Monday, April 14, 2014

The Financialization Of The Economy And Inequality

Paul Krugman, has connected the growth of finance with the growth of inequality.  He contrasts the political decision by the governor of New Jersey to scuttle a project to build another tunnel between NYC and New Jersey, with the expensive private investment in a fiber optic network that connects the commodity futures market in Chicago with the trading floors in NYC.  The tunnel between NYC and New Jersey would have improved public transportation.  The fiber optic network cut milliseconds off the communication time between trades in Chicago and trades in NYC.  It serves no public service.  It enables traders in NYC with a faster network to gain advantage against traders with slightly slower communications.  That is a sum-zero game.  One trader's gain is another trader's loss; nothing worthwhile is added to the economy.  However, fortunes are made on Wall Street, The City of London and elsewhere by traders engaged in sum-zero speculation.  Growth in the financial industry is not correlated with growth in the economy but it is correlated with the growth in income inequality.

In theory, the banking industry is supposed to allocate savings to their most productive use.  It seems to be performing another function.  It creates asset bubbles which eventually collapse at great cost to the losers, but which provide opportunities for the winners to get very rich.  The bankers get paid large sums in both directions.  They operate the casino, and they have inside information which gives them an advantage in trading on their own accounts.

The global economy is still recovering from the housing bubble which was created by bankers and their allies who securitized mortgages and sold them to pension funds and other investors around the globe. The food chain between the origination of mortgages, packaging them into securities and selling them to investors was corrupted by fraud. Fortunes were also made trading derivatives like credit default swaps which were supposed to insure the safety of the securities.  Its hard to argue that the banking industry performed its theoretical function of allocating savings to their most productive use.  The government was also a partner in this enterprise.  It could not have happened without the easing of regulations which were developed to prevent a repeat of the financial crisis in the Great Depression.  It was a depression made on Wall Street.

The dotcom boom was also enabled by Wall Street.  Venture capitalists invested in high tech start ups and they got their payoff when Wall Street banks took them public.  Some of these start ups have survived and they are a valuable part of our economy.  Many of the start ups, which were underwritten by Wall Street banks, failed but the bankers made large fortunes on the winners and the losers.  They operated the casino, and their analysts helped to sell the start ups to the suckers.  They and their favored customers got rich in the process.  The suckers were attracted to market by greed as the stock prices for many of the unsuccessful star ups rose rapidly after their IPO.  The early investors, favored by the bankers, got rich by selling the initial shares to the suckers who got into the market late.  The boom was also enabled by the media which fueled the speculation with stories about the riches being made.  The audience for one the financial news networks during the boom exceeded that of CNN which was the largest cable news network during the boom.  They are a critical part of the financial industry which is supposed to allocate scarce savings to their most productive use.  We have learned that the most productive use of savings is to enable bankers and their allies to prosper at the expense of the suckers.  They are the predators and most of us are the suckers.

The large global bankers also play an important role in managing the wealth of their largest customers.  They operate subsidiaries which help the super-rich to avoid taxes by hiding their wealth in tax havens.  The tax revenues that we don't collect from the super-rich must be collected from the rest of society, or social welfare programs must be reduced.  The bankers play a critical role in the process of predation.  Making money is their only goal.  They don't keep score on the damages from predation.

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