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"In other words, the issue is not one of “markets vs. state” - “free” markets vs. “sand in the wheel” transactions taxes. It is: how can banks be better organized? And not just banks. The issue of NHS or schools reform poses the same questions.
In this sense, the traditional statist left and free market right are both wrong."
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The right is wrong because it overlooked issues of the organization of private companies because it believed that the market would select against bad forms of organization and in favour of good ones. This belief ran into two problems - that bad organizations were (are) widespread*, and that selection against them can be a hugely disruptive and costly process.
The statist/Keynesian left is wrong because its faith that the state can manage the economy by macroeconomic policy and regulation ignored the organizational failings of the state - that there’s a danger of regulatory capture, or that inadequate knowledge would yield bad regulation and policy.
"Bank bosses have played a trick which countless ordinary workers do. The IT support guy who introduces lots of “security features” to his firm’s IT systems, or the secretary who has an incomprehensible filing system, make themselves indispensable by inconveniencing others."
"Finance has always been complex. More precisely it has always been opaque, and complexity is a means of rationalizing opacity in societies that pretend to transparency. Opacity is absolutely essential to modern finance. It is a feature not a bug until we radically change the way we mobilize economic risk-bearing. The core purpose of status quo finance is to coax people into accepting risks that they would not, if fully informed, consent to bear."
" Consider that we trust military and homeland security personnel with our lives, yet we don’t give them lavish bonuses. They get promotions and the honor of a job well done if they succeed, and the severe disincentive of shame if they fail. For bankers, it is the opposite: a bonus if they make short-term profits and a bailout if they go bust. The question of talent is a red herring: Having worked with both groups, I can tell you that military and security people are not only more careful about safety, but also have far greater technical skill, than bankers. "
"Here’s a theory. It’s to do with organizational brittleness. Here are some background principles:
- The death rate for firms generally is high. Of the UK’s biggest employers in 1907, only three are still independent, stock market-listed companies today.
- Companies embody specific vintages of organizational capital. Their expertise depends upon the state of technology when they were formed. It’s rare for a firm to transform itself from one activity to a completely different one; Nokia, which used to be a cable firm, is a rare exception - and a less healthy one than it seemed a few years ago.
- Because organizational capital is fixed, firms have “very limited capacities to acquire knowledge.” Rather than adapting to new conditions, firms die."
"This ongoing popular distrust of banks and bankers, however, seems not to be shared by many of the economic historians we look to for leadership on these issues, and who often treat historical bankers with respect verging on reverence. As a result, the stories of American banking that find there way into mainstream history often treat the objectives and goals of bankers as economically sound and politically neutral, even when they acknowledge popular dissent.
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Comments discuss the place of Marx in anthropology and social sciences.
in list: Economic Crisis
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So far, so good. Except, there's a hole. That hole is that the Fed hasn't followed the simple "Taylor rule." In fact, there's been a significant gap between Taylor rule and interest rates. Or more exactly, two of them.
The first was between 1994 and 1998 -- the Fed was consistently above the Taylor rule. This lead several more left-leaning economists to call for lower interest rates to get more growth. The second was between 2001 and 2008 - the Fed was consistently below the Taylor rule. What a coincidence. So the argument that the Fed was a transparent carrier of the economic demand for funds breaks down. The other point is that there is a simple explanation for all three - short term rates, inflation, and budget deficits moving in tandem over the last 10 years, namely that they represent the same thing, not a market that is clearing, but three different forms of the same thing, namely, risk aversion.
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The reality is that Federal Reserve interest rates, government bond auctions, and federal budget deficits all have one thing in common: they aren't markets in the sense of "many independent actors making independent decisions." The Fed's decision is in the hands of a few people, most of the buyers of government treasuries is a small number of large players, and of course, the Federal budget deficit is written by a few hundred people and their staff members. These are not large markets, but small ones. Hillary was pilloried for saying that it takes a village to raise a child; but the evidence here -given that the results of the last 10 years have been a market crash, a terrible recovery, and a massive global downturn- is that it took "The Village" to raze the economy.
I would argue that the fundamental flaw in financial regulation is that it is based on the assumption that regulators are not self-interested individuals like the rest of us. We think about regulation only in terms of how to engineer the incentives of the regulated and ignore the fact that regulators themselves rarely have a stake in doing their job well, which in any other occupation would limit the motivation and types of individuals a position attracts.
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It is unlikely that consumers will ever hold much influence over the realities of the financial regulatory process because they are not organized in comparison to the financial industry, which concentrates significant resources in the creation of inefficient regulators. By and large, consumers are not well-informed about what they have at stake in the regulatory process and, even if they were, that would not be the sole determinant of how they define themselves politically.
Adding another layer of guards to guard the existing guards ultimately results in an infinite regress. I do not think it is cynical to suggest that, absent an actual paradigm shift with respect to accountability in the financial industry, we are just going to have more of the rent-seeking that has gone on to date and the economic calamities that ensue. For my part, I would propose opening up financial regulation to a small group of social entrepreneurs. Let people establish for-profit companies that can compete for government contracts to stress test the holdings of financial institutions independently and audit their records.
Mainstream financial journalism is doing its level, eye-rolling, heavy-sighing best to stuff Matt Taibbi back into the alt-press hole he came from, but he’s not going along with it, and the mainstreamers in any case are making a big mistake.
The Rolling Stone writer cemented his status as the enfant terrible of the business press with “The Great American Bubble Machine,” a 10,000-word excoriation of Goldman Sachs, a muckraker’s-eye view of Goldman history, exploring the bank’s and Wall Street’s contributions to various financial disasters
in list: Economic Crisis
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The Atlantic’s Megan McArdle, who doesn’t lay a glove on Taibbi in this attack, is unintentionally revealing of a certain strain of financial journalism thinking:
Taibbi is a gifted narrative journalist, whose verbal talents I greatly admire. But financial meltdowns don’t offer villains, for the simple reason that no one person or even one group is powerful enough to take down a whole system.
“Financial meltdowns don’t offer villains?” Does anyone believe that?
And wait a minute: Are we really so sure that “one group,” Wall Street, was not central to this crisis and that its increasing influence over government at all levels—what gives, for instance, with ex-Goldmanite Neil Levin deciding as New York State banking commissioner in 2000 not to regulate credit default swaps as insurance?—was not decisive? And isn’t Goldman Wall Street’s leading firm?
Good explanation of Wall Street trading and impact of high frequency trading.
in list: Economic Crisis
It’s hard to imagine a better illustration than high-frequency trading. The stock market is supposed to allocate capital to its most productive uses, for example by helping companies with good ideas raise money. But it’s hard to see how traders who place their orders one-thirtieth of a second faster than anyone else do anything to improve that social function.
in list: Economic Crisis
Financial innovation was presented to us in a way that suggested that great things were happening for mankind. The presentations were usually vague. To understand them, we had only the power of our own imaginations, or perhaps, failing that, our awe in the face of this powerful expertise, confidently propelling us to a greater future....
Malarky. This is all code for defer to the wishes of those who make money from these techniques.
in list: Economic Crisis
The remote technocrats at the Fed who decide money and credit policy for the nation are deliberately opaque and little understood by most Americans. For the first time in generations, they are now threatened with popular rebellion.
Taibbi gives a good rant on the subsidies that boosted Goldman Sachs profits to record levels.
4 arguments for strong regulation of banks. "But we regulate banks not because they'll make too much money, but for fear that, left to themselves, they'll lose too much."
in list: Economic Crisis
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