Thursday, January 5, 2012

Oh those job creators

Of all the annoying Frank Lunz memes, the idea the that uber-rich in USA are somehow associated with creating jobs is truly the most vile.  Once up a time, there were rich guys who DID create a lot of jobs.  But that was back in the days of industrial capitalism.  Now the vast majority of the 1% have actively destroyed employment—especially in the category of good jobs.

The Big Lie
Wall Street has destroyed the wonder that was America
Dec 26, 2011


And that was back when Wall Street was basically honest, brought into line thanks in part to Ferdinand Pecora’s 1933 humiliation of the great bankers of the Jazz Age and even more so because of the communitarian exigencies forced on the nation by war. From Pearl Harbor to V-J Day, greed was definitely not good, and that proscriptive spirit lingered on right up to 1970, when everything started to change, and the traders began their long march through our great houses of finance, with the inevitable consequence that the Street’s moral bookkeeping grew more and more contorted, its corruptions more elaborate, its self-interest less and less governable. What someone has called the “Greed Wars” began.

But now, I think, the game is at long last over.

As 2011 slithers to its end, none of the major problems that led to the crisis point three years ago have really been solved. Bank balance sheets still reek. Europe day by day becomes a financial black hole, with matter from the periphery being sucked toward the center until the vortex itself collapses. The Street and its ministries of propaganda have fallen back on a Big Lie as old as capitalism itself: that all that has gone wrong has been government’s fault. This time, however, I don’t think the argument that “Washington ate my homework” is going to work. This time, a firestorm is going to explode about the Street’s head—and about time, too.

It’s funny; the Big Lie has a long pedigree. A year or so ago, I was leafing through Ron Chernow’s indispensable history of the Morgan financial interests, and found this interesting exchange between FDR and Russell Leffingwell, a Morgan partner and Washington fixer, a sort of Robert Strauss of his day. It dates from the summer of 1932, with FDR not yet in office:

“You and I know,” wrote Leffingwell, “that we cannot cure the present deflation and depression by punishing the villains, real or imaginary, of the first post war decade, and that when it comes down to the day of reckoning nobody gets very far with all this prohibition and regulation stuff.” To which FDR replied: “I wish we could get from the bankers themselves an admission that in the 1927 to 1929 period there were grave abuses and that the bankers themselves now support wholeheartedly methods to prevent recurrence thereof. Can’t bankers see their own advantage in such a course?” And then Leffingwell again: “The bankers were not in fact responsible for 1927–29 and the politicians were. Why then should the bankers make a false confession?”

This time, I fear, the public anger will not be deflected. Confessions, not false, will be exacted. Occupy Wall Street has set the snowball rolling; you may not think much of OWS—I have my own reservations, although none are philosophical or moral—but it has made America aware of a sinister, usurious process by which wealth has systematically been funneled into fewer and fewer hands. A process in which Washington played a useful supporting role, but no more than that.

Over the next year, I expect the “what” will give way to the “how” in the broad electorate’s comprehension of the financial situation. The 99 percent must learn to differentiate the bloodsuckers and rent-extractors from those in the 1 percent who make the world a better, more just place to live. Once people realize how Wall Street made its pile, understand how financiers get rich, what it is that they actually do, the time will become ripe for someone to gather the spreading ripples of anger and perplexity into a focused tsunami of retribution. To make the bastards pay, properly, for the grief and woe they have caused. Perhaps not to the extent proposed by H. L. Mencken, who wrote that when a bank fails, the first order of business should be to hang its board of directors, but in a manner in which the pain is proportionate to the collateral damage. Possibly an excess-profits tax retroactive to 2007, or some form of “Tobin tax” on transactions, or a wealth tax. The era of money for nothing will be over.

But it won’t just end with taxes. When the great day comes, Wall Street will pray for another Pecora, because compared with the rough beast now beginning to strain at the leash, Pecora will look like Phil Gramm. Humiliation and ridicule, even financial penalties, will be the least of the Street’s tribulations. There will be prosecutions and show trials. There will be violence, mark my words. Houses burnt, property defaced. I just hope that this time the mob targets the right people in Wall Street and in Washington. (How does a right-thinking Christian go about asking Santa for Mitch McConnell’s head under the Christmas tree?) There will be kleptocrats who threaten to take themselves elsewhere if their demands on jurisdictions and tax breaks aren’t met, and I say let ’em go! more
I am not a big fan of psychobabble so I am not especially attracted to the idea that the various calamities that Wall Street has visited on the real economy are the products of especially evil people.  I am more of the opinion that these outcomes were pretty much baked into any system that allows important economic decisions to be made by people who have no idea what they are doing (the "Father forgive them for they know not what they do" concept from Christianity.)  But for those who think psychological reasons are important, here is a argument for why the Wall Street bandits are actually crazy.
Did Psychopaths Take Over Wall Street Asylum?
By William D. Cohan Jan 2, 2012 6:01 PM CT

It took a relatively obscure former British academic to propagate a theory of the financial crisis that would confirm what many people suspected all along: The “corporate psychopaths” at the helm of our financial institutions are to blame.

Clive R. Boddy, most recently a professor at the Nottingham Business School at Nottingham Trent University, says psychopaths are the 1 percent of “people who, perhaps due to physical factors to do with abnormal brain connectivity and chemistry” lack a “conscience, have few emotions and display an inability to have any feelings, sympathy or empathy for other people.”

As a result, Boddy argues in a recent issue of the Journal of Business Ethics, such people are “extraordinarily cold, much more calculating and ruthless towards others than most people are and therefore a menace to the companies they work for and to society.”

How do people with such obvious personality flaws make it to the top of seemingly successful corporations? Boddy says psychopaths take advantage of the “relative chaotic nature of the modern corporation,” including “rapid change, constant renewal” and high turnover of “key personnel.” Such circumstances allow them to ascend through a combination of “charm” and “charisma,” which makes “their behaviour invisible” and “makes them appear normal and even to be ideal leaders.”

Until the last third of the 20th century, he writes, companies were mostly stable and slow to change. Lifetime employment was a reasonable expectation and people rose through the ranks.

This stable environment meant corporate psychopaths “would be noticeable and identifiable as undesirable managers because of their selfish egotistical personalities and other ethical defects.”

For Wall Street — a rapidly changing and highly dynamic corporate environment if there ever was one, especially when the firms transformed themselves from private partnerships into public companies with quarterly reporting requirements — the trouble started when these charmers made their way to corner offices of important financial institutions.

Then, according to Boddy’s “Corporate Psychopaths Theory of the Global Financial Crisis,” these men were “able to influence the moral climate of the whole organization” to wield “considerable power.”

They “largely caused the crisis” because their “single- minded pursuit of their own self-enrichment and self- aggrandizement to the exclusion of all other considerations has led to an abandonment of the old-fashioned concept of noblesse oblige, equality, fairness, or of any real notion of corporate social responsibility.” more
The biggest problem with the financial community is not so much evil or madness but the simple fact that whatever "services" these people provide, they are WAY too expensive.  For example, even though the world had gotten along without Credit Default Swaps for most of human history, there are those who will maintain that there are real economic reasons for them to exist.  The trouble is, the useful swaps are just a TINY fraction of all the swaps issued.  The rest are just churn.  This means by simply adding a transaction tax, the useful swaps would still exist but the churn would be taxed out existence.  There is probably no better reason for a transaction tax than this.
A Financial Transaction Tax Could Weed Out All The Pointless Trading
Dave Crisanti | Jan. 4, 2012

In an editorial published in the Wall Street Journal (“Taxing Stock Trades Will Hurt Main Street”, by Yakov Amihud and Haim Mendelson, Nov 11, 2011) the authors inadvertently make the case for imposing a stock trade tax rather than opposing it.

Their argument against a tax boils down to the claim that a fee of 0.25% on each trade (which is the amount a bill going through the Senate would levy) would depress stock prices 10%, which in turn would have a cataclysmic effect on our economy. But based on their own evidence the tax would not depress stock prices, and in my opinion would provide large indirect benefits.

I have made a living since 1986 in high frequency trading and a tax of .25% would drive me out of business as I know it. However I have long recognized the potential benefits of such a tax, my own personal situation notwithstanding. To wit, a tax would reduce superfluous trading volume, volume which in and of itself does little for our nation’s prosperity.

Dime store economists will argue that volume provides liquidity for securities markets, which I agree is an undeniable good for an economy. But at some point the marginal gain in volume doesn’t provide increased liquidity or any other benefit—it’s just churn.

It’s difficult to say where trading volumes begin to have zero marginal value, but some numbers might help give context: from 1948 to 1983 our banking sector was responsible for between 5% and 17% of our national corporate profits, while from 1998 to 2007 the range was 27% to an astounding 40%.

Meanwhile NYSE trading volume grew from 34mm shares a day in 1979, to 900mm shares a day at the peak of the dotcom bubble in 1999, to 2.5bb a day in 2007 (which is still the average in 2011). Yet between 2001 and 2011 our economy has had its worst decade by many economic measures including job creation, stock market performance, and GDP growth.

By what mechanism has all this additional trading volume hurt our economy? One way is by using valuable resources that could have been used elsewhere, taking scientists and engineers and other talented quants (not to mention history majors) out of the lab and on to trading desks. I know this because I’ve hired some of them myself. And what does that extra volume provide if not liquidity? Trades in and of themselves do not create wealth for an economy since trading is a zero sum game. The total wealth gained or lost in any market is only equal to the amount the market moves. more


  1. Luv it man! But i cant understand 1 thing.!. Why in hell wouldn there be 1000s of comments on this topic! I guessing, people just take it all in, and then let it all out again, and keep continuing on there/our daily routines... There are alot of great ideas out there, on how to change for the better! But my opinion is, tht not much will change for the better in this world! I beleave were all headed toward a bad ending! With only lil changes to slow the way...

  2. Sorry I haven't been better at writing more about solutions like the transaction tax on this blog. It's just that I have been writing about this since the 1980s when everyone still called it the Tobin Tax. I guess I just assumed everyone I know knew this about me. I forget that I am attracting a bunch of new readers (thank you) who need for me to go over my list of solutions more often. In the meantime, you can read a bunch of them by reading Elegant Technology: or:

    Thanks for your comment.