He who places his hope on thee, O Virgin all-glorious, will prosper in all he does.

Inscription on Byzantine coin during reign of Romanus III



Wednesday, September 17, 2008

Concerned About Wall Street?

You should be. The free allocation of capital to opportunities is the key determinant of economic growth. Low marginal tax rates, low regulatory burdens, concretely specified property rights, and the easy transferability of such rights play an important role.

The two Presidential demogogues and their journalist groupies are spouting meaningless cliches about greed and free-wheelin' Wall Street megabuxters.

What they don't tell you--perhaps they don't know--is that Wall Street is already heavily regulated with rules designed by smart attorneys. Maybe that means that more regulations designed by more smart attorneys would have a low probability of solving anything, but a high probability of getting in the way.

Let's go back in time, say, six or seven years ago, when the Federal Reserve dumped liquidity into the financial system with a 1% Federal Funds rate target. The commercial banking system lent the excess moola, Wall Street created hedge funds and customized securities, and Main Street bought or flipped or refinanced mortgaged real estate.

Then, the Fed decided that liquidity was causing "imbalances" and decided to jack up interest rates, and, after a respectable period of time, the liquidity disappeared, hedge funds blew up, securities tanked, and Main Street got stuck with a big house that won't sell or excess condos or a pesky ARM.

Boiled down to its essence, recent economic history is easy to understand. You should be concerned about Wall Street. You should be concerned also about government involvement.

7 comments:

Andrea Elizabeth said...

My husband talks about how all business decisions are made for bottom line profits on wall-street nowadays, and how the workers become a slave to the reportable increase proofs thereby justifying overtime and willynilly layoffs. While greed seems to play a big part in all this to me, I also think that short-sighted reactionarianism with an over-concern for and dependence on external security also contribute.

Visibilium said...

Pecuniary profit seeking is an important, although not a sole, goal for businesses, including businesses on Wall Street. In this age of heightened mobility, talk of labor slavery is laughable. Workers have a choice among employers and can become employers themselves. Employment nowadays, however, isn't effortless; workers are responsible to keep their skills current to remain employable.

It's possible that some business decisions are short-sighted, but businesses tend not to last long if they repeat such decisions for long. More often, businesses appear to be short-sighted only because the government distorts price signals that businesses use to anticipate future conditions.

The cluster of business errors that is happening right now is the result of the Fed's actions in distorting the structure of interest rates. Interest rates are prices, and they signal the relative future profitability of more capital-intensive production projects.

Andrea Elizabeth said...

I consider cubicles prison cells, so maybe "slavery" was the wrong word. Outdoor jobs don't seem to pay as well either, but I do agree that some choice is involved in one's voluntary confinement.

Regarding the fed, do you see their bailing out these financial companies as penance?

Visibilium said...

Well, I wouldn't discount your aesthetic views of cubicles or labor. Sure, both involve disutility, as the economists say.

Some outdoor jobs pay well. I know a forester who makes good money. He works on his own, and therefore takes on the economic risk involved. He has to share his earnings with Uncle Sam and his wife, but no one else.

The Fed is bailing out with OUR money. Some penance.

Moreover, by setting the Federal Funds Rate target to 2%, the Fed is setting us up for another credit crunch 5-10 years from now. Mark your calendar.

By setting us up for a repeat performance, the Fed is showing no repentence.

Practically speaking, if you get a job in a cyclical industry when the job market starts prospering again, you may want to assess your future prospects again when the Fed starts tightening the screws in a few years.

George said...

"Should be concerned... about gov involvement"?

I am. Not because of the economic consequences down the road, though that's a little unnerving, but more because it begs the question 'who are we?'

All that we were taught in school about the great values of America, of freedom and capitalism - I don't think that's who we are. You mentioned government distortion of price signals. I used to think that was due to bureaucratic incompetence, but over the past several years I've become aware of the manipulation and in some cases corruption that seem pervasive through multiple government agencies.

What I wonder now is whether it's just at a certain level, with higher meta-level values still intact that will periodically correct the situation, or whether the corruption is built into the system top down, part and parcel with injured human nature. I suspect the latter, which means we'll never escape corruption/manipulation under any government or system, and that includes, apparently, church administration if we judge by history.

Which is ironic, since the Church provided the means to escape, not the corruption in the world, but the effects of it. When we reorient our goals and aspirations to be toward transfiguration, we profit whether the market is up or down, so to speak.

By the way, thanks for your explanation of what's going on - you have a way of expressing the basic essence of what seem to be extremely complex issues.

Visibilium said...

George,

Thanks for your kind words. I hear your complaints, but I'd like to point out a couple of things.

First, monetary policy as it's being conducted now has been around since the 19th Century, and America learned it from the Bank of England. I don't like it because it's ultimately unnecessary. It's used mainly to pander to constituents, and I wouldn't consider it any more corrupt than other demagoguery that's standard political fare.

Second, you're right about the ultimate Truth that the Church teaches. On the other hand, my general question is whether we should be so focused on the age to come that we relinquish this world to sin. Seeking to eradicate sin entirely would mean denying the Fall, but aren't we obliged to make inroads against it? The Protestants don't seem to have a problem with intertwining Christian values into political and social life, and prior to the 60s, they were enormously successful at it.

George said...

Visibilium,

Interesting that you should mention 19th century Bank of England practices. We just finished watching the whimsical movie "Kind Hearts and Coronets" (Alec Guiness). It was set in the 1860's, and I don't know how true to history it was, but there was a discussion about someone's ruin after they had shorted certain stocks which failed to drop as expected. Took me by surprise.
I understand your point about the social influence of Protestants prior to the 1960s, but I question how much that constituted "success". I would grant some points for holding abject social degradation at bay for a generation or two, but I think true success would be proven by enduring (centuries-long) cultural change, a widespread demand for the apostolic faith, and a surge in monastic communities.

That said, I agree with you that any degree of inroad we can make against sin is good. I don't propose that we focus on "the world to come", as my hope is that a illumined lives like that of St. Seraphim show how theosis or transfiguration can bring the Kingdom, the finger of God, into the immediate situation of many folks. I think the Lives of the Saints illustrate that this is possible under any style of Government or economic situation.
Still, my preference would be that we all obtain nearness to God in an environment free of economic suffering - that's the context of being concerned about the recent actions of our Government.