The analogy I would choose is finance as placebo. Financial systems are sugar pills by which we collectively embolden ourselves to bear economic risk. As with any good placebo, we must never understand that it is just a bit of sugar. We must believe the concoction we are taking to be the product of brilliant science, the details of which we could never understand. The financial placebo peddlers make it so.
The core purpose of status quo finance is to coax people into accepting risks that they would not, if fully informed, consent to bear.
I'm not a bad man. I'm not an unusual man. I just wanted to change the world. And I think there'll come a time when everyone understands that. They'll realise they were banishing something of themselves along with me. I believe that.
I know it's hard to understand. How can something be worth a million dollars in the morning and nothing by the afternoon? Same way a man goes from captain of industry to a fraud sitting in jail. You want to look at something and know it has... a worth, a fundamental value? Bullshit. You're making the same mistake as any religious person. You wanna hold a mirror up to nature.
The huge crack along the wall of the building glows from behind and becomes the jagged line graph of the Dow Jones Index over the last century.
The line on the graph/crack glows.
There's your mirror. Every dip, every crash, every bubble that's burst, that's you. Your brilliant stupidity. This one gave us the railroads. This one the Internet. This one the slave trade. And if you wanna do something about saving the environment or reaching other worlds, you'll need a bubble for that too. Everything I've ever done in my life worth anything has been done in a bubble; in a state of extreme hope and trust and stupidity. Would you have gotten married if you could see her face twenty years on turn to you through tears, saying "You never knew me at all"?
September the eleventh. 1929. Beginning of the Great Depression, and Washington Post prints Mark Twain: "Don't part with your illusions. When they have gone you may still exist, but you have ceased to live."
He points to spikes and dips on the graph.
All humanity is here. There's Greed, there's Fear, Joy, Faith, Hope...
And the greatest of these... is Money.
The sound of prison doors slamming.
Nick Rowe memorably described finance as magic. The analogy I would choose is finance as placebo. Financial systems are sugar pills by which we collectively embolden ourselves to bear economic risk. As with any good placebo, we must never understand that it is just a bit of sugar ... I do think there are alternatives to goat-herding and kleptocratically opaque semi-fraudulent banking. But adopting those would require not “reform” but a wholesale reimagining of status quo finance .... The (real!) benefits to opacity that I’ve described must be weighed against the profound, even apocalyptic social costs that obtain when the placebo fails, especially given the likelihood that placebo peddlars will continue their con long after good opportunities for investment at scale have been exhausted.
One of the more depressing bits of emerging conventional wisdom is the notion that the financial system took on “too much risk” in recent years. I think it is equally accurate to suggest that the financial system took on too little risk ... The big central banks, whose investment largely drove the credit boom, were (and still are) seeking safety, not risk. The banks and SIVs that bought up “super-senior AAA” tranches of CDOs were looking for safe assets, not risky assets.
There is a wave of anger rising, and if we can keep the rage in check, we can use it to fix things
Then look at the green line. Triple-A debt wasn’t a huge part of the bond market back in the early 90s, but for the past decade it has invariably accounted for somewhere between 50% and 60% of total global fixed income issuance. That’s possibly the most horrifying bit of all: it simply defies credulity for anybody to be asked to believe that more than half the bonds issued in any given year are essentially free of any credit risk.
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