Thank you for such a fine lesson

Watched the inside job.

It’s natural that deregulation would lead to higher returns to investors. By deregulating, you allow higher volatility in the market, allowing band of extreme return to get wider and extending the potential range of extreme return. So, it is logical to conclude that yes, financial deregulation would lead to more profits for investor.

It’s almost magical. The mean, returns that is possible under the current economic output, remains the same. Yet by allowing 2 or 3 more standard deviation to the same mean, you can access wildly extreme return, with the same baseline economic output.

But, the above statemen does not mean that financial deregulation would lead to an improvement in the econmy.

There seem to be an assumed bridge between “more profit from financial deregulation” and “good for the economy”.

An when you have assumptions, you have the seeds of a fuck up.

The above assumption fails for 3 reasons:
a. An increase on the left side of the equation due to volatility. Just as the band and range of return increases, the band and range of risk also grows. So the probability of hitting gold and rotten fish is equal.

But the art is making a product structure that delays the impact, not the occurence, of the fish. And then as the fish smell gets apparent, build a structure where you would be asked to stop the rot to spread.

You get money by putting rotten fish in your net, and you get money cleaning the net. Beautiful.

b. Financial profit don’t go to taxes or labor, it goes to capital owner. Investment banks and their employees can hire tax lawyers to minimize their tax payout, so the effect of financial profit to taxes and subesequent economic growth through government spending is minimal.

Financial profits usually don’t go to mass consumer spending, since these firms distribute most of their compensation to select few labor in their institution. They spent a lot, but they buy things that are so expensive, exclusive things, there’s not many labor involved in providing thess luxurious goods, the impact is limited, since there’s only so many vp and partner in banking, compared to the general population, the effect on consumer spending is minimal.

And financial profits don’t usually help exports, i fail to see consistent meaningful use of wall street profits to support american exports.

A good part of profit goes to capiyal owners and select bankers, who themselves generally already has a. Lot of money. So this grou put profits in their bank account where the money sits idle. Such money has no velocity and thus does not contribute to economic growth. Even if it does being use, since they don’t know enough about china or india or indonesia to invest a good part of their profits in these emerging economies. The money feed back into the financial system, jerking itself off (lack of growth in non FS sector of american and european economy makes investment there also unattractive)

So, if financial profits are not made to go into government spending, mass consumer spending, and has no relevance to direct export, how does that help economic growth?

c. The labor in investment banking doesn’t receive’s a typical labor’s cut of the profit, they are paid sums closer to the capital owner’s share of the profit. One way is to solve the agency problem in modern corporation is by aligning the labor’s interesr with the owner’s, with bonuses and profit sharing.

But there’s a significant difference between labor and capital owner, labor doesn’t own most of the capital being gambled away. So, should the fish hit the fan, labor sent the capital owner’s money to bankruptcy, labor then either reveive monthly payment to steer the company out of bankrupcy or move to other company, academia, or regulatary bodies.

The only labor who has the right to fully gamble away capital, is the capital owner him/herself, and you don’t have that in investment banks.

Considering the existence of non-executive shareholders and owners of capital whose funds are being use as leveraged,you don’t have that in investment bank.

Their board just let this took place, the management, as invested as they are, are being run amok with other shareholders money.

So yes, alignment needs to happen, but it needs to happen in both direction. Good enough for agents to be producive and efficient, but small enough so agents has no incentive to bet the capital owner’s house.

But after watching all that? You know the best insight i get from watching the movie?

There will be another financial crisis, greed guarantees this. And the bankers, the regulators, the credit agencies, senator, congressman, and academia will claim ignorance on what happen and their role, they will fluster in congressional hearing, maybe booed by some protester, and after the show’s over, got away vastly richer than before.

Thank you America, for your fine education in getting rich quick. Increase the volatility of the market.


Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s

%d bloggers like this: