Be it resolved that financial 'innovation' does not boost economic growth
March 2, 2010 6:24 AM   Subscribe

Basicland vs. Sorrowland
A parable about how one nation came to financial ruin by Charles Munger. For extra colour there's...

...a debate on the merits of financial innovation; Jeremy Grantham writes "Beware the Financial Industrial Complex"
Clients can't easily distinguish talent from luck or risk taking. It's an unfair contest, nothing like the fair fight assumed by standard Economics. As we add new products, options, futures, CDOs, hedge funds, and private equity, aggregate fees per dollar rise. As the layers of fees and layers of agents increase, so too products become more complicated and opaque, causing clients to need us more.

As total fees in the past grew by 0.5%, we agents basically reached into the clients' balance sheets, snatched the 0.5%, and turned it into income and GDP. Magic! But in doing so, we lowered the savings and investment rate by 0.5%. So, we got a short-term GDP kick at the expense of lower long-term growth.

This is true with the whole financial system. Let us say that by 1965 – the middle of one of the best decades in U.S. history – we had perfectly adequate financial services. Of course, adequate tools are vital. That is not the issue here. We're debating the razzmatazz of the last 10 to 15 years. Finance was 3% of GDP in 1965; now it is 7.5%. This is an extra 4.5% load that the real economy carries. The financial system is overfeeding on and slowing down the real economy. It is like running with a large, heavy, and growing bloodsucker on your back. It slows you down.

For 100 years the GDP Battleship grew at 3.5%. (Even the Great Depression did not change that trend.) But after 1965 the GDP growth rate ex-finance fell to 3.2% a year. After 1982 it fell to 3.1%, and after 2000 to 2.5%, with all of these measurements to the end of 2007 before the current crisis.

From society's point of view, this additional 4.5% burden works like looting or an earthquake. Both increase short-term GDP through replacement effect, but chew up capital. All of the extra financial workers might as well be retirees or children, in that they are supported by the rest of the workforce, but they are much, much more expensive.
BONUS(es)

Bonuses boost activity, not quality

Bonuses and pay-for-performance are a risky business:
First, it can be hard to see whether employees make the right decisions; superiors do not hold the same information, and the results of decisions play out years later. Second, performance pay will attract exactly those who are willing to take on more risk. People interested in high but steady income will choose other careers. Third, to get their pay, employees may manipulate the system, against the interests of those who set up the incentives: like teachers who are threatened with losing their jobs and teach to the test. Finally, and most perniciously, performance pay can crowd out intrinsic rewards, as when children, having received gold stars for drawing pictures, later draw less than before in their own time. Why draw without getting paid?

In organisations that work well, employees identify with their work and their organisations. People want to do a good job because they think they should and because it is the right thing to do... Why then, we ask, do traders and bankers need outsize bonuses and performance pay to get them to do their jobs?
CAUSES

So What Exactly Caused the Financial Crisis? [1,2,3]

Lessons from the crisis

How financial innovation causes bubbles

A special report on financial risk: Financial risk got ahead of the world's ability to manage it, cf. Mark-to-Make Believe – Still toxic after all these years, viz. When Goldman Sachs hates marking to market

Are Derivatives the Real Problem? "it's the underlying 'business purpose' of transactions. Hedging has a legitimate business purpose. Making markets, speculation, and financing projects have solid business foundations as well. But entering into transactions that serve to hide or obfuscate economic reality work against this principle... let's be clear. The issue isn't derivatives; it's all financial transactions whose objective is to deceive or to weaken financial transparency."

FIXES

Breaking the Banks: "they promote a noncompetitive industrial organization. They do that by, among other things, creating informational asymmetries. The innovative products they promote -- both derivatives and consumer products -- give them an informational edge over their customers."

Maybe it's time to bank simple?

The Big Bank Fix:
...many countries with integrated banking systems did not have to bail out any of their financial institutions. Canada's banks were not too big to fail – just too boring to fail. There is nothing in Canada to rival the power of Wall Street or the City of London. This enabled the government to swim against the tide of financial innovation and de-regulation. It is countries like the US and Britain, with politically dominant financial sectors competing to take over financial leadership of the world, that suffered the heaviest losses. This is the point that the well-intentioned regulators miss. At root, the battle between the two approaches is a question of power, not of technical financial economics...
cf. Douglass North

POLITICS

Business interests and democracy, cf. Persistence of bad governments

Were the US & UK central banks complicit in robbing the middle classes?

Elizabeth Warren Does The Daily Show Again, cf. Parametric estimations of the world distribution of income

The Market's "Howard Beale" Moment

How Should We Reform Taxes? [1,2,3]

A government that works well is a government that taxes easily [1,2,3,4]

CULTURE

Institutional failure

Double Down Institutional Investing: "Are we the double-down society as far as investing goes? It's sad to see this phenomenon reappearing. Don't we ever learn?"

Interview with Raghuram Rajan: "Private sector—yes, it can take care of itself, but its incentives may not be in the public interest; may not even be in the corporate interest if corporate governance is problematic. So the trader could fail the corporation, could also fail society."

Power: "The scientists argue that power is corrupting because it leads to moral hypocrisy. Although we almost always know what the right thing to do is - cheating at dice is a sin - power makes it easier to justify the wrongdoing, as we rationalize away our moral mistake."

Does feeling like a victim make you selfish?

The corporate conscience

Ten things that influence conformity: "People use conformity to ingratiate themselves with others... Have you noticed that nonconformers are less likely to care what other people think of them?"

Beliefs Conform To Cultural Identities: "an experiment that demonstrates that people don't put as much weight on facts as they do their own belief about how the world is supposed to work"

The arts are far more than just another industry: "After gravity, culture is the thing that holds humanity in place."

ACADEMIC

A financial system ill-equipped to serve the purpose to which it is addressed: "Real market institutions seem designed to hide information and shift consequences rather than reveal outcomes and allocate costs and rewards." [1,2]

Market Failure: "I want to propose a new definition of market failure. For me, market failure exists to the extent that innovation is blocked by incumbents. If innovators can succeed by out-competing incumbents, then the market is working. If incumbents have a self-reinforcing system that keeps out innovators, then we have market failure." [1,2]

Winding up economists: a research methodology
Q: What is a market?
A: it's an institution
Q: who owns it?
A: often nobody, sometimes a private company
Q: so is it a private asset or not?
A: not really. Even if it is owned, it has considerable positive externalities. It's what we call a 'public good'.
Q: what is a 'public good'?
A: It's one of the four varieties of 'market failure'.
Q: So you're telling me that a well-functioning market is a 'market failure'.
The disciplines of economics [1,2]

High modernism and expert knowledge -- Seeing Like a State: How Certain Schemes to Improve the Human Condition Have Failed

OVERVIEW

What Is the "New Normal" for Global Growth?

Your undivided attention for the full 90 seconds
To begin with, let's get reacquainted with the fundamental economic problem of our age – lack of global aggregate demand – and how we got to where we are today:

(1) Twenty years of accelerated globalization incrementally undermined the real incomes of most developed countries' workers/citizens, forcing governments to promote leverage and asset price appreciation in order to fill in what is known as an "aggregate demand" gap – making sure that consumers keep buying things. When the private sector assumed too much debt and asset prices bubbled (think subprimes and houses, or dotcoms/NASDAQ 5000), American-style capitalism with its leverage, deregulation, and religious belief in lower and lower taxes reached a dead end. There was a willingness to keep on consuming, there just wasn't the wallet. Vigilantes – bond market or otherwise – took away the credit card like parents do with a mall-crazed teenager.

(2) The cancellation of credit cards led to the Great Recession and private sector deleveraging, the beginning of government policy reregulation, and gradual deglobalization – a reversal of over 20 years of trade policies and free market orthodoxy. In order to get us out of the sinkhole and avoid another Great Depression, the visible fist of government stepped in to replace the invisible hand of Adam Smith. Short-term interest rates headed to 0% and monetary policies of central banks incorporated new measures labeled "quantitative easing," which essentially involved the writing of trillions of dollars of checks to replace the trillions of dollars of credit that disappeared after Lehman Brothers. In addition, government fiscal policies, in combination with declining revenues, led to double-digit deficits as a percentage of GDP in many countries, a condition unheard of since the Great Depression.

(3) For awhile it seemed that all was well, that the government’s checkbook could replace the private market’s wallet and credit cards. Risk markets returned to normal P/Es as did interest rate spreads, and GDP growth resumed; it was only a matter of time before job growth would assure the world that we could believe in the tooth fairy again. Capitalism based on asset price appreciation was back. It would only be a matter of time before home prices followed stock prices higher and those refis and second mortgages would stuff our wallets once again.

(4) Ah, but Dubai, Iceland, Ireland and recently Greece pointed to a potential flaw in the model. Shaking hands with the government was a brilliant strategy in 2009 when it was assumed that governments had an infinite capacity to leverage themselves.

But what if they didn't? What if, as Carmen Reinhart and Kenneth Rogoff have pointed out in their book, "This Time is Different," our modern era was similar to history over the past several centuries when financial crises led to sovereign defaults or at least uncomfortable economic growth environments where real GDP was subpar based on onerous debt levels – sovereign and private market alike. What if – to put it simply – you couldn't get out of a debt crisis by creating more debt?

You are now up-to-date and I've used up all of my 90 seconds...
The Ring of Fire: "These red zone countries are ones with the potential for public debt to exceed 90% of GDP within a few years' time, which would slow GDP by 1% or more. The yellow and green areas are considered to be the most conservative and potentially most solvent, with the potential for higher growth."

Forward Don Quixote, the windmills are in sight:
Quixotic journeys often make for great literature, but by definition are rarely productive. I am, after all, referring to windmills here – not their 21st century creation, but their 17th century chasing. Futility, not productivity, was the ultimate fate of Cervantes' man from La Mancha. So it is with hesitation, although quixotic obsession, that I plunge headlong into a discussion of American politics, healthcare legislation, resultant budget deficits and – finally – their potential effect on financial markets. There will be windmills aplenty in the next few pages and not much good can come of these opinions or my tilting in their direction. Still, I mount my steed, lance in hand, and ride forward.

Question: What has become of the American nation? Conceived with the vision of liberty and justice for all, we have descended in the clutches of corporate and other special interests to a second world state defined by K Street instead of Independence Square. Our government doesn't work anymore, or perhaps more accurately, when it does, it works for special interests and not the American people. Washington consistently stoops to legislate 10,000-page perversions of healthcare, regulatory reform, defense, and budgetary mandates overflowing with earmarks that serve a monied minority as opposed to an all-too-silent majority. You don't have to be Don Quixote to believe that legislators – and Presidents – often do not work for the benefit of their constituents: A recent NBC News/Wall Street Journal poll reported that over 65% of Americans trust their government to do the right thing "only some of the time" and a stunning 19% said "never." What most politicians apparently are working for is to perpetuate their power – first via district gerrymandering, and then second by around-the-clock campaigning financed by special interest groups. If, by chance, they're ever voted out of office, they have a home just down the street – at K Street – with six-figure incomes as a starting wage.

What amazes me most of all is that politicians can be bought so cheaply. Public records show that combined labor, insurance, big pharma and related corporate interests spent just under $500 million last year on healthcare lobbying (not much of which went to politicians) for what is likely to be a $50-100 billion annual return. The fact is that American citizens have never been as divorced from their representatives – and if that description fits the Democratic Congress now in control – then it applies to Republicans as well – past and present. So you watch Fox, or is it MSNBC? O'Reilly or Olbermann? It doesn't matter. You're just being conned into rooting for a team that basically runs the same plays called by lookalike coaches on different sidelines. A "ballot box" pox on all their houses – Senators, Representatives and Presidents alike. There has been no change, there will be no change, until we the American people decide to publicly finance all national and local elections and ban the writing of even a $1 check for our favorite candidates. Undemocratic? Hardly. Get on the internet, use Facebook, YouTube, or Twitter to campaign for your choice. That's the new democracy. When special interests, even singular citizens write a check, it represents a perversion of democracy not the exercise of the First Amendment. Any chance that any of this will happen? Not one ghost of a chance.
The Twilight of the Guilds? "The biggest bubble in the United States is the upper-middle class professional bubble; for the last generation the incomes of Americans with professional degrees continued to rise, sharply in many cases, even as incomes for blue collar workers steadily fell... This can't and won't go on."

Towards A Vocation Nation

The cost of doing nothing [1,2,3]

The Real Roots of the Crisis
Macroeconomists argue that the roots of the crisis are in imbalances: asymmetries in the flow of trade between nations. But those imbalances themselves are just effects. A current account deficit is a symbol: just numbers that point to a deeper reality.

The real roots of the crisis aren't about liquidity requirements, reserve ratios, or monetary transmission mechanisms. No amount of regulation or rule-making can fix it. And mere "growth" in GDP, as we're discovering, isn't a cure for it.

What really caused the crisis was the fact that we didn't care. Bankers didn't care about the loans they issued. Boards didn't care about bankers. Shareholders didn't care about boards. Markets didn't care about shareholders. Communities didn't care about markets. Society didn't care about communities. No one cared much about society.

The fundamental question, then, is this: why not? My answer's simple — and probably even simplistic. But it will serve well enough to make a point. We didn't care because we were chasing stuff. The real crisis is a crisis of nihilism: the belief that apart from stuff, nothing else matters economically. In the name of stuff, we sacrificed what mattered: people, community, comity, trust, education, skill, quality, happiness — and tomorrow itself.

It is those institutions — not mere stuff — that underpin authentic value. Stuff is just window dressing. In Wall Street's parlance, we got blown up by a bad trade. Trading stuff for institutions was a bad idea.

The real crisis is inside us. It's how we make sense of the world, what motivates us, and in what we value. It is, in short, culture. And it is culturally that we have lost our way.
cf. The Rules Have All Changed: "Julian Sanchez, criticizing guru Umair Haque and his manifesto[s]" [1,2,3,4,5]
posted by kliuless (34 comments total) 75 users marked this as a favorite

 
It's like you're trying to make me miss my meeting and just start drinking now.
posted by The Whelk at 6:35 AM on March 2, 2010 [6 favorites]


Woah.

The problem with allegory and parable is that they rely entirely on the validity of the comparison, and the plausibility of counterfactual history. Is this overwhelming barrage of information (seriously- how long are we supposed to spend on this post: months?) intended to convince me that the analogy is valid?

How can I know I can trust the Good Father of this imaginary alternative history if he passively waits for people to come to him with cap in hand? What if he's just an armchair pilot? And then, how can I trust that applying the wisdom of the Good Father will lead me through the valley of the shadow of bankruptcy into the green uplands of prosperity?
posted by honest knave at 6:36 AM on March 2, 2010


WTF man.
posted by smackfu at 6:45 AM on March 2, 2010


That'll do, pig.
posted by shakespeherian at 6:55 AM on March 2, 2010 [8 favorites]


More like Universe Money. This is great and I will not get any work done today, further hollowing the GDP.
posted by The White Hat at 7:00 AM on March 2, 2010


This post is pretty thin. Couldn't you have fleshed it out a bit with a few more links?
posted by Fuzzy Monster at 7:13 AM on March 2, 2010 [12 favorites]


Seriously, though-- good stuff. Thanks.
posted by Fuzzy Monster at 7:14 AM on March 2, 2010


Did you lose a bet with Mutant or something?
posted by chillmost at 7:28 AM on March 2, 2010 [18 favorites]


tl;dr

;)
posted by Phanx at 7:42 AM on March 2, 2010


This post fills me with such hope, and then crushes it under loads and loads of abject terror.
posted by shmegegge at 8:12 AM on March 2, 2010 [2 favorites]


I'm going to read these. I hope you all are still commenting in 11 days.
posted by milestogo at 8:22 AM on March 2, 2010 [2 favorites]


That's it, I'm getting off this planet - possibly off this Material Plane. Who's with me?
posted by The Whelk at 8:33 AM on March 2, 2010


This is like one of those movie previews that tell you so much about the movie that you no longer need to see the movie.

Except this one of those previews that's so long you can't even watch the entire preview.
posted by happyroach at 8:37 AM on March 2, 2010 [1 favorite]


(NB: For the uninitiated, Charlie Munger is Warren Buffett's right-hand man at Berkshire Hathaway.)
posted by ZenMasterThis at 8:47 AM on March 2, 2010


Be honest now. This is just a link dump from your bookmarks, innit?
posted by symbioid at 9:10 AM on March 2, 2010 [2 favorites]


Since this looks like the place for finance link dumps I'l put this here

Wall Street by Doug Henwood. It's an incredibly prescient book about how the american financial system works that you can get for free.
posted by afu at 9:10 AM on March 2, 2010


Eisenhower initially intended to refer to the "military-industrial-Congressional complex." That would fit here, too. Pork + campaign contributions + an aura of respectability and authority go a long, long way.
posted by ibmcginty at 9:20 AM on March 2, 2010 [1 favorite]


Great work on gathering this all together. Obviously we're in real trouble and the fun hasn't even started yet. Get a deer rifle and some ammo and a fishing rod because that's the only way you gonna feed your family.
posted by gigbutt at 9:34 AM on March 2, 2010 [1 favorite]


gigbutt: That's not helpful.
posted by pts at 10:26 AM on March 2, 2010


Well, nobody was willing to step up to support Obama's push for the Volcker Rule. The press buried coverage of the proposal as ruthlessly and efficiently as it always does.

The rest of the Washington establishment and the media offered nothing but skeptical appraisals of the Volcker Rule push, despite near-universal consensus among credible economists that the regulatory changes were already long overdue.

Even NPR as much as pronounced the rule DOA.

And a lot of "liberals" were too busy excoriating Obama over perceived mishandling of the HCR bill to even bother offering any meaningful political support for the Volcker Rule.

Dammit, I told people they needed to support it. Also, previously.
posted by saulgoodman at 10:43 AM on March 2, 2010


I think kliuless is playing the long game, because this is a post that needs time to be properly read... like maybe a week.

But going by the first link, is it even possible to shut down Basicland's casinos at this point? The finance sector is rich and huge, and it will fight for its survival like any other threatened organism, which makes any attempt to return to the more fiscally conservative ways of the past problematic.
posted by Kevin Street at 10:55 AM on March 2, 2010


get a deer rifle and some ammo and a fishing rod because that's the only way you gonna feed your family.

If it comes to that, I really doubt it's going to work out well, except perhaps in regions where we're not such a large lot of predators for relatively scarce prey.

You're probably better off investing money, yourself, or both in a society that functions. Maybe that means a country outside of "the ring of fire", maybe that means a community that's working here in the U.S.
posted by weston at 10:56 AM on March 2, 2010 [1 favorite]


So what's this all about?
posted by mrgrimm at 11:47 AM on March 2, 2010


I'm going to say something that is very unpopular:

I don't trust the advice of Warren Buffett or anyone else at Berkshire Hathaway on how to turn around the American economy.

Buffett is a man who sole claim-to-fame is his success as an investor. We are supposed to believe he is a great American solely based on his investment returns. His contribution to the American economy has been entirely in the realm of finance. Does he invest is small, innovative companies looking to break into new markets? No. Companies that are going to change the world? No.

He invests in insurance companies and mass market food and retail. Berkshire Hathaway has a vested interest in ensuring that Americans continue to live and consume the high-quantity, low-quality way they have been for the last 30 years. You want Americans to eat healthy - he wants Americans to eat at Dairy Queen and drink Coca-cola.

Of course, this is all within his rights and he is entitled to do with his money whatever he wants. But this essay in Slate, and Buffett's prognostications on CNBC, amounts to little more than old-school finance blaming all the nation's problems on new-school finance, and I'm not going to allow myself to succumb to its crude scapegoating.

The problem isn't high finance. The purpose of finance is to facilitate production and trade. If you want efficient production and trade, you need finance. The problem is that American finance wasn't willing to commit suicide as readily as American manufacturing was, and it lingered on after manufacturing went to Asia. But Berkshire Hathaway is hardly a manufacturing giant fighting the good export fight on behalf of the country. Look at that list of assets. Is there a company on that list that produces anything that isn't a commodity or that Europeans and Asians would want to buy in significant quantities? Furthermore, I submit to you that every company on that list has more at stake in maintaining the status quo than Goldman Sachs ever will.

You can curtail the trading of derivatives all you want and they will invent or discover something new to trade. This is because the smartest people in America work on Wall Street, not K Street or Main Street. They are inventive and creative, energetic and motivated.

The problem is the country's leadership allowed those people to waste their talents there. More broadly put, no leader in recent memory has articulated a national vision that would inspire the best an brightest to do something other than try to make as much money for themselves as possible.

I had hoped that Obama would change this, but I've since become convinced that he simply lacks the imagination to articulate such a vision. I know I'm right about this because the most important issue of the day is about paying for health-care, not health-care itself. That this is such a difficult issue on the national agenda presupposes that Americans cannot, and will not, be able to afford to pay for healthcare, either collectively through govt spending or privately through the market.

The solution to the healthcare problem is the same as the solution to the national debt problem and every other problem - production. We need to make things that people want and that means making the best in the world of a variety of products. It means ending the incrementalism that passes for innovation in US industry, and it means abandoning the low-margin, high volume supermarket mindset. Not 30 brands of cereal made from corn that will kill me slowly over a period of decades. Five brands that will actually improve my health. Not 500 channels of unscripted reality dreck. 10 channels of the the kind of programming the people who work in Hollywood would themselves want to watch. Not five GM brands of mediocre cars that only sell to cops, fleets, and rentals. One GM brand that makes cars that are better and cheaper in every category than anything toyota or honda puts out.

We need leadership top channel the talents that are at present drifting aimlessly in the market. We have big problems that are unsolved because there has been little commitment from the top to solving them. Energy, cancer, education. These are the persistent problems that underlie everything else going wrong in the country and the world right now.

If government doesn't want to take those on, then I don't even understand why we need a central government beyond a technocratic bureaucracy to fix the roads and raise an army. I'm not kidding. If the President wants to address symptoms of problems rather than the problems themselves, does it matter who he is? No matter what he does or wants to do, leaving the real problems unaddressed means things will only get worse.

So while the rest of Kliuless's links look very interesting, I'm going to spare myself the implicitly self-congratulatory pseudo-folksiness of Charlie Munger and his boss.
posted by Pastabagel at 11:48 AM on March 2, 2010 [12 favorites]


gts: ruling out the possibility of collapse is not helpful.

so many say 'i can't imagine the global financial system collapsing', as if it depended on their ability to envision same

hope for the best, prepare for the worst.

pastabagel: munger's piece is not advice on how to turn the american economy around. it is a post-mortem.
posted by kimyo at 12:02 PM on March 2, 2010


part of what's stimulating about this discussion, and this post, to me is that the general idea seems to be "people are basically gambling on things they don't understand, and the information they'd need to understand it is being withheld." as someone who does not invest (me has no moneys), and certainly doesn't understand the math and language, this resonates with me. perhaps that's because I don't understand it, so I can't understand why that's wrong, but it resonates with me nonetheless. and it seems like there are movements out there to make it so people understand what's going on, and that they're being resisted within the industry.

I don't know what to do about that, if that's the case. As much as I might agree with Pastabagel (if I understand him correctly, and I may not) about the men behind this shit being the smartest guys in the room and that they'll find another way to game the system, it smells a little bit like an appeal to authority argument to me (though again, maybe I don't understand what he's saying.).

I certainly hope there's something that can be done, because from where I'm sitting it really does look like we're all gambling without knowing the stakes, and I can't help but feel like that simply has to change.

what I'm saying is "hope me. I don't get it. Is this it? What is it?"
posted by shmegegge at 12:05 PM on March 2, 2010


Hmm. A Master's thesis reading list, maybe?
I wonder when the new international moneys will be announced. Universal Credits; UCs? Creds? If I could think of something that started with 'b' we could still have give someone a BUC.
posted by LD Feral at 12:21 PM on March 2, 2010


Irony - a guy who made his fortune betting the end of the world wasn't at hand in the 70's now telling everyone the end of the world is near.

Pastabagel - your heart is in the right place on not trusting Buffett but I think you are getting there the wrong way.

Also I think this post is fucking terrible. Its just a huge link dump with editorializing through the links chosen. If this isn't a case for someone to be told to get their own blog I don't know what is.
posted by JPD at 1:41 PM on March 2, 2010


At least with a blog post like this you can figure out who is using Favorites as bookmarks.
posted by smackfu at 1:59 PM on March 2, 2010


It could be improved by trimming down the number of links. One of them is an eighty minute video that I'm not going to sit through, and a lot of them are little blog entries, like the links at the end. But there's some really interesting stuff, too. Maybe the post would be stronger if it was at least one-third of its current size.
posted by Kevin Street at 2:28 PM on March 2, 2010


Also I think this post is fucking terrible.

Maybe the post would be stronger if it was at least one-third of its current size.

Or if there were one specific topic ... is it the risks of financial innovation? The current financial "crisis"? Corporatism in government? Economics as a science? Jonathan Gruber?

Perhaps the post is an attempt to replicate the complexity of the subject/industry to the layman. If so, kudos.
posted by mrgrimm at 2:42 PM on March 2, 2010


I'd Keep the first section on the (lack of) merits of financial innovation, and some of the links from "CAUSES," "FIXES," and "OVERVIEW," with less quoting of long blocks of text. The rest seems extraneous.
posted by Kevin Street at 2:46 PM on March 2, 2010


It's like when one of those kids vomits one big constant stream, and he shakes his head from left to right while he's doing it, making this nice broad zig-zag, where in this case the zig-zag is echoed by my neck trying to parse all the indentation.
posted by circular at 3:37 PM on March 2, 2010


i was just trying to put together some trees in an attempt to see the forest :P here's a few more... to throw on the fire!

A Banker's Progress
The doomsday cycle
Financial Innovation II
They Replaced Horses, Didn't They?

also i've always found fareed zakaria eminently sensible...
Defusing the Debt Bomb
It can be done. Here's how.

First, adopt a value-added tax. More than 100 countries have some kind of a national sales tax. If America were to enact one tomorrow, at something like the average for industrial countries (18 percent), and drop income-tax rates to compensate somewhat, we could bring in hundreds of billions of dollars every year. To get a sense of the revenue potential, imagine if the United States were to adopt a VAT at the high end of the range—25 percent, similar to that of many Scandinavian countries whose economies have still grown as fast as America's over the last three decades. Such a tax, Leonard Burman calculates in the University of Virginia Tax Review, would bring in enough money to balance the federal budget, pay for health-care expansion, eliminate the income tax for all those earning less than $100,000 (90 percent of households), and cut the top tax rate to 25 percent. The tax would also restrain Americans from over-consuming and reward them for saving, the single most important long-term shift we need to encourage.

Second, end the massive, distorting subsidies for home-ownership, health care, and agriculture. These three subsidies together cost the federal government about $250 billion a year. All of them encourage behavior that is bad for the economy. The interest deduction on mortgage has encouraged the massive accumulation of debt that is at the heart of the current crisis. (No, it does not encourage homeownership. Neither Canada nor Britain has the subsidy, and both have slightly higher rates of home-owner-ship than we do.) Tax exemptions for employer-based health plans encourage overconsumption of health services—a point on which economists from both left and right agree. Agricultural subsidies, mostly handouts to large agribusinesses, are so egregious and market-distorting, one doesn't really know where to begin.

Finally, make sensible adjustments to entitlements. The most important fix is to tie benefits to rises in inflation, not wages, a seemingly technical matter, but one that could save the government hundreds of billions of dollars. Then raise the retirement age by a couple of years, and link it to life expectancy, which increases by three months every year...

...just these three fixes would place the United States on a firm fiscal footing, leaving it with ample resources to invest in research, education, infrastructure, alternative energy, and whatever else we want. I know, I know—it's the politics that makes this look hard. I understand how impossible it is for Congress to impose even a little pain, despite general agreement that we are in a severe crisis. But as we sink, let's not pretend that our problems are insurmountable. The solutions are out there in plain sight. [1,2]
oh and btw what i like about munger, grantham and gross is that they're all about to die -- or have, at least on some level, realised their mortality (like say in the case of soros, gates and jobs) -- and are trying to leave behind some kind of legacy after decades of successfully 'playing the game'. having necessarily studied and thought hard about how it all works and, no doubt, having exploited flaws in the system, they're arguably in the best position to either contemplate how to make it better or compensate for its deficiencies...

I wonder when the new international moneys will be announced. Universal Credits; UCs? Creds? If I could think of something that started with 'b' we could still have give someone a BUC.

buffer? there's also been somewhat of a push for SDRs...
posted by kliuless at 9:41 AM on March 4, 2010 [1 favorite]


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