Universal Translator

Wednesday, September 21, 2011

Of Lubricants and Epiphytes

Over at Digby’s, in a post titled Killing Credibility, David Atkins writes:

In the absence of any sort of political and economic reporting that actually makes sense, voters are left to trust pre-defined political narratives. . .  [T]he biggest problem with the narratives on both sides is that economics is treated as a religion in which hidden priests serving as economic doctors must be placated by appropriate policies to “gain confidence” and “heal the economy.”  There is a massive air of mystery and clandestine actors at whose mercy sovereign nations tremble.

Reality is far simpler:  the economy is like an engine.  Demand fuels it.  A strong middle class is the best way to ensure that the fuel level stays high.  Credit via lending is a lubricant, sort of like motor oil.  In exchange for providing the lubricant, financiers are allowed to skim off the top and make out like bandits even in times of relative equality.  Lately, however, the financiers have been playing radical games to suck economy-killing amounts out of the tank, while the economy sputters to a stop due to lack of demand.  In this situation, it would seem that government would be best suited to shunt the vampire financiers off to the side, provide a fuel injection of demand and oil up the engine itself on behalf of the people.  The only problem is that the vampire financiers have too tight a control on government policy through corruption, and aren’t about to be pushed aside. (emphasis added)

I’ve long described the relationship of the financial industry to the actual economy using the same metaphor:  the financial industry helps the engine of the economy run smoothly (by allocating surplus capital to where it is needed) but it isn’t the engine itself.  It is more like what Atkins describes – motor oil.

Another way to think of the financial industry is as an epiphyte, like Spanish Moss or Mistletoe, that grows on the Great Oak that is the economy but is not the Great Oak itself.  This idea doesn’t track nearly as well as does the engine/motor oil metaphor, but I still like it because “epiphyte” reminds me of the word “epiphenomenon” -- a secondary phenomenon that is birthed from a primary phenomenon.

And the financial industry most certainly is that.  It is possible to have an economy without a financial industry, the problem is just that the “friction costs” inherent in such an economy makes it wildly inefficient.  So a financial industry will naturally arise out of an underlying economy to help bring creditors and debtors together, hopefully as inexpensively as possible.  By centralizing and streamlining the transfer of capital from unproductive surplus holders to economically productive ventures, the markets hum along more efficiently, risk can be allocated and hedged against more precisely, and the economy as a whole improves.  But the financial industry itself is not actively productive.   Ultimately, the financial industry does nothing useful other than make the underlying economy – the real economy – run more smoothly.

But it can be made to look important.

In American Theology:  The Peril and Politics of Radical Religion, Oil, and Borrowed Money in the 21st Century, Kevin Phillips points out that, historically, “top world economic powers have found ‘financialization’ a sign of late-stage debilitation, marked by excessive debt, great disparity between rich and poor, and unfolding economic decline.”  He goes on to clarify that

“Financialization” can be defined as a process whereby financial services, broadly construed, take over the dominant economic, cultural, and political role in a national economy.  In his book In Praise of Hard Industries, British journalist Eamonn Fingleton deplores financialism as “the increasing tendency by the financial sector to invent gratuitous work for itself that does nothing to address society’s real needs but simply creates jobs for financial professionals.” 

And there is certainly sufficient data and anecdotal evidence to indicate that the United States has entered its “financialization phase.” 

Great disparity between the rich and poor?  Check.  An unfolding economic decline?  Check.  A “tendency by the financial sector to invent gratuitous work for itself that [only] creates jobs for financial professionals?”  Check.  (What else would one call knowingly and intentionally creating and selling CDO’s that were designed to fail?  Except, of course, straight-up fraud?)

And, again from Phillips, here are some interesting statistics demonstrating how significant a share of the nation’s profit is now derived solely from the epiphytic financial services industry:

·         By 2000, manufacturing accounted for only 14.5% of the nation’s Gross Domestic Product but the FIRE (finance, insurance and real estate) sector accounted for 20%;
·         By 2004, the financial sector accounted for 25% of America’s total stock-market capitalization, up from 11% in 1990 and from only 6% in 1980;
·         And by 2004, financial firms alone accounted for nearly 40% of all U.S. profits.

In America, it seems, large profits are no longer made by actual economic activity – what economists describe as “actively working” – but by transferring credits and debits in new and exciting ways.  Hopefully one of the many, many really smart mathematicians and scientists who left their chosen fields to go work on Wall Street over the past fifteen years or so can explain to me how this is expected to lead to actual economic growth, because I’m having a hard time seeing it.

No, what seems apparent is that as of 2011 the financial industry already has acquired “the dominant economic, cultural, and political role in [our] national economy.”  Nothing makes that more apparent than the coordinated bleating from so many on the Right conflating “rich people” with “job creators.”  Really?

[L]ast year . . . the top 25 [hedge fund] managers earn[ed] an average of more than [one thousand million ($1B) dollars] apiece.

All told, those 25 men earned a total of $25.3 billion, according to AR magazine, a new record.  Also setting a record was the man atop that list, Appaloosa Management’s David Tepper, who earned [four thousand million ($4B) dollars] in management fees and on his own investment in the fund . . . .  Tepper’s take-home eclipsed the record payday set in 2007 by Paulson & Co.’s [resident high stakes grifter] John Paulson, who earned [three thousand seven hundred million ($3.7B) dollars] three years ago.

[But] Paulson didn’t do too badly this year, either, earning [two thousand three hundred million ($2.3B) dollars], topped only by Tepper, Soros Fund Management’s George Soros ([three thousand three hundred million ($3.3B) dollars]) and Renaissance Technologies’ James Simons ([two thousand five hundred million ($2.5B) dollars]). (emphasis added)

These are men – and, yes, they are all men – who earn thousands of millions of dollars every single year, and who do so not by actively working, not by creating jobs in the real economy, but by selling lubricant.  Try to put this into perspective:  you’d have to win the $200 Million Powerball Lottery five times in one year to have an income equivalent to what these 25 men make on average year after year after year. 

So that must be some really high-grade economic motor oil those guys are providing to be so expensive, but at least it keeps the economy running smoothly.  Oh, wait . . . no, I’m looking at the news and y’know what?  It really doesn’t.

But do we hear anyone questioning whether this seems like a good way for income to be distributed, with obscene profits going to the epiphytic financial industry?  Hell no we don’t.  People who make that much money in the United States are revered simply for having made that much money  – we like winners in this country, and we don’t particularly care how you win. 

The banksters’ one responsibility was to keep the country’s economic engine from jamming up and stalling out and they failed spectacularly -- but so completely have they captured our nation that we still have to pretend that they are the real job creators and it is their gritty, gritty lubricant that is also somehow the actual fuel the economic engine runs on.  So tight is their stranglehold on politics, culture and the economy these days that our politicians are powerless to regulate them, we willingly accede to their demands that they never suffer a financial loss, and the press writes TeenBeat articles fawning over how rich they all are . . . . while the rest of us all get swirlies trying to ride out the economy that they flushed down the toilet.

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