Time to Throw the Traders Out the Temple (Part 2)

So the Dow's gone down and up and down. Politicians have assembled in impressive locations and intoned grave statements. Presidential campaigns have adjusted their rhetorical attack lines and pivot points. National propaganda has moved from "bailout" to "stimulus". And nothing much has changed.

A potential catastrophe — or perhaps a historic opportunity — is unfolding in glacial slow motion before our befuddled eyes. Corporatist media prefer to reduce the situation to an infantilizing superstitious battle of bulls vs. bears, as though the stock market consists of imaginary stuffed-animal friends and whichever side we believe in with more fuzzy fervor will magically win. But to me the story of financial crisis and rippling economic disruption is a serious matter not because of what happens on Wall Street, but because of what it could mean for broad swaths of the planet for years to come

This whole ridiculous business of obsessively tracking and sensationalizing amorphous fluctuations of financial indexes is nothing but noise and static. First of all, by the time numbers show up on trading boards and TV tickers, the big bank players and back-channel arbitrageurs and cutting-edge day-traders have already made their moves and everyone else is playing Simon Says in their wake and to their tune. Small investors really have no business messing around with speeding tickers, wasting time gazing at crumbled receipts on wingtip-trodden floors. Second, all the jargon-dripping retroactive rationalizations for market movements which the pseudo-psychic interpreters of numbers, lines, and arrows shovel out of their mind-sewers for a living are complete and utter bullshit. Most TV financial shills have absolutely no clue what they're talking about; their job is simply to sell the viability of the Wall Street racket, so when markets go up they say "invest!" and when markets go down they say "stay invested, please". Third and most importantly, the buoyancy of stock indexes is in no way a meaningful measure of the overall health of the economy. Stock indexes can soar right alongside homelessness, corruption, infant mortality, malnutrition, and systemic maldistribution; and I reject any measurement of a society's economic health which lacks the sophistication — or the decency — to incorporate such fundamental aspects of human well-being.

When I talk about the economy, I'm not talking about finance; I'm talking about human activity which produces and distributes social value, from food and shelter to laughter and beauty. Of course, our modern economy is inextricably entangled in the constructs of post-industrial capitalism. But the way things are need not constrict our envisionings of the ways that things could be better. And I think now is a particularly compelling moment for progressives to make the argument that things could be better.

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From my perspective, none of the "fixes" being floated and talked up by government helmsmen and captains of finance address that which ails our economy. Instead, they appear designed to keep the racket going a little longer. They may buy time, but when that time's up, another meltdown awaits. As I see it, the big honking unstated problem is that a structurally-significant portion of banking has gone underground, far away from basic savings, checkings, loans, and investments, into an unchecked unmonitored shadow realm of highly-leveraged speculative derivatives. By "highly-leveraged", I mean that you can put down $10 and place a $200 bet. If you win, you collect and pay the margin from your earnings. If you lose, the wild derivative math kicks in and the pain gets spread around to a hundred pools which are constantly hustling new cash to cover. In other words, a pyramid scheme.

Over the past decade or so, investment banking has remade huge stretches of corporate America in its own leveraged-debt-scheme image and carved a gaping economic cavity in which many trillions of dollars are pumped madly through mathematical sequences which nobody quite understands. On top of hedge funds, pension funds, mutual funds, holding companies, and other investment firms, many companies which proclaim to be in other businesses — retail banking, mortgages, HMOs, insurance, retirement planning, leasing, other cash-heavy sectors — have transmuted into shells in which the driving business imperative is actually financial speculation. Just about all big corporations these days have substantial divisions or subsidiaries which operate as specialized investment firms. And all these firms work together and play with the same toys. I remember a period during the 90s when General Electric, the manufacturing giant, was losing money in virtually every part of the business except for GE Capital, its finance arm, which kept the rest afloat. That's how twisted our economy has become: manufacturing companies have transmogrified into derivatives speculators who are rewarded by the market for laying off workers, shutting down factories, and dreaming up fanciful trading contracts.

Nobody knows precisely what's going on in this shadow banking world, because nobody's supposed to know. The credit default swap market alone is estimated at $62 trillion, and there's a whole lot more where that came from. Not that competent regulators couldn't figure it all out and clamp down if they wanted to; but let's remember that Wall Street kinda owns and runs the government, and they tend to feel it's best to leave shadow banking alone. To my thinking, it's slightly inaccurate to say that investment banking is "unregulated"; I think it's more accurate to say that it's exactly as regulated as those in power see fit. I sometimes hear liberal arguments on behalf of "regulated capitalism". It makes me smile then shrug, because capitalist markets are always regulated. The only question is, in whose interest? It's not really a matter of more regulation vs. less regulation; it's a matter of what the regulations achieve and whom they benefit. Forget about what Greenspan, Volcker, or Bernanke say; you can't trust a word out of their mouths because their public statements are instruments of policy, not truthful observations. The truth is that the federal government has been tweaking monetary and fiscal policy and financial regulation for decades in support of exactly the kind of Wall Street racket that has been achieved. Just take as an example the Depository Institutions Deregulation and Monetary Control Act, enacted in 1980, which eliminated caps on interest rates previously set by state usury laws, lowered capital reserve requirements, and generally pushed banking toward riskier, greedier, more reckless behavior. So you see, laissez-faire doesn't just happen; it takes purposeful acts of legislative intervention to sculpt a free market.

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[ To be continued ]

Comments

[nezua]

reading along with rapt attention bro! looking fwd to part 3.

[mm]

great series, kai! thanks for breaking this down for us. looking forward to the rest.

[Mamita Mala]

Gracias for this series Kai and for breaking it down. What struck me in this part was the concept of the economy as activity attributing social value to things and even life activities themselves. When I worked in the belly of the beast, one of the derivatives they were developing was to be based on the rise and fall of numbers like homelessness and poverty. That's when I jumped ship.

[Josiah]

Brilliant stuff. You should turn this into a regular column.

[Kai]

Nez, mm, thanks! I'll try to post part 3 in about a week. First, one more piece on the election in this last week!

Mamita Mala, ah, yes, that sounds like a pretty good reason to jump ship. For me it wasn't one particular thing, it was more the whole scene, the daily grind, the overall mental orientation of the industry. I felt like I'd learned enough and was ready to move on to the next adventure. So I got a job in corporate media! Hehe. It was a funny decade. Anyway, yeah I like to think about the concept of economy from a variety of angles, find it useful in visualizing what might be done differently. Thanks for droppin in!

[Kai]

Josiah, thanks, maybe I'll toy around with the idea of an ongoing series on economics. It's an important subject which fascinates me, and almost everything I hear about economics in mainstream media is atrocious.