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regulating capitalism; long and rambling.
Topic Started: Oct 4 2008, 01:42 PM (242 Views)
Horace
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HOLY CARP!!!
A well known special case of capitalism which is destructive to society and that would inevitably arise without governmental controls is monopolies. As one business corners a market, they can accumulate enough power to do as they please because they will no longer be beholden to the capitalistic check/balance of competition.

So nobody thinks that capitalism is a pure elegant system that can just run by itself without oversight, because eventually greed finds a way to do what it always set out to do, accumulate power/money for an individual to the exclusion of everybody else.

The financial sector seems to be to be another special case which needs to be closely controlled. (It never will be and will eventually cause the downfall of civil society, IMO, but that's another point.)

It's pretty obvious why monopolies need to be controlled. But why does the financial sector need to be controlled?

Theoretically, they are given teh entire country's money and their job is to add value to the economy by weilding that power (that money) in the most productive way possible. Essentially their job is to leverage the money in such a way that the economy grows much faster than if it'd all been put in a mattress.

That works, theoretically, and even if those geniuses on wall street are compensated based on a percentage of the entire country's money, i.e. a gross amount compared to the serfs that earned that money to begin with, the serfs *still benefit* if those geniuses really are geniuses and are devoting their genius to pro social investment strategies.

So how would one regulate the financial sector in such a way that they are more motivated to do pro social investing?

Warren Buffet regulates himself by keeping his entire net worth in his own fund. In this way he bets everything he has on every choice he makes. That doesn't guarantee he's pro social about anything but at least his self interest coincides with everybody else's.

But Warren Buffet is a profoundly decent human being which is way more than can be said for most on Wall Street. (In fact divorcing emotions from decisions and seeing the world through a quantifying lens would be an easier task for those who lack a certain 'humanity', i.e. being a good investor is probably inversely correlated with being a "good" person as most people define the term.)

I don't know what the answer is, but I think clearly the amounts 'earned' on wall street are part of the problem, and they introduce perverse anti-social incentives which allows greed to find its own level, bypassing the pro-social part of capitalism entirely.

Multi-year financial bubbles will *always* be a problem in such a system because it allows financial sector types to make several lifetime's worth of serf wages in the span of that bubble, and when it pops, they're set for life.

When Lehman went bankrupt, which human beings, specifically, lost money?

We hear the word "bankrupt" and immediately assume taht someone is in dire financial straights because of it.

Name them, in Lehman's case.
As a good person, I implore you to do as I, a good person, do. Be good. Do NOT be bad. If you see bad, end bad. End it in yourself, and end it in others. By any means necessary, the good must conquer the bad. Good people know this. Do you know this? Are you good?
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jon-nyc
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As one of the resident wall street geniuses, I'll chime in. ;)


The top creditors of Lehman are all banks.

Other losers include shareholders. Employees owned a good chunk of the stock, maybe 30%. Some of these people had the bulk of their net worth wiped out. Most of whom did not have 7-figure salaries.



Re:

Quote:
 
I don't know what the answer is, but I think clearly the amounts 'earned' on wall street are part of the problem


I think its very clear that you have a problem with Wall Street salaries, I don't think you've ever made the case why its harmful to society.


Back to your discussion of investments, whats the measure of 'social good'? I think the best measure we have of that is profitability. Investors already have a strong incentive to seek the most profitable investments.

Re regulaiton, I agree much is necessary, mostly to keep people from getting fleeced. I kind of like Robert Shiller's idea of a product safety commission for financial products. I think if done well it could be very beneficial without being onerous to innovation in the industry.

I also think more needs to be done to reduce systemic risk from OTC derivatives. I've outlined my thoughts on the subject at WTF before.

Keep in mind that, as much as we love to blame Wall Street or poor irresponsible people or deregulation or government interference with the market, at the end of the day the root of this problem was a housing bubble. I don't know how you can regulate away bubbles. Greenspan had some interesting things to say about that in his book.
In my defense, I was left unsupervised.
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Horace
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HOLY CARP!!!
jon-nyc
Oct 4 2008, 02:17 PM
Quote:
 
I don't know what the answer is, but I think clearly the amounts 'earned' on wall street are part of the problem


I think its very clear that you have a problem with Wall Street salaries, I don't think you've ever made the case why its harmful to society.

Yes, I have, and many others in the national media these past few weeks have too. Your emotional bias (based on self interest) prevents you from seeing it.

If someone's job is to take huge amounts of other people's money and invest it such that it grows in 12 months time (or even less), and they earn for themselves a percentage of taht gain but do not lose any of their own money if the investments fail, then they have an obvious conflict of interest with the true owners of that money (the millions of serfs).

This is exacerbated if they are able to make several lifetime's worth of serf wages in a short time (maybe a couple years) after which they couldn't care less what the fallout of their shell game is.

Any anti-social decisions they make which have timeframes of more than a few years is exactly the problem. Their own self interest, the only real regulation being counted on to keep them in check, has a timeframe which is much shorter than the timeframe for the consequences of their decisions.
As a good person, I implore you to do as I, a good person, do. Be good. Do NOT be bad. If you see bad, end bad. End it in yourself, and end it in others. By any means necessary, the good must conquer the bad. Good people know this. Do you know this? Are you good?
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jon-nyc
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I think the moral hazard problem is totally independent of the question of salaries. You could cap their pay at 200k and still have a moral hazard problem. You could also solve the moral hazard problem and still pay them lots of money. In fact, I've seen proposals (internal to the industry) that address that.


I still think the problem with high salaries on Wall Street is one of envy.

In my defense, I was left unsupervised.
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Horace
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HOLY CARP!!!
jon-nyc
Oct 4 2008, 02:46 PM
I think the moral hazard problem is totally independent of the question of salaries. You could cap their pay at 200k and still have a moral hazard problem. You could also solve the moral hazard problem and still pay them lots of money. In fact, I've seen proposals (internal to the industry) that address that.

That would be wonderful.

As I said in the original post, there is an obvious theoretical benefit to managing the country's money in such a way that the country's economy grows, to the benefit of everybody. but the moral hazzards, in demonstrable practice, are also an issue.

If you can't see how 2000k per year creates more of a hazzard than 200k then that is willful denial in the face of reality. In one case someone can make enough not to have to worry about the health of the overall economy in the future. In the other case they still have to.

Quote:
 
I still think the problem with high salaries on Wall Street is one of envy.


Unfortunately that point, while I'm sure it helps you sleep at night, does nothing whatsoever to refute the common sense I've just laid out in front of you.
As a good person, I implore you to do as I, a good person, do. Be good. Do NOT be bad. If you see bad, end bad. End it in yourself, and end it in others. By any means necessary, the good must conquer the bad. Good people know this. Do you know this? Are you good?
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ivorythumper
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I am so adjective that I verb nouns!
jon-nyc
Oct 4 2008, 03:46 PM
I still think the problem with high salaries on Wall Street is one of envy.

I don't Jon. I don't care how much people make as long as they don't fvck up the economy doing it.
The dogma lives loudly within me.
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Horace
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HOLY CARP!!!
ivorythumper
Oct 4 2008, 03:16 PM
jon-nyc
Oct 4 2008, 03:46 PM
I still think the problem with high salaries on Wall Street is one of envy.

I don't Jon. I don't care how much people make as long as they don't fvck up the economy doing it.

Back in 2500 bc, all the biggest and strongest guys bonked the smaller weaker guys on the head and took their stuff.

This made the smaller weaker guys very envious, and when they eventually formed societies, the smaller weaker guys created social mores which prevented the bigger guys from doing quite so much head bonking.

A couple thousand years later, these societies were made up of families who had homes. Sometimes some members of society would enter other people's homes while the owner wasn't there, and take their stuff. That made the rightful owners very envious, so they created more social mores which prevented so much "thievery", as they called it.

A coupe thousand years later, some corporations were getting so big and powerful that they had almost complete control over certain thngs that the society depended on. This made society very envious of them, so they passed laws which prevented such a high degree of success.

Now we're all envious of wall street because they're able to siphon so much real value in exchange for adding dubious (and often demonstrably fictitious) value. So maybe we'll just have to create another social more or two to account for that.

Envy is bad for the soul but good for society.
As a good person, I implore you to do as I, a good person, do. Be good. Do NOT be bad. If you see bad, end bad. End it in yourself, and end it in others. By any means necessary, the good must conquer the bad. Good people know this. Do you know this? Are you good?
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jon-nyc
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IT -

The housing bubble screwed up the economy. Wall Street was caught up in it, just like main street. To say Wall Street fcuked up the economy is an exaggeration at best.


Bubbles tend to take in much or even most of society. Irrational behavior can be found after the fact in all corners. The corner one chooses to look in tells you more about that persons biases than it does about the causes of the bubble.
In my defense, I was left unsupervised.
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ivorythumper
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I am so adjective that I verb nouns!
jon-nyc
Oct 4 2008, 04:39 PM
IT -

The housing bubble screwed up the economy. Wall Street was caught up in it, just like main street. To say Wall Street fcuked up the economy is an exaggeration at best.


Bubbles tend to take in much or even most of society. Irrational behavior can be found after the fact in all corners. The corner one chooses to look in tells you more about that persons biases than it does about the causes of the bubble.

Gosh Jon, I didn't even blame Wall Street. I just pointed out that its not about envy.

But it is disingenuous for you to say that WS was "caught up" when they were the money pump behind the bubble. Where did all that capital move in order to buy securitized mortgage bundles, thus freeing up banks to make even more loans?
The dogma lives loudly within me.
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jon-nyc
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All that proves is that they were a participant. Securitization can, and did, go on for decades without creating a bubble. You could also have bubbles without securitization.

Bubbles are caused by mass psychology, not a few hundred guys in Manhattan.
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ivorythumper
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Bubbles are facilitated by the influx of capital, and those who found a way of infusing capital into the secondary market on securitized products, thus freeing up the banks to make more loans, so that more money was chasing the supply, thus driving up prices, and made billions doing so, seem to have congregated on Wall Street.
The dogma lives loudly within me.
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jon-nyc
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Are you suggesting the following causal connection?

Securitization -> lower interest rates -> housing bubble.

We had low interest rates in the 90s with no housing bubble. Not to mention earlier in the decade.

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ivorythumper
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No Jon, I did not suggest that.
The dogma lives loudly within me.
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Horace
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HOLY CARP!!!
when I try to come up with something simple and fundamental that could be used to regulate this, to keep wall st from getting $ signs in its eyes to the detriment of the economy as a whole, I keep coming back to teh notion of "compensation based on the amount of other people's money you move around". That seems fundamentally broken because as that amount of other people's money grows big enough, no one person (or corporation) can ever shoulder risk to the same degree that tehy stand to be rewarded. at that point we're no longer leveraging greed for social gain, and capitalism breaks.

So yes, it does come down to personal compensation, as it must, because we're dealing with real human beings here and that is their primary concern.

It's why Warren Buffet keeps his net worth in his own fund. he's only human and he knows that. He is just as susceptible to moral hazzards as the rest of us are.

The envy thing is a red herring, convenient and emtionally satisfying to some but ultimately self defeating.

The self serving motivations that give rise to envy are the same motivations which give rise to anti-social behavior on wall street. Self interest and greed, expressed in different contexts.
As a good person, I implore you to do as I, a good person, do. Be good. Do NOT be bad. If you see bad, end bad. End it in yourself, and end it in others. By any means necessary, the good must conquer the bad. Good people know this. Do you know this? Are you good?
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QuirtEvans
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I Owe It All To John D'Oh
Horace
Oct 4 2008, 05:26 PM
jon-nyc
Oct 4 2008, 02:17 PM
Quote:
 
I don't know what the answer is, but I think clearly the amounts 'earned' on wall street are part of the problem


I think its very clear that you have a problem with Wall Street salaries, I don't think you've ever made the case why its harmful to society.

Yes, I have, and many others in the national media these past few weeks have too. Your emotional bias (based on self interest) prevents you from seeing it.

If someone's job is to take huge amounts of other people's money and invest it such that it grows in 12 months time (or even less), and they earn for themselves a percentage of taht gain but do not lose any of their own money if the investments fail, then they have an obvious conflict of interest with the true owners of that money (the millions of serfs).

This is exacerbated if they are able to make several lifetime's worth of serf wages in a short time (maybe a couple years) after which they couldn't care less what the fallout of their shell game is.

Any anti-social decisions they make which have timeframes of more than a few years is exactly the problem. Their own self interest, the only real regulation being counted on to keep them in check, has a timeframe which is much shorter than the timeframe for the consequences of their decisions.

Horace, I have some real sympathy for your point of view, but you misunderstand the regulatory structure.

Quote:
 
If someone's job is to take huge amounts of other people's money and invest it such that it grows in 12 months time (or even less), and they earn for themselves a percentage of taht gain but do not lose any of their own money if the investments fail, then they have an obvious conflict of interest with the true owners of that money (the millions of serfs).


Serfs can't get that deal. Performance fees can only be paid, under applicable SEC rules, by sophisticated investors. And only sophisticated investors can invest in hedge funds, which have that kind of fee structure, typically.

And, to qualify as a sophisticated investor, you have to be reasonably wealthy. Not Rockefeller wealthy, but certainly more than upper middle class. Definitely not serfs.
It would be unwise to underestimate what large groups of ill-informed people acting together can achieve. -- John D'Oh, January 14, 2010.
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Horace
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Thanks Quirt. But that's at a pretty technical level, and I'm not sure it has anything to do with my basic point.

$60b in bonuses were paid out last year to the financial sector on top of their salaries that would already provide them with compensation well ahead of most american serfs who equaled the education/risk their respective occupations demanded (he said without cite).

Those bonuses are predicated on the amount of other people's money they move around. it might be separated by a few legal levels from a regulatory perspective but at the end of the day, they get paid a massive magnification of how much other people produce.

Thus it becomes "reasonable" for someone to make several million dollars a year because they have a pedestrian acquaintance with math and happen to be working in the right job during a financial bubble. It doesn't even matter what sort of financial bubble. Any will do, and any will enrich them. Taht is a conflict of interest and it's poison to the economy.
As a good person, I implore you to do as I, a good person, do. Be good. Do NOT be bad. If you see bad, end bad. End it in yourself, and end it in others. By any means necessary, the good must conquer the bad. Good people know this. Do you know this? Are you good?
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