How the rise of finance has warped our values
washingtonpost.com
washingtonpost.com
The author laments borrowing money to pay dividends, but the two are net-zero activities (investors are just shuffling their investment from stocks to bonds).
The author finally argues that real investment has fallen since the mid-century. This is not true in a real dollar sense [2]. As a share of GDP though, investment has fallen from the 1950s because we are no longer rushing to build up capital destroyed in WWII. As noted by Paul Graham [3] and more technically by economist Robert Solow [4], it was the decades surrounding WWII that was the exception and not the rule.
Finally, the finance sector has already been retreating as of circa 2005 [5]. The predicate of the article may then no longer be true. If it is, would the author agree we're seeing less issues and more social justice now than in 2005?
There are many precise, carefully thought-out treatments of inequality or the problems of financialization out there. I count Philippon's and Piketty's research among them. But this article seems to move in fuzzy concept space between "finance has gone up" and "we don't have a caring command economy".
I wish the author spelled out his thinking more clearly. It sounds like it would be an interesting argument if made well.
[1] "The state becomes submerged and hidden from our everyday lives, working through elaborate and blunted market mechanisms rather than helping citizens directly."
[2] https://research.stlouisfed.org/fred2/series/GPDIC96
[3] http://paulgraham.com/ineq.html
[4] https://newrepublic.com/article/117429/capital-twenty-first-...
[5] Figure 5 of http://pages.stern.nyu.edu/~tphilipp/papers/Finance_Efficien... Incidentially, Philippon's graph is used by the Wikipedia article on "financialization" but cut off at the 2005 peak to make it look like an unrestrained explosion upwards.
Well, no. There are very definite regulatory changes that allowed bigger banks to eat smaller banks, for instance. I still remember how my parents opened my first savings bank at a bank that was regional to Northern New Jersey, which was then later eaten by something I don't remember, than by Bank of America. Likewise, the whole "mortgage tranche" fiasco happened because we allowed loan originators to sell off the ownership of loans to other parties, rather than having to eat the lunch they'd made for themselves with their own levels of risk-taking.
This is sort of the big problem. All the money being made is justified by citing the risk banks/traders/funds take and yet we are constantly told that X is a good thing because it increases liquidity/decreases risk.
the problem was that companies were allowed to buy insurance against bad loans they didnt even make, and insurers were allowed to sell more of that insurance than they had capital to back them up.
so when a person defaulted on their home, the homeowner lost, the bank lost, the insurer lost, and the company who bought the near garentee win insurance also lost. capital flows froze, then companies who needed liquidity lost, and losses just kept chaining.
Our economy is a machine we built, and we built it to fulfill a purpose. We can build other machines with different characteristics. Markets can be important and useful components of those machines, but they are not the point.
A few people will always try to get around the laws. That's not a reason to give up on laws. Viruses always try to get around our immune systems, but that doesn't mean we give up on finding new vaccines, new treatments, new preventative measures.
I think the important thing is for us to distinguish between three kinds of economic activity: 1) creating customer value, 2) reducing waste, and 3) extracting wealth. The first two are useful behaviors. The third, pursued exclusively, is parasitic.
I used to work in the financial industry, but I likely never will again, because most of it is about wealth extraction. One practical thing we can do is to treat people differently based on the extent to which they are economic contributors versus economic parasites. In America we tend to honor wealth much more than contribution. If we reversed that, if investment banker and financial trader were lower than garbage man, I think that'd do at least as much as tighter regulation.
GHWB lost an election by trying to apply the brakes, and here we are.
Free market ideology means stuff peddled by CEI, Heritage, Grover Norquist - tax the rich less, deregulate, fight unions. This doesn't seem especially nonspecific to me.
Also, spending as fraction of GDP hasn't changed that much over time. What has changed is interest rates, which leads to debt accumulation.
To be fair, though, overpriced buybacks do benefit investors who have warrants or options.
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*Unless you happen to get lucky and time the market. Very few people can do that repeatably.
Stock prices are high because profits are high and hence companies have lots of cash with few places to invest.
In which years was the trailing P/E of the S&P 500 higher than 24?
Not sure what your point is; if you try to use P/E as a predictive metric, you're going to have a bad time. Maybe there are people out there who have a higher rate of expected earnings growth than you do, and are will to pay more for it in a period of unprecedented low interest rates?
Of course this may be a new era, and stock prices may have reached a permanently high plateau.
But when shares are cheap, you're missing out if they don't do a buyback. Late 2008/early 2009 was an easy time to make good buyback purchases.
The big issue is centralization. Technologies that facilitate decentralization can help combat the negative effects of centralization. Better technology integration into society in general is also necessary.
Look at things like Bitcoin or Ethereum, decentralized autonomous organizations, etc. We have and can continue to develop better ways to cooperatively regulate our society while avoiding concentration of power and allowing systems to evolve freely.
Money is very powerful but it's a type of technology that needs to be updated.
This article is paint by numbers economics designed to whitewash all the problems caused by the gov't and demonize corporations for taking advantage of a situation the gov't created.
But there were other pieces of legislation, namely the Commodities Futures Modernization Act, that had a more damaging effect.
The more general problem is that the market prices risk based on the underlying assumption that if anything bad happens the government(s) will step in and bail out the bad actors. The mentality leads directly to risky behavior and, in fact, induces risky behavior. If you take away that inducement, these actors will behave differently.
You had it right at the beginning. It's the fusion of government with corporations that's the problem. Corporations manipulate and influence government for their benefit, not the other way around.
Likewise, treating corporations as hapless beneficiaries of some sort of bumbling government largesse is disingenuous. It's the deliberate co-opting of government by corporate interests that is the problem.
I would want to move there.