Does it serve the public?

[RoarkRangor]

This debate in the Economist really reminded me of Ayn Rand (the part where Jim is riding with Dagny to a debate about Rearden Steel) They are debating whether bankers should be allowed to use financial innovation products. The criterion by which they judge to allow or forbid it, is of course: "does financial innovation serve the public?". "Sure", they say, "financial innovation has been profitable for bankers, but what about the common good and the needs of the public? It speaks for itself that if bankers do not serve us, they must be outlawed."

The moderator of the discussion has this to say:

That is what this debate will be about. We will examine whether financial innovation benefited anyone beyond the bankers. Did it boost productivity and enhance economic growth or did it leave the economy less stable and less efficient?

By framing the discussion in these terms, the bankers have lost in advance.

[musashi]

By framing the discussion in these terms, the bankers have lost in advance.

This bit is leading.

That is what this debate will be about. We will examine whether financial innovation benefited anyone beyond the bankers.

but she managed to get to the basic question here.

Did it boost productivity and enhance economic growth or did it leave the economy less stable and less efficient?

It is a very substantial debate, and true to form The Economist gives a bigger portion than I can digest. I’ll keep chewing on it.

To start with I think she did a poor job of framing these new fangled “financial innovations”. What is that? Is this narrowly defined as credit default swaps? Or is it the broader derivative market as a whole? Or does it get even broader yet and include the futures market? To me she’s cast a very wide net both in terms of products and in terms of innovation chronology. I think the discussion comes out many deferent ways depending on what you define as “financial innovations”.

The proponent did a piss poor job of framing the specific benefits.

How about I focus on the derivative market? It started as a peer to peer system, much like futures. And it served a purpose. An asset holder was afforded a degree of insulation from downward fluctuations in market value in exchange for the enjoyment of the upward fluctuations. Is that bad?

One benefit I’ve seen and enjoyed is a stable US Dollar. For the last four decades the US trade imbalance created a surplus of US dollars for creditors. The surplus had to go into some form investment; major choices: US real estate, stocks and bonds. Not a problem up to a point, but as principal grows too large a loan becomes a swindle. As exposure grows, investors should be more concerned about collateral and less about credibility. Eventually you reach a point where the investment in an asset so great that risk of loss associated market fluctuation is simply too big for any one investor or country to bear. There is a market need to spread the risk: The derivative market... The futures market... both serve in this capacity.

Without the derivative market the lies told by the CPI over the last two decades would not have mattered. The US economy would have crashed much, much sooner. The US dollar would have declined in value. The resulting inflation would have made Paul Volker’s time with Jimmy Carter seem like the good old days. And countries like China would not have had the economic boom to create a new group of bourgeoisie to sacrifice to the machine of Communism (they killed the last group off back in the 1930’s).

See all that stuff could have happened and it didn’t. Good thing right? And I can still buy a new pair of socks at Walmart for $0.50. Socks shipped from China, produced (labor, materials and overhead) at a price equivalent to 4 minutes of US labor (at federal minimum wage $7.25/hr). I call that a wealth-transfer from China to the US in terms of increased standard of living.

Is it sustainable? No. Did you enjoy the ride? I did.

[Magron1]

Without the derivative market the lies told by the CPI over the last two decades would not have mattered. The US economy would have crashed much, much sooner. The US dollar would have declined in value. The resulting inflation would have made Paul Volker’s time with Jimmy Carter seem like the good old days. And countries like China would not have had the economic boom to create a new group of bourgeoisie to sacrifice to the machine of Communism .

But it _did_ crash. In the late 70's. That's when the Great Prevaricator and his Reaganites came up with...oh..what was that term...oh yes...Voodoo Economics. Who would ever have been so brilliant as to sell off a countries future for a few decades of opium dream?