Post #121,978
10/20/03 11:02:42 AM
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Wealth & Democracy - Paging Ben Tilly.
So, I've been thumbing through Wealth and Democracy, and while a fair amount of it is clear, I don't have the background in finance and economics to be sure I really grok what he's saying.
I've read up through Chapter 4 (I think - talks about the economic misfortunes of Spain, Holland, and England) and I think I've come up with a metaphor that comes pretty close to describing what went wrong with the finances in those three countries, and what's going wrong here right now:
Think of the finance system as the circulatory system of the nation. The blood carries nutrients to the areas that need it to produce growth. However, as time goes on, the finance system begins to regard itself as so important, that it misappropriates resources that could be used to produce actual goods, and instead uses those resources to generate more wealth.
Basically the circulatory system takes over the body, and uses resources which would be used to grow the body, instead to grow more blood - which is ultimately a useless exercize, because the process takes away nutrients from the brain, stomach, muscles, etc. that is needed for day-to-day function.
Am I right?
Thanks,
Thane
In that final hour, when each breath is a struggle to take, and you are looking back over your life's accomplishments, which memories would you treasure? The empires you built, or the joy you spread to others?
Therin lies the true measure of a man.
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Post #121,986
10/20/03 11:20:07 AM
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Re: Wealth & Democracy - Paging Ben Tilly.
I haven't read the book, but I'm familiar with his main philosophy.
There is good capitalism - making products that are worth something and selling them - and bad, depending on interest, moneychanging, margins, etc. etc. - in short focusing on MONEY as a thing in itself - "finance capitalism" to use a phrase.
The American economy from the end of the war until the mid-60s was based on production and selling real things. The middle class thrives when a lot of "good" money circulates - and so does the government because "good" money produces tax revenues over and over as it circulates.
When most of the money circulating is "good" money, actual tax rates can be very low because the money keeps producing revenue as it circulates. "Bad" money - the kind that is made in hostile takeovers, interest on lending, inflated stock dividends, basically is "good" moeny siphoned off into a dead end. The less actual production - creation of real "wealth" - the higher tax rates need to be to support the existing infrastructure.
-drl
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Post #122,578
10/23/03 3:41:32 PM
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Re: Wealth & Democracy - Paging Ben Tilly.
The distinction you propose is silly. There is no difference between "finance" and any other productive activity.
Lending and borrowing are good things, full stop. Why? They let people make purchases today based on their future income. Lending is why most American families can afford homes. Bond offerings let corporations finance capital investments. Lines of credit permit businesses with bursty income flows, such as selling expensive heavy equipment to a small customer base, to pay for ongoing costs like employee salaries. In all these cases borrowing permits people to adjust their inter-temporal consumption patterns to maximize their long-term well-being.
Risk is real, and it's of real value to reduce one's exposure to it. Stock markets let people easily diversify their holds, reducing their risk exposure. Health and fire insurance let people hedge against the financial risks that unexpected illness or house fires cause. Derivatives markets permit mortgage companies to purchase large portfolios of home loans from banks and sell shares in the portfolio back to them, increasing the financial stability of the banking system. In all these cases people are paying a small amount of money to spread a large risk among a much larger pool of people.
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Post #122,583
10/23/03 4:00:23 PM
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Not silly at all
Farming is production. Finance is not. If everyone is a farmer, you have a viable economy. If everyone is a financier, you don't.
===
Implicitly condoning stupidity since 2001.
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Post #122,593
10/23/03 4:58:36 PM
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If everyone is a farmer, you do not have a viable economy
The "why" is left as an exercise for the reader's brain.
--
OK, George W. is deceptive to be sure. Dissembling, too. And let's not forget deceitful. He is lacking veracity and frankness, and void of sooth, though seemingly sincere in his proclivity for pretense. But he did not lie.
[link|http://www.jointhebushwhackers.com/not_a_liar.cfm|Brian Wimer]
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Post #122,595
10/23/03 5:16:54 PM
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True, but they can all eat
===
Implicitly condoning stupidity since 2001.
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Post #122,597
10/23/03 5:28:48 PM
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Um, how?
I think I understand what you're trying to get at (there are unproductive uses of financial assets), but your analogy doesn't work, IMO.
There are too many people in the world for everyone to grow their own food - enough food for year-round survival. Cities would have to be depopulated. Pol Pot would be happy, but few others. Who would produce the fertilizer, farm equipment, diesel fuel to run the tractors, etc., etc.?
There has to be a way for capital to move in the modern economy. Even if derivatives and the like don't have an obvious direct impact on production of goods and services, they do help spread risk. And risk is the monster hidden in the closet in most economic decisions (always in the background).
Of course, abuses in the system should be removed.
Cheers,
Scott.
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Post #122,600
10/23/03 5:36:28 PM
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Who said it had to look like the current one?
Cities would have to be depopulated. Cities can only exist with a more-advanced economy than that in a purely agrarian society. So yes, financing is a necessary part of a modern economy. But I still say it is possible to have a society without financiers, but you can't have a society without producers. To say that there is no distinction between the two (which is what I proposed the analogy to refute) is wrong. ===
Implicitly condoning stupidity since 2001.
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Post #122,602
10/23/03 5:44:49 PM
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Nope, the brain is otherwise occupied, I guess
What you get that way is not a sustainable economy, but a sustainable ecology. All of them who do not die of starvation, diseases, exposure and predators can certainly eat. In a good year.
--
OK, George W. is deceptive to be sure. Dissembling, too. And let's not forget deceitful. He is lacking veracity and frankness, and void of sooth, though seemingly sincere in his proclivity for pretense. But he did not lie.
[link|http://www.jointhebushwhackers.com/not_a_liar.cfm|Brian Wimer]
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Post #122,585
10/23/03 4:13:28 PM
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What you're missing....
...is the self-induced drain of resources in the financial community. If that were just >banking< or just >investing< activity then I would agree more with your assessment. There is a huge value to allowing banks to spread wealth to more productive uses (in other words...loaning others money) and a huge value in letting people invest in productive capital inventment (in amounts that they can afford on an individual basis).
However, the capital markets have now created "investments" such as derivatives and other like toys that are nothing more than gambling devices. They are not productive uses of resources. There are BILLIONS being traded based on paper and money alone...these transactions have NO bearing on the productive assets of the economy.
If you push something hard enough, it will fall over. Fudd's First Law of Opposition
[link|mailto:bepatient@aol.com|BePatient]
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Post #122,607
10/23/03 6:27:34 PM
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Re: What you're missing....
Derivatives are extremely valuable instruments, which is why there is so much effort dedicated to creating and trading with them. What they let you do is hedge against risks that previously could not be hedged against, and this in turn allows people to try things that were too risky to contemplate doing before the derivatives existed. I spent half a decade working at a company that was trying to roll out a new derivative product. The idea was that home loans usually represented the single largest source of financial risk to a given family. If you could buy insurance against sudden declines in the market, then you would not have to worry about potentially getting "trapped" in a bad job or bad neighborhood because of an unanticipated drop in property values. That's a new liberating potential made possible by a very sophisticated piece of financial design.
Sure, derivatives can be misused, but that's true of everything: the human capacity for fraud, self-delusion and stupidity long predates the Black-Scholes equation.
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Post #122,764
10/24/03 9:59:35 PM
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Yes, derivatives have positives and negatives
However my concern is that financial markets tend to concentrate risks with those who are most willing to take risks. More sophisticated instruments allow those risk-takers to get farther out on a limb at far higher leverage. And yes, I know the requirement for any company who is issuing massive derivatives to maintain quality credit ratings. But the move that I am talking about can happen in ways that traditional quality ratings find hard to measure, and the shift to a very risky exposure is very hard to monitor until things blow up.
The result is that risks are borne by people who can't handle them when they blow up. So parts of the system that thought they were guaranteed to not take the risk, get hit. Or (like Long-Term Capital) the amounts at stake become so large that they simple Are Not Allowed To Fail, and the government steps in. (And, of course, when risk-takers take risks on the bet that government will rescue their sorry asses, bigger and better risks get cheerfully taken.)
This is, of course, not even taking into account the opportunities for outright fraud that you get when scammers (to use the cliched example, eg at Enron) use the complexity you can get with custom derivative instruments to keep people from understanding the house of cards they are erecting.
So yes, if derivatives were used properly, I understand all of the theory for why they should be good things. However I still am not convinced that on balance the more obscure ones are a good thing.
Cheers,
Ben
"good ideas and bad code build communities, the other three combinations do not"
- [link|http://archives.real-time.com/pipermail/cocoon-devel/2000-October/003023.html|Stefano Mazzocchi]
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Post #122,042
10/20/03 2:35:54 PM
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Your analogy is pretty good
The role of the financial system, like the bloodstream, is allocating resources. The problems come when the financial system has enough influence that it can misallocate resources to itself, get others to unfairly bear the risks that are supposed to be borne by the financial system, and it starts reallocating the real economy to other countries. The result of which is massive concentrations of wealth, the nation having to bear intervention costs, and an export of jobs and skills elsewhere.
The bloodstream analogy gets the misallocation, and sees the atrophying of other necessary body parts. It doesn't get at all of the dynamics, but expecting it to is pushing the analogy too far.
Cheers,
Ben
"good ideas and bad code build communities, the other three combinations do not"
- [link|http://archives.real-time.com/pipermail/cocoon-devel/2000-October/003023.html|Stefano Mazzocchi]
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Post #122,092
10/20/03 7:16:02 PM
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Thanks, both of you.
Nice to see that I've got the gist of it, too bad it makes me want to slit my wrists. :P
(Not seriously, folks, not seriously. I plan on waiting this one out, then hitching a ride on a Vingean Singularity to immortality. :D)
In that final hour, when each breath is a struggle to take, and you are looking back over your life's accomplishments, which memories would you treasure? The empires you built, or the joy you spread to others?
Therin lies the true measure of a man.
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Post #122,802
10/25/03 1:47:41 PM
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analogy of todays economic climate
points to who recognises the author
picture our economy as 100 buckets that have varying amounts of water in them. Water is money. Now picture people rushing about spilling water from one bucket into another willy nilly. No one really knows how much water there is available unless all activity stops, then the realization starts that there is notmuch left at all.
thnks,
bill
"You're just like me streak. You never left the free-fire zone.You think aspirins and meetings and cold showers are going to clean out your head. What you want is God's permission to paint the trees with the bad guys. That wont happen big mon." Clete
questions, help? [link|mailto:pappas@catholic.org|email pappas at catholic.org]
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