Our Best Economic Minds Are Failing Us by Michael HirshSomervell County Salon-Glen Rose, Rainbow, Nemo, Glass....Texas

Our Wall Street Troubles

Our Best Economic Minds Are Failing Us by Michael Hirsh

16 September 2010 at 9:21:12 PM

This is an excellent article from Michael Hirsh at Newsweek, http://www.newsweek.com/2010/09/16/our-best-economic-minds-are-failing-us.html

"The most terrifying moment in modern economic history occurred two years ago this month. For several long days after the fall of Lehman Brothers on Sept. 15, 2008, the financial system was in danger of total collapse, and the United States seemed on the precipice of another Great Depression in that “Black September.” Just as bad, our economists and senior policymakers had barely any idea why this was happening. The assumptions of an entire era had been proved wrong. The “Great Moderation”—the period of post–Cold War prosperity in which capitalism was said to have been tamed and risk mastered—was revealed to be an illusion. Alan Greenspan professed his “shocked disbelief” that the Wall Street institutions he had trusted in were so reckless as to blow themselves up. “The whole intellectual edifice has collapsed,” the former Fed chairman told Congress that fall. Economists said they would have to come up with new theories for how markets worked, in particular how the financial system functioned and interacted with the “real” economy. “Large swaths of economics are going to have to be rethought on the basis of what happened,” Larry Summers, the presidential adviser who doubles as a world-renowned economist, told me in an interview shortly after Barack Obama took office."


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1 - OldBridge   18 Sep 2010 @ 10:57:45 AM 

Hirsh concludes by asking: "how should we think about our outsized financial sector now, and how can it be made to serve the larger economy rather than the other way around?"

Let me suggest a way of thinking about this.  First, why do people in the finance sector get paid a great deal? 

The answer: they are the first to touch 'new money'.   When the Federal Reserve and the Treasury department create new money out of thin air, the first 'reality' it takes occurs in 'Primary Dealer' accounts. The primary dealers then loan out the newly created cash and take a profit.  On an individual dollar basis, the operation is very efficient, but when the smallest unit of measure is $100,000, and they 'process' hundreds of billions, the profit is very large.  The primary dealers lend to regional banks. Regional banks lend to local banks.  Primary, regional and local banks loan to business, and so on.  Each layer takes a cut, but each layer down, the cut gets smaller.  The big money is at the top.  The first people handling the cash get paid the best hourly wage.

If anyone wants to stop 'the best and brightest' from pursuing finance careers, just tell the Federal Reserve and Treasury to stop creating dollars from thin air.

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2 - humanbeing   18 Sep 2010 @ 9:54:44 PM 

With all due respect, OB, I think you're missing the point of the article. My understanding of it is how the 'best and brightest' of Wall Street did themselves in (and us, too) by creating financial instruments that have no intrinsic value. These derivatives are so convoluted that even the CEO's of the huge, investment banks don't understand what they are.

When huge amounts of money are made from the trades of this imaginary product instead of for something of value, like goods or services, that money is removed from the economy and does not flow back into it. It's just a dead end. A few people score really big, but the whole reason for the existence of a stock exchange (trading money for value) has been bypassed. Wall Street then becomes an entity unto itself, more and more removed from the economic dynamic of the whole system, and the rest of us get left out. Eventually, this takes its toll and the system collapses. Any economic system that does not reward the productive ones-the ones producing the goods and services-will not survive.

Ironically, Wall Street is what is destroying Capitalism.

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3 - salon   19 Sep 2010 @ 10:14:27 AM 

@oldbridge and humanbeing-I think OB has a point abou the Federal Reserve and Treasure, even if it isn't completely germaine to the article. I thought this was interesting from the article.

Wall Street execs have been whining for two years that to reduce pay incentives and bonuses would cost the firms their best talent. The government’s response should be YES! That’s precisely the idea. Finance was once a means to an end: the growth of the real economy. Banking once served industry and services. Now finance has become the end, and the real economy is subservient to financial services (it’s no surprise that after the crisis, over-the-counter derivatives trading quickly climbed back up to more than $600 trillion).

Makes me wonder what America has for goods and services now. We aren't really a manufacturing society any more; about everything I buy has a China sticker on it. What goods and services do you think? Being second hand purveyors of cheap goods made elsewhere?In other words, a retail or wholesale or food services economy?
 What position does financial services have

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4 - humanbeing   19 Sep 2010 @ 12:46:51 PM 

I do acknowledge OB's observation about the Fed and Treasury as part of a number of problems in our financial systems.

Your comments, salon, are exactly right and a very real part of this crash that I believe most citizens don't quite understand. I admit, we're all trying to understand this mess.

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5 - OldBridge   25 Sep 2010 @ 10:53:59 PM 

humanbeing wrote:
>My understanding of it is how the 'best and brightest' of Wall Street did themselves in
>(and us, too) by creating financial instruments that have no intrinsic value. These derivatives are
>so convoluted that even the CEO's of the huge, investment banks don't understand what they are.

Consider, for a moment, the possiblility that the 'best and brightest' were hired by the same CEOs specifically to defraud the US government and American taxpayer.  If this was the case, wouldn't everyone engaged in the fraud claim confusion when asked why their industry required multi-billion dollar bailouts?

I'm reading William Black's excellent 'The Best Way to Rob a Bank is to Own One.'  Following is a quote describing one Larry Taggart, Commissioner of the California Department of Savings and Loans (CDSL) in 1986. 

"His judgment was so poor that he put the following in writing in his August 4, 1986, letter to Donald Regan, now the president's chief of staff (and the man leading the administration's effort to force Gray to resign):

[T]hese actions being done to the industry by the current chief regulator of the Federal Home Loan Bank Board [Gray] are likely to have a very adverse impact on the ability of our Party to raise needed campaign funds in the upcoming elections. Many who have been very supportive of the Administration are involved with savings and loans associations which are either being closed by the FHLBB, or threatened with closure. (U.S. House Banking Committee, 1989,3:630)"

This shines a light on the process.  The banking industry successfully lobbies for deregulation, and attempt to have fired anyone that might halt the fraud.  With deregulation, they can legally loan money out that has no chance of ever being repaid, but pays the company vast and immediate commissions.  When the loans go bad, the Federal government steps in and transfers the losses to the US taxpayer.  The CEO takes his bonus, finds a new bank, hires more people to lobby congress, and starts the cycle over, again.

This isn't a partisan activity.  The role played by Donald Regan is currently being played with gusto by Larry Summers, who is reprising his performance in the same role during the Clinton years. 


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6 - humanbeing   26 Sep 2010 @ 9:28:27 AM 

There's no doubt about it, OB, that our financial systems have been engaging in massive fraud for years while government chose to look the other way. I haven't read William Black's book but did see these two excellent interviews with him on Bill Moyers Journal. Everyone should visit the two links below for some REAL discussion.



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