Saturday, November 26, 2011

Wall Street detour...  

Say what you will about the OWS movement, the idea of "The 1%" has taken root. While many before had questioned how the finance sector added so much value it was entitled to oversize profits, some of our best economic minds are having trouble seeing this to be true as well. In the process of thinking this through some are discovering something farmers have instinctively, if not consciously, believed. (Note my emphasis below)
But the bigger idea, I guess, is that the “normal people” helped by Wall Street are the 1%, and that Wall Street has its “fingers on the scales in their favor”, and that if the scales are tipped towards the 1%, then that means the 99% are the losers. They’re the prey for Wall Street’s predators.
I don’t buy this analysis. I don’t believe that Wall Street is meaningfully improving the lives of the 1%, except insofar as Wall Streeters are the 1%. (Remember that financial professionals make up only 14% of the top 1%, and 18% of the top 0.1%. They’re a large chunk, but by no means the majority.)
In fact, I suspect that the top 1%, if anything, are responsible for a disproportionate share of Wall Street’s income. Wall Street isn’t picking the pockets of the 99% and giving the proceeds to the 1%: it’s picking the pockets of the 1% and giving the proceeds to itself. And Wall Street is taking a whole bunch of money from the 99%, too. But for the 86% of the top 1% who don’t work in finance, I really don’t believe for a minute that Wall Street is helping them out by giving them the hard-earned money of the 99%.
I also don’t believe in some halcyon era when Wall Street was “an economic helpmate” to the 99%. It has always been very good at extracting rents, and very bad at creating wealth for its clients.
Narrowly speaking it’s easy to see where Emerson’s speech is coming from: the housing bubble was certainly instrumental in allowing millions of Americans to live beyond their means. And yes, Wall Street was a necessary part of the machinery of the housing bubble. But of course the Americans who bought beyond their means did not “get to continue living like kings”; instead, they got foreclosure and eviction notices. And Wall Street wasn’t there to help them when that happened.
But I don’t believe that Wall Street has its fingers on any scale. There are wealthy families who have managed to preserve and grow their wealth over many centuries — Italy and Germany both have quite a few of them, the ultimate Black Swan that was World War II notwithstanding. Those families tend to have a lot of real property: income-producing land, if you’re growing things like grapes or trees, is an amazing long-term asset, since the main rents you’re extracting come directly from the Sun. By contrast, the rich families who hire Goldman Sachs to look after their money and end up invested in Global Alpha or pre-IPO Facebook shares tend to be much newer money. They made it quickly, and they’ll probably lose it quite quickly too — it could quite easily all be gone within two or three generations. [More]
Long before I even suspected what was going on in big banks, I resented their seemingly unnecessary fee extraction rackets. This from a 1996 Top Producer article:

Much has been said about the single-minded focus of farmers for land. Interestingly enough, we are not the only profession with such prejudices. I have noticed accountants and financial advisers, for instance, tend to favor money, especially cash or easily convertible assets. The reason is analogous - they “farm” these assets like we do land. If you make your living by moving others’ money from one form to another, seeing it tied up for centuries in land, which ends their involvement (and commissions) is not attractive.[More]
The global financial sector is not earning its pay, IMHO. "Efficient allocation of assets", my posterior! We have cash piling up in companies and banks while deflation remains an ominous threat in the developed world, for the fifth year running. Does that sound efficient to you?

What finance has done is perfected rent-seeking tactics for all those who prefer cash as an asset over all other things. In a totally unexpected development, the world is awash in such assets, as the growing global economy and technology /productivity have generated more available capital and simultaneously tempered demand for private investment. We have enormous wealth looking for somewhere to be.

I feel perversely lucky I have always been absolutely terrible at managing money, and piled my wealth into other forms instead. Moreover, debt is one really good method to countering to the One Percent, when you think about it.  Nobody embezzles a loan.

When the game is rigged against you, don't play. And while everyone should feel free to to mock and deride the loopy protestors in the Occupy movement, it should give you pause that there is some serious kernel of truth fueling this anger.

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