Posts Tagged ‘finance’

vlcsnap-2014-03-05-13h31m23s82

Lynn Parramore [ht: ja], in reviewing Rana Foroohar’s forthcoming book, Makers and Takers: The Rise of American Finance and the Fall of American Business, presents a memorable image (straight out of Dr. Terror’s House of Horrors):

Foroohar’s book explains how our financial system stopped funding new ideas and projects and started extracting precious resources from Main Street. Her writing leaves a vivid impression that once the financial wizards get their way, nobody is safe, from the young college grad next door drowning in debt owed to predatory lenders to the child halfway around the world whose dinner fell victim to commodities speculation.

As I turned the pages, I began to imagine Big Finance as a giant exotic vine from some florid disaster movie that has grown out of control, creeping onto the roofs of our houses, reaching into the food on our plates, tightening its hold on our wallets—even taking over our minds. I’m embarrassed to say how many times I hear phrases like “human capital” and “return on investment” issuing from my own lips: finance-originated concepts used to describe relationships and activities that have little to do with spreadsheets.

Still, it’s not quite as dramatic as Matt Taibbi’s reference to Goldman Sachs as “a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.”

04.08.09-Martin-Rowson-on-005

Cartoon of the day

Posted: 21 March 2016 in Uncategorized
Tags: , ,

Tribuneprankcallresize

12531127_1729296227302080_750663966_n

Special mention

bo160223_0 download

Reuters

The members of the political establishment in the United States seem surprised by the astounding success of Bernie Sanders’s campaign. Reuters even has the democratic socialist now leading by more than 6 percentage points.

As it turns out, the political establishment in the United Kingdom has had a similar problem: they don’t understand how Jeremy Corbyn has come to lead the Labor Party.

Simon Wren-Lewis argues that the Left’s success on both sides of the Atlantic really shouldn’t be a surprise. That’s because of the growing importance of the financial sector, which has fueled obscene levels of inequality and created the conditions for the Second Great Depression.

The establishment on the centre left often seems too timid or ignorant to talk about the power of the financial sector, and is therefore unwilling to challenge it. Many ordinary people who support the left in the UK and US do have some understanding of what has gone on. It should therefore not be surprising that they have moved away from established leaders towards those – like Corbyn and Sanders – who are willing to talk more openly about the power of the financial sector and inequality.

Why were politicians and the media so surprised by this success? I think it tells us how insular the Westminster and Washington bubbles really are. Political commentators talk to politicians who talk to political commentators. It tells us how embedded the influence of the City and Wall Street is. The media relies on economists from the financial sector, and so tends to see the economy from their perspective.

The blind spot is mostly to the left, because we have the Daily Mail and Fox News. As a result, it came as a complete surprise that a crisis caused by the financial sector that left that sector unscathed but instead led to a diminished role for the state, might make many people rather angry.

Surprised? Don’t be.

 

American-Roulette3-1024x832

William D. Cohan’s broadside [ht: ja] against Bernie Sanders hinges on a simple, but fundamentally wrong, argument: we all benefit from the risks taken by Wall Street.

Simply put, Wall Street’s purpose is to re-allocate capital from people who have it (savers) to those who want it (borrowers) and then use it to grow businesses that employ billions of people around the globe and help give them a modicum of wealth that they did not have before. One man’s speculation, in other words, is another man’s risk-taking. Without people willing to take those risks, and having the chance to reap their reward, there wouldn’t be an Apple, a Google, a Facebook, or countless other large corporations. The billions of people around the world who are employed by thriving companies would lose their jobs.

Clearly, Cohan doesn’t understand Wall Street (or, for that matter, the rest of the financial sector). It doesn’t collect capital from one group of savers and allocate it to another group of borrowers, which then creates jobs. Rather, it recycles the surplus created by people who work in order to allow those who appropriate the surplus to collect even more. In other words, Wall Street manages the surplus on behalf of a small group of wealthy individuals and large corporations. And it grows its own profits not as a reward for taking risks but by taking a cut of each and every financial transaction.

As we know, Wall Street does in fact take risks, as it did in the lead-up to the crash of 2007-08. But the risks were borne not by Wall Street, but by the rest of us—in the form of massive layoffs and foreclosures.

What about the other part of the argument, that Wall Street helps businesses grow?

US-financial-corp-profit-share

As it turns out, Matthew C. Klein addressed this issue just about a year ago. His argument, in short, is that productivity growth in rich countries started slowing down around the same time that the financial sector’s share of economic activity started rising rapidly.

First, the high salaries commanded in the financial sector — much of which can be attributed to too-big-to-fail subsidies and other forms of rent extraction — make it harder for genuinely innovative firms to hire researchers and invest in new technologies.

Second, the growth of the financial sector has been concentrated in mortgage lending, which means that more lending usually just leads to more building. That’s a problem for aggregate productivity, since the construction industry is one of the few that has consistently gotten less productive over time.

US-tfp-vs-fin-share

In other words, as illustrated in the chart above, the growth rate in productivity was systematically faster when the finance sector was relatively smaller (from 1948 to 1975), and then when the finance sector got bigger, productivity growth got smaller (from 1976 to 2014).

The ultimate irony is that Cohan actually makes Sanders’s case for breaking up Too Big to Fail banks and reigning in Wall Street:

Sanders is right that Wall Street still needs reform. The Dodd-Frank regulations fail to measure up; Wall Street lobbyists and $1000-an-hour attorneys work away each day to gut the meager reforms signed into law by President Barack Obama in July 2010. It is also unconscionable that Wall Street’s compensation system continues to reward bankers, traders, and executives to take big risks with other people’s money in hopes of getting big year-end bonuses. Thanks to this system, which has been prevalent since the 1970s, when Wall Street transformed itself from a bunch of undercapitalized private partnerships (where those partners had serious capital at risk every day) to a group of behemoth public companies (where the risk is borne by creditors and shareholders while the rewards go to the employees), Wall Street has become ground zero for one financial crisis after another.

Neither Sanders nor I could have said it better.

STOCK, n.

Posted: 19 November 2015 in Uncategorized
Tags: , ,

book_buy_sell_sell_new_1024x1024

Stock, according to Jason Zweig’s new book, The Devil’s Financial Dictionary, is defined as

The right to own a fraction of a business, regarded by most investors as the right to play a video game.

The word “stock” is rooted in the Old Teutonic stukko, a stick, trunk, or log—an ancient metaphor largely forgotten as television and the Internet have reduced the idea of a stock to a TICKER SYMBOL and a stream of prices flickering on a screen. A tree trunk is a solid foundation for many branches bearing green foliage and grows higher unless it is trimmed back, in which case it sprouts new growth. The history of the word stock thus expresses what most investors want from a stock itself—but seldom get, because they treat it like a weed rather than like a tree.

As early as AD 862, it appeared in Old English as stocca or stocce. One of its earliest meanings, by analogy to a tree trunk that generates many smaller branches, was as the source of a line of descent. That sense is still used, as in “She comes from good stock.” In another early nuance, stocke meant a stem in which a graft, or transplanted twig, is inserted.

Early on, stokke referred to the wooden chopping blocks on which butchers and fishmongers hacked up their merchandise. In 1282, a “stokkes market” was built in the heart of the City of London; it survived until Dickens’s day. A city chronicle recorded, “This yere [1450] the stokkes was dividid bitweene fishmongers and bochers [butchers].” Because London’s securities market later sprang up in the same district, it is conceivable that the term stock market originated in this haggling, open outcry, and bloody chopping of goods into little pieces for resale.

A stoke or stocke of money appeared in English by the fifteenth century to describe a sum set aside to fund future expenses. Soon, the image of a deeply rooted core or trunk led stock to mean the total wealth of an individual or nation.

In 1729, for instance, Jonathan Swift’s “A Modest Proposal” satirically claimed that if the Irish raised babies for food, “the Nation’s Stock will be thereby encreased Fifty Thousand Pounds per annum.”

Stock was first used to describe the funds available for a company’s operations in the early seventeenth century. “Many…put in different summes, which all together made up six hundred thousand pound, the first stock upon which this Company has built its prodigious Encrease,” a historian of the East India Company wrote in 1669. Individual shares of that total were called stock as well, as were what today we call bonds.

Instead of playing with stocks as if they were blips in an electronic game, investors would be far better off planting them like trees.