.

  9. ERISA gutted the notion of fiduciary duty in any event.

  10. Andrew Macpherson

    The Economist is largely a Rothchild owned brand, so you can’t really expect them to support breaking up their own monopoly.

  11. Maybe you’re both right. Banks need to be downsized and campaign finance rules need to change. My suggestion for political reform:

    1. Reduce the advantage of money in elections
    Distribute 25% of all money raised to other candidates. This probably requires a 2-step process to weed out weak candidates. This would mean both more choice and a better airing of issues during elections.

    2. Reduce the power of seniority
    Make seniority only one of several factors that qualify a candidate for a leadership position. Rotate positions (as randomly as possible). This would reduce the ability of senior representatives to ensure their election by raising gobs of money by catering to corporations and other wealthy interests.

    I’m sure there are many other possible ways to reduce the hold of “special interests.” Finance and political reform is not likely to be any easier than reducing bank size but until we do, our representatives will continue to have more incentive to serve the crony capitalist oligarchy than the interests of their constituents.

  12. the.Duke.of.URL

    James, Satyajit Das had a critical comment to make of 13 Bankers.

    “13 Bankers” sees a conspiracy in this arrangement and also considerable danger. Like all good conspiracy theories there is some validity in the argument….

    The thesis in “13 Bankers” is similar to the work of Mancur Olson, the American economist. In his books (”The Logic of Collective Action” and “The Rise and Decline of Nations“), Olson speculated that small distributional coalitions tend to form over time in developed nations and influence policies in their favor through intensive, well funded lobbying. The policies result in benefits for the coalitions and its members but large costs borne by the rest of population.

    “13 Bankers” is grounded in a traditional American fear of a financial oligarchy, dating back to the fights between Thomas Jefferson and Alexander Hamilton over the “Bank of the United States” and Franklin Roosevelt’s Depression-era regulation of finance. While American banks may certainly be powerful and highly influential, the case for a conspiracy is not entirely convincing.”

    He later on contends that ““13 Bankers” and “ECONned” are written intelligently with the non-technical layman, rather than the “econo-wonk”, in mind.”

    Das is right that there need be no conspiracy, in the strict sense, for collective behavior of a given group of people to act as if there were one, as the environment can act as a synchronizing agent. Nevertheless, it does not follow from this that the individuals/firms in questions are not engaging in the kinds of behavior you claim they are.

  13. Scot Griffin

    I’m quite enjoying 13 Bankers, in large part because you guys are bring economic history into the mix, something that others have not done as well, if at all. I especially like that you dug up Brandeis’ “Other People’s Money,” which I discovered on my own just a couple of weeks before I picked up your book (I found it through research I was doing that was unrelated to economics).

    While I do agree that breaking up the banks and capping their size is necessary, I don’t believe it will be sufficient in the long run. The key is to figure out how to avoid regulatory capture, which can be done through collusion by many smaller players as easily as by a monopoly.

  14. Dan Palanza

    Buttonwood Said:
    “Something has clearly changed within the past 40 years. Banking and asset management used to be perceived as fairly dull jobs, which did not attract a significant wage premium. But after 1980, financial wages started to climb much more quickly than those of engineers, another profession that ought to have benefited from technological complexity.
    “Around the same time, banks became more profitable.”

    Two things happened about 40 years ago. (1) Book-keeping moved to software driven coded systems and (2) bankers found increasingly cleaver ways to get their fingers into the ’till.

    The economist is correct in pointing out that bank size is not the prime issue. (I personally do believe it is a huge part of the issue.)

    The prime issue is money’s rules-based control system: a proper double-entry book-keeping that records a real-time reusable history.

    Real-time reusable history is transparent in the sense that it is easily audited. Proper audits would show where in fact the banker is putting his illicit fingers into the money that by tradition he is paid to hold safe.

    Only the 670 year old double-entry book-keeping framework of rules can teach us how money maintains the social integrity that a society of cultures needs if it is to be a guardian of freedom’s democracy.

    Our monetary system is only as good as book-keeping that lives by the rules of the constitution of the United States. That is not happening today. Constitutional government is becoming a bad joke.

    With 40 years of mounting abuse that is hidden in half baked software, our monetary system is a shambles of half-truths. Fix the rules that control the monetary system — the double-entry framework of rules that distinguishes value versus expression — and bank size will fix itself.

  15. Think Buttonwood is a ‘she’.

  16. This is the Gordian knot, isn’t it. Both for the pensioners and the managers, the gun at the head is the question,

    “How to break away from this protection racket in order to benefit the whole without sustaining unacceptable damage myself?”

    (The same is true more broadly for most workers and value creators and true entrepreneurs – how to economically function at all without having to collaborate in corporatism and in one’s own serfdom?)

    The true, rational answer is that not finding the will to make a clean break, however severe the short term disruption, will result in far worse pain for everyone over the middle and long terms.

    As Taleb said, we should choose to undergo the “blood, sweat, and tears” of smashing the finance rackets now. The only alternative is far, far worse blood, sweat, and tears in the future.

    But individuals, institutions, and societies don’t think rationally about this. They’re the same as the junkie who won’t quit shooting up because his overwhelming fear is the few days of withdrawal, and never mind that after those few days he’d be free. The short term horizon is all there is, and he’d rather stay high until he ODs.

    So there’s the institutional investor as exemplary of society as a whole.

    If you’re resolved to break the finance tyranny you have to ask, what would you do with that junkie if he were someone you loved?

  17. See, it just goes to show, in every group (“Economist” magazine), there is always one good apple.

    Buttonwood…. we love you brother. Although we have a dark suspicion the tag of Buttonwood was given to you by the retarded members of your publication’s editorial board, who disallow all writers to use their real name, due to the fact they themselves cannot write and are useless c_nts. Although that is a theory at this stage. Buttonwood can verify that later when he’s working for a real publication.

    I do like the Paul Woolley trail of thought here, and it’s strongly worth noting this isn’t just a “big banks problem” (although that this a large percentage of the problem), it is also a corporate governance problem in general. I am planning a long-winded post related to mutual funds in the future, which largely steals from a female academic in the Massachusetts area. As soon as I get out of my lazy spell and it passes her approval (for not being too “Mitch Albomish” in structure) I plan to submit it here as a post if it passes Mr. Kwak and Professor Johnson’s standards.

  18. Bondgirl says: “they seem to think having a fiduciary duty is the solution to everything.”

    You mean the same way Goldman Sachs and other investment bankers think falsely claiming they are “market-makers” can excuse them of F_cking over a large number of their clients and the U.S. economy????

  19. Well California has overwhelmingly passed Proposition 14 so there seems to be some hope for political reform.

  20. It’s quite interesting to me, that at the same time you have incredible intra-day volatility (which can be extremely damaging to individual investors) and the recent “flash crash”, and Goldman Sachs and friends have proven they are anything but “market-makers”, investment bankers yank out this lame defense, this pathetic looking show, like pulling out a monopoly game “get out of jail free” card to get out of a rape charge: “We are market-makers!!!”

    The imbeciles who depend on algorithmic trading for their daily bread, because they can’t read a balance sheet anymore want you to know, they are market-makers. I’m sure the folks trading P&G on May 6 were so grateful for that market-maker function.

    And also, how long do people think FINRA, a self regulating organization of the financial industry, which is now policing the NYSE is going to turn into a mess??? How long do you think a self regulating lapdog of the financial industry—namely FINRA, can police NYSE trading in a responsible way??? Think Minerals Management Service and the oil industry and you’ll start to get a small idea what is in store for the future with FINRA.

  21. A link to WSJ, which discusses FINRA’s “enforcement policies”. By the way, I think we can also confirm Mary Schapiro is a joke now, based on her past record at FINRA. I think President Obama made a huge mistake choosing a FINRA person to head the SEC, and if Schapiro ever steps down, he needs to choose someone to head the SEC who has never been a part of FINRA.
    http://online.wsj.com/article_email/SB123194123553080959-lMyQjAxMDI5MzExNTkxNDUxWj.html

  22. Frankly I think bank size per se should not be the metric itself. Having National and international banks has some unique advantages for consumers, businesses, travel and trade.

    Rather, the leverage allowed ought be reduced (capital adequacy required ought be increased) as the size and systemic importance of the bank increases. Also the periodicity of reporting and frequency of audit ought increase as size increases. Limits on trading activities and insurance type activities ought also be increasing restricted as systemic risk increases.

  23. I don’t 100% trust Wiki, but they say it is Philip Coggan. Again, that’s not written in cement, but it’s a good wager.
    http://www.ft.com/comment/columnists/philipcoggan

  24. Ed: It is hard to reverse history. As we have discussed, economic policy proposals are a lot like term papers.

    •“C” papers provide an answer, i.e. TBTF scale

    •“B” papers provide solution metrics to connect the factual dots where breaking up TBTF financial institutions create Too-small-to-settle (TSTS) intermediation problem and the unintended consequence of self-organized criticality from one-size-fits-all deterministic governance (Broughton Bridge collapse).

    •“A” papers ask the correct foundational questions where complexity begets uncertainty that requiring segmenting the underlying economic governance of predictable, probable, and uncertain regulatory regimes.

    Timing and sequence play a critical role.

    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

  25. I have a general question about how fund managers operate and get promoted: is this the 100th idiot problem? Do the lucky ones get promoted to manage more money? If all fund managers acted randomly, there would still be 3 and 5 sigma people who beat the market and appear brilliant. Is there any way to separate idiotic luck from skill when evaluating performance?

  26. The pragmatitist

    Mr. Kwak

    Your criticisms of Buttonwood’s proposal is based on a false assumption. You assume that the investment policies and practices of pension funds are set by the fund managers. These guys are just the hired guns, the policies are set by the governing boards. Having sat on such a board I know that we set such criteria as average maturity, annual turn over, and asset allocation. We employed a variety of fund managers, from small cap value managers to fixed income managers. As time went on we learned more and more that picking a fund manager was a lot like picking a stock. If you chase performance you will limit your total returns. When I left the board the sentiment was strongly against actively managed funds, with their higher fees and lower long term returns.

    If the governing boards do their job they will see that they are “getting screwed by the sell side and start looking after its(their)own interests”.

    We see evidence of this in recent big bank stockholder meetings where large investment funds have staged revolts and attempted to force meaningful changes.

    That said, these boards do not have a history of successfully moderating the excesses of the sell side, so it may be overly optimistic to assume they will do so in the future.

  27. Mr Kwak, I wouldn’t worry about any review of your book by the Economist. It published an appallingly uncritical review of Paulson’s memoir a few months ago, in which it devoted almost as much space to recounting the problems of Paulson’s stomach as it did to examining the problems caused by his actions or inactions.

  28. The pragmatitist

    It is not just the intra day trading that damages indivivual investors. Professional trading in all its guises is simply a transfer of wealth from the ordinary person to the successful trader. Real returns only have one source and that is company profits. You can trade the stock forever and never add any value.

    Would it be so wrong to fundamentally question the value of the current system. Perhaps there should be a class of stock whose price was permanently linked to the company’s balance sheet. If this were the case I would suggest that these shares be the only voting shares a company has. Sure there would be problems making such a system work, but the costs of fixing those problems would have to be better that the rape and pillage that we preently allow and encourage.

  29. Conspiracy or no conspiracy, we need to re-evaluate how the financial services sector services society as a whole and not itself.
    By becoming global conglomerates, many banks seem to have lost the idea of what banking is actually for and how it should be applied in our ever more technologically advanced world.
    Given its global nature and economic size, there is no doubt that banking tales up way far too much of a slice of global GDP – banking and finance that should be.
    So yes, ones in favour of not only breaking these conglomerates up into their respective constituency elements, but also regulating each segment to benefit all of society and not niches.
    The first way to succeed in this is to remove government guarantees full stop – if a bank is listed it becomes a shareholder problem, so let the shareholders demand reform to protect their holdings.
    As in nature, the removal of all state subsidies and guarantees would actually make bankers think about what they are actually doing.
    Sound regulation and compliance would also help, although rushed policy such a SOX’s and compromise policy such as Obama’s reform package are most likely to have an adverse effect on banking.
    Looking at what the European Union is thinking certainly helps, and quite a few central bankers – Heonig, Fisher, King et. al. seem to get the idea that something is wrong.
    Ultimately, the Austrian School of thought may be right, and I say this as a firm believer in regulation, let them fail if they make mistakes.
    At the end of the day, national governments can always take over the payments infrastructure and make sure money is pumped into the economy by bypassing banks themselves.
    Indeed, given all the systemic risk out there and problems associated with TBTF, governments should begin organising national banks that can step into any breach.
    Whilst the issues are most complex, you do not need to be a rocket scientist to be a banker or understand banking – this only applies to financial engineering and if people don’t understand it, it should be banned.
    Hence, if stake holders are forced to take haircuts matters would have to change, by basically holding economies hostage, no change will take place, so best change the ground rules.
    Apart from that, some good posts and links today – some of these issues will be covered by Dr. James Bullard in Asia next week, so check out the St Louis Fed for two papers he’s delivering.

  30. Scot Griffin

    “Ultimately, the Austrian School of thought may be right, and I say this as a firm believer in regulation, let them fail if they make mistakes . . . Hence, if stake holders are forced to take haircuts matters would have to change”

    But you’re forgetting the original moral hazard: the limited liability corporation. Because of leverage, the harm that banks can do when they fail often (always?) will be a multiple of the shareholders’ equity. Haircuts for shareholders alone aren’t enough. At the very least we should consider imposing personal liability for bank management and shareholders for certain situations (e.g., fraud).

  31. Good comment

    Structure matters, as segmenting regulatory governance corrects for non-correlative information and better allocates liability.

    Asymmetrical information is an unintended consequence of poorly structured governance regimes. Economic fundamentalist thinking supporting one-size-fits-all regulatory regimes, frustrate the natural tendency of markets to segment as they mature. Market evolution correlates information into predictable (US Treasuries), probabilistic (large-cap, S&P100 issuers), and uncertain (small-cap, negative cash flow issuers) regimes based on the underlying economic environment’s degree of randomness. Markets self-select efficient development pathways to minimize a group’s or market externalities’ competitive advantage due to “local knowledge.”

    The test for fraud is scienter, a legal term that refers to intent or knowledge of wrongdoing. This means that an offending party has knowledge of the “wrongness” of an act or event prior to committing it. If there is complexity, there is uncertainty. What is the standard for scienter in an indeterminate underlying economic environment? How do you know in an inherently unknowable environment?

    Alternatively, innovation is the hallmark of capital markets, yet innovative solutions for global markets create greater complexity. Complexity begets uncertainty as innovative financial products evolve from earlier, simpler versions to address heretofore uncertain and unforeseeable circumstances. One-size-fits-all, deterministic governance regimes are disproportionate to uncertain issuers. Thus, it is not surprising that many issuers have gravitated to offshore markets like the London Stock Exchange’s Alternative Investment Market (“AIM”). Absent market segmentation, one-size-fits-all, deterministic governance regimes are toxic to indeterminate, innovative issuers and will crush the free market system.

    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

  32. I have to agree with you on that, and its just not limited liability, its actually giving corporations full rights as if they were actual humans – which evidently they are not.
    However, to be fair on the issue I raised, the market is punishing BP for a rather large mistake and ultimately, shareholders will either dump stock or demand change within the corporation – whichever way it goes, Jo Blogs will be left with some of the bill for the clean-up.
    As for ‘moral hazard’, by bailing out the banking system and effectively protecting bond holders within 24 months of pushing the world into recession, the big global banks are back at casino capitalism, a form of capitalism which does nothing to enrich society in general, only a certain segment – which certainly abandons the moral element found in much economic thought.
    Again, and I’ve made clear previously, sound regulation and compliance can and indeed do work. Within banking, as William Black keeps informing us, we have see no serious criminal prosecutions and investors have not taken serious losses, only the tax payer seems to be paying for all this mess.
    As has been pointed out previously, legislation and regulatory programmes existed but were not enacted by those who should be using them.
    The fact remains, people only care about the bottom line or freedom, if your own pocket is hurt and you are imprisoned, one would think twice.
    As it stands, you get congratulated for your mistakes will rather large salaries and bonuses all based on short term gains.
    Such a scenario may benefit a few, it certainly does not benefit the many and this is what actually counts in a democracy.

  33. At risk of being considered a loop, I have to ask, why have for-profit banks at all, regardless of size? Banking is what I’d call a secondary service. When I get a mortgage for a house, I don’t live in the mortgage. Likewise with a car loan – I don’t drive the loan. It’s just a means to an end. The higher the interest and fees, the more money the bank makes, but the less money I can afford to borrow and the less money that goes to the housing or auto industry. Banking is intrinsically a drag on the rest of the economy.

    Bankers make noises about “efficient allocation of capital” and “maintaining liquidity,” but the investment side of banking strikes me as Las Vegas wearing pinstripes. (When they really should be wearing orange jumpsuits) All that second derivative stuff lacks social utility.

    Banking was at its most functional and stable in between the New Deal reforms and the deregulation of the 1980’s. It wasn’t exciting or immensely profitable, but that was good for the rest of the economy.

    I personally bank at a credit union. It provides me with all the services of a for-profit bank at better rates and better customer service. All I hear from BofA and Citi customers is how much they hate their banks. What is so sacred about banks? Credit unions lack the motivation to commit the crimes we have been seeing from the private sector. There’s an intrinsic safeguard.

    I am completely on board with campaign finance reform. Check out the PIRG report called “The Wealth Primary.” They found that whichever candidate in a congressional primary spent the most, won, 9 times out of 10. 80% of the money came in $500-plus chunks from millionaires. Consider that the #2 and #3 spenders also depend on those big checks, and any candidate with opinions that would offend the wealthy looks like a bad bet. Those well-paid bank execs and their lobbyists are part of the tiny elite that chooses who the rest of us get to vote for.

  34. Canute,
    I’d call you most sane rather than a ‘nut’.
    In the UK we still have Building Societies which are mutuals or ethical banks such as the Co-Operative bank and these actually do offer services we need.
    I’d be mad if I went out and purchased a derivative, funny though, this is what lots of private and institutional investors did at the peek of the bubble – shame they lost their money!

  35. I’ve seen you bemoan the lack of double entry accounting in software for a while on here, but never say if there’s anyone actually doing it right. There’s an extensive list of accounting packages on Wikipedia, many mentioning double entry in their features.

    http://en.wikipedia.org/wiki/Comparison_of_accounting_software

    Many of those packages are open source and free, meaning they’re available to everyone at no cost AND the source code is open so a good programmer with accounting knowledge can look for flaws in how well they’re doing accounting.

    So if we’ve got many software packages already doing double entry, and they’re so open as to allow code checks, should accountants be pushing their clients toward these packages? Should I as an IT consultant be pushing toward these packages? How do I know which packages are doing it right if I don’t know much about accounting?

  36. Dan Palanza

    3-D Said:
    “I’ve seen you bemoan the lack of double entry accounting in software for a while on here, but never say if there’s anyone actually doing it right. There’s an extensive list of accounting packages on Wikipedia, many mentioning double entry in their features.”

    Dan: My goal in posting my thoughts on double-entry book-keeping in this venue is to create a deeply needed discussion among persons who seem to me have powerful reasons to reconsider their understanding of this topic. A proper book-keeping is critical to a free society.

    3-D Said:
    http://en.wikipedia.org/wiki/Comparison_of_accounting_software

    Dan: I have never found information on the wiki that is even close to adhering to the book-keeping standards that were refined into practice 670 years ago and generally lost 50 years ago, when paper systems were coded into software.

    3-D Said:
    “Many of those packages are open source and free, meaning they’re available to everyone at no cost AND the source code is open so a good programmer with accounting knowledge can look for flaws in how well they’re doing accounting.”

    Dan: The deeper question is not the accounting, it is the book-keeping framework of rules. The proper book-keeping rules are the rules of the science of thermodynamics. The book-keeping framework is natural science. A proper book-keeping framework is naturally occurring control language. The general pattern is that there is a framework of book-keeping rules and an accounting strategy. The accounting strategy can be as diverse as one likes, so long as it abides in the rules of thermodynamics.

    3-D Said:
    “So if we’ve got many software packages already doing double entry, and they’re so open as to allow code checks, should accountants be pushing their clients toward these packages? Should I as an IT consultant be pushing toward these packages? How do I know which packages are doing it right if I don’t know much about accounting?”

    Dan: That you don’t know much about accounting is quite natural. That accountants, auditors, and economists don’t know enough about software driven double-entry book-keeping hits on why I post my occasional comments to this blog. Simon and James are making a noble effort to untangle a financial mess. But clearly neither of them understands a proper double-entry’s role in a well ordered society that is commercially trading its goods and services.

    What a proper book-keeping protects is the integrity of the monetary system. Fudge the books and you fudge the monetary system. Giant banks today are openly fudging their books. Anything moved off the balance sheet, for example, no matter what governmental organization says its okay to do so, is fudging the books: hence fudging the monetary system.

    The issues of science are enormous. The rub here is that book-keeping is a social science, a control language. The traditional sciences such as physics and math seem reluctant to take social science to be an integral part of Natural Science. The computer forces us to reconsider that prejudice.

    Book-keeping’s rules, which record a reusable, transparent history, is a natural phenomena — an information science. We have a great deal to relearn on this topic. And so I comment when I can in hopes that others will make this important science a topic of discussion. And I thank you for doing that here today.

  37. Would these size rules have prevented the systemic risk of LTCM or Continental Illinois?

  38. Doubtful.

    To some extent you are comparing apples with oranges because it was a different industry, but breaking up TBTF financial institutions create Too-small-to-settle (TSTS) intermediation problem and the unintended consequence of self-organized criticality from one-size-fits-all deterministic governance. How big is the snowflake that causes the avalanche?

  39. Well said

    “The rub here is that book-keeping is a social science, a control language. The traditional sciences such as physics and math seem reluctant to take social science to be an integral part of Natural Science. The computer forces us to reconsider that prejudice.”

    I argue that the prejudicial gravamen is that the one-size-fits-all deterministic bias where economic value exclusively is determined by assigning probabilities has been rendered inoperable by complex uncertainties of randomness. In a world of growing complexities, governance needs to recognize, disclose, and measure uncertainty via segmentation of predictable, probabilistic, and uncertain regimes.

  40. Dan Palanza

    Stephen:
    A proper double entry system does in fact create a real time model of goods and services traded. It does not use probability at all. It also creates a transparent history of those actual trades. Probability science is valid and important to a complex culture so long as it is working from the basis of the real time commercial model that only a proper book-keeping can supply.

  41. Are you forgetting the SCOTUS and how much free speech they believe the corporations should be able to enjoy by virtue of their being “persons”? Even if CA or any other state passes public financing of elections, it will be assassinated by a 5-4 margin.