Saturday, December 31, 2011

New Year; Dunno About Happy

Going Out On A Whimper



It could be fairly said that there's not enough of other things going on with this Dog to make for a cheery and hopeful New Year. Well, that's the breaks, folks.

I wanted to be able to focus on something hopeful for 2012, but like the mythical half-full glass, I can't see it. One principal reason can be summed up in a post at Brad DeLong's Grasping Reality With Both Hands blog, entitled "America's Financial Leviathan".
In 1950, finance and insurance in the United States accounted for 2.8% of GDP, according to US Department of Commerce estimates. By 1960, that share had grown to 3.8% of GDP, and reached 6% of GDP in 1990. Today, it is 8.4% of GDP, and it is not shrinking. The Wall Street Journal’s Justin Lahart reports that the 2010 share was higher than the previous peak share in 2006.
This is "rentier" capitalism, where a small number of people (relative to the overall population) are paid obscene amounts of money, every year, to move other money from one financial category to another: Cash to equities and commodities; cash to insurance against risk; equities to cash, and so forth.

Traditionally, the idea of a financial sector has been to move money into the hands of business through investment; into the hands of individuals through loans; or to indemnify business and individuals against loss through insurance. However, it's always been The Big Casino: The Game is rigged in favor of the house to bring in a consistent stream of revenue through investment in the markets, interest on loans, or monthly premiums on insurance.

Since the 1980's, 'growth' in the financial sector has been about less about putting money to work and more about finding new ways to increase revenue and thus net profits. Nothing wrong with that, on the face of it -- but for the finance 'industry', the past twenty-five years has been about increasing risk -- and making the hapless client assume that risk.

It gets even better: Now, the entire population of the United States has assumed the risk of it's financial 'sector', as the government paid some $1.2 Trillion in the year between November, 2008 and October, 2009 to keep it afloat. The banks own us, not the other way around.

And it gets even even better: An audit of the U.S. Federal Reserve banking system (one forced by Congress and the results of which had to be obtained last month through an FOIA request by Bloomberg News) that the Fed has made emergency loans and other forms of assistance totaling $29 Trillion Dollars to banks worldwide.

Much of this money has been to prop up financial 'houses' still filled with toxic debt and derivatives, and which is only being shuffled around. Who, ultimately, will be made to assume all that debt, that risk? Why, you. The banks certainly won't be left holding the bag; no, sir. Not our fault; not our problem -- it's the governments' problem... because We're Too Big To Be Allowed To Fail.

The individuals pushing money around these days add no value; they simply charge the economy in general for handling money and moving it around. If it was otherwise, there would be an obvious benefit to that kind of activity -- as in other sectors of the economy, like Silicon Valley, say: Where chips are produced, technology is invented and refined. The benefits there, while debatable in some sense, are still obvious.

Not so in "Finance". It seems to exist, not to perform a necessary function in the economy -- but to separate as many Marks from their money as possible, we the fools. As practiced today, it's a Thieves' College, a School For Scandal, and not something a human being with morals or ethics should involve themselves in.

Bernie Madoff is seen as a negative role model in 'Finance'... because he got caught. The lesson of Little Bernie isn't 'Don't behave like Madoff' or, 'Don't steal' -- it's Don't Get Caught.
Overall, however, it remains disturbing that we do not see the obvious large benefits, at either the micro or macro level, in the US economy’s efficiency that would justify spending an extra 5.6% of GDP every year on finance and insurance.

Lahart cites the conclusion of New York University’s Thomas Philippon that today’s US financial sector is outsized by two percentage points of GDP. And it is very possible that Philippon’s estimate of the size of the US financial sector’s hypertrophy is too small.

Why has the devotion of a great deal of skill and enterprise to finance and insurance sector not paid obvious economic dividends? There are two sustainable ways to make money in finance:
  • Find people with risks that need to be carried and match them with people with unused risk-bearing capacity, or
  • Find people with such risks and match them with people who are clueless but who have money.
Are we sure that most of the growth in finance stems from a rising share of financial professionals who undertake the former rather than the latter?
[Note: Bulletpointing added] ...And that sums up America for the past decade, and in 2011. It's why people -- and not enough of us -- are in the streets. And more of it to come in 2012.

And yes, Virginia; we are the 99%. Happy New Year.