"Change is in the Air for Financial Superclass"

Is the financial superclass about to have its wings clipped?

Change is in the air for financial superclass, by David Rothkopf, Commentary, Financial Times: ...The re-engineering of international finance has been one of the transformational trends of our times – in just a quarter-century, capital flows became massive, instantaneous and controlled by a new breed of traders representing a handful of major financial institutions from a few countries. Their rewards have transcended any in history as shown by an estimate ... that the top hedge fund manager last year made $3bn.

The concentration of power has also steadily grown..., the key executives are in the US and Europe, underscoring the transatlantic nature of this elite. Change, however, is in the air. The history of elites is one of their rising up, over-reaching, being reined in and supplanted by a new elite. Several recent developments suggest that the financial crisis could signal the high-water mark of power for this group.

First, the crisis is prompting a re-regulatory drive. The power of financial elites had been evident in their ability to argue that global financial markets and markets in new securities should remain “self-regulating” (how many of them would hop into a self-regulating taxicab?), then when crisis comes ... these champions of less government involvement have then persuaded governments to cauterise their wounds.

Now, however, there are encouraging, if preliminary, signs of a push towards more effective collaboration between governments – the first steps towards creating the much needed checks on global markets... This could erode the agility of financial elites to play governments off against each other, with the weakest regulator setting the rules.

Second, the credit crisis is exacerbating the emerging backlash against corporate excess. Elites make billions on markets whether they go up or down and their institutions win government support while the little guy loses his home. ... The crisis has focused attention on the obscene inequities of this era – the world’s 1,100 richest people have almost twice the assets of the poorest 2.5bn. There are signs of open and growing anger at this, as we have seen this week in the Netherlands with calls to address bonuses, and the attack on the world’s financial markets as “a monster that must be tamed” from Horst Köhler, the German president.

Third, the accumulation of financial reserves in the Persian Gulf, Russia and China underscores that the centre of gravity in global finance is also shifting. ... The top creators of great new personal fortunes are in China, India and Russia. It seems unavoidable that the transatlantic elite ... will be rivalled in influence by the Asian contingent – a group that has as little appetite for the ... the values and priorities of the western financial superclass.

So, are we at the beginning of the end of a golden era for transatlantic financial elites? Perhaps, but elites cede power reluctantly and there are signs of an effort to stave off decline. There is now a recognition of the need to accept some global market reforms to avoid more invasive legislation. ... Institutional investors could play a role by demanding more sensible pay packages from money managers. The rise of Asia probably cannot be resisted. But by recognising that there are public interests to which they must respond, the financial superclass can stall the fate of previous elites. To succeed at that they must shun their arrogant “leave-it-to-the-market” explanations for the inequality they have helped foster.

Is it different this time? [See also Fed Chariman Bernanke's speech today, Risk Management in Financial Institutions. Update: See also How Should We Respond to Asset Price Bubbles? by Fed Governor Mishkin. There's been a lot written about how the Fed's recent communication on bubbles represents a change in policy for the Fed where bubbles will be attacked more aggressively, but they've always said regulatory and supervisory steps were needed to moderate financial markets, the big change would be for the Fed to use interest rate policy to manage bubbles, and I don't see much change in the way the Fed intends to conduct monetary policy.]

Comments

[kthomas]

Re-regulatory. I love that word. Perhaps I'll live long enough to see Re-re-regulatory.

[Jas Jain]

--
"Perhaps, but elites cede power reluctantly and there are signs of an effort to stave off decline."

Financial Nazis would have to be destroyed and that would mean collapse of the American econo-political system as it has existed for a long time. Democracy will be fully discredited. For 300+ years the Anglo-American democracy has been a front for the rule of the moneybags.

Democracy = Domination of Money – Spengler

Ceaserism is next in the long cycle of the Modern Western Civilization. Blood will conquer money! History doesn’t repeat but it does rhyme.

Jas

[Eric Dewey, Portland OR]

What will be different is the location of the power centers, not the fact that there are financial elites.

Of course, the change will take some time.

While the US financial elites may decide to swallow the noxious pill of additional regulation and recognize the public interests they currently ignore, the power of the US "public interests" is substantially less than the public interests of the developing nations.

The mass market for creation of wealth is in China, India, Brazil (and possibly Russia). The US consumer is tapped out and overleveraged compared to their income to such a degree that, even with additional regulation of financial companies, they will likely not be able to service the debt.

The big guys can "de-leverage" by selling off pieces of their companies; the US consumer will have a much harder time deleveraging...

[bob]

>> Financial Nazis would have to be destroyed

One of the most taboo subjects in america is the idea that the rich are actually a big drag on the country.

I think the period from 1980 to the present proves that to be true.

I am in favor of destroying them (no physical violence please).
Just take their mountains of wealth away from them and make sure they can never get any more mountains.

[TigerPaw]

It'd be lovely to see these parasites brought down. But I'll only believe it when I see it. It'll take politicians to enact the regulations, and politicians are oh so easily distracted by bribes ... oh pardon me I mean campaign contributions.

I'm not going to hold my breath.

[Bruce Wilder]

I have my doubts.

Weighing against the power of wealth, and all the organization and selfish, focused determination that that entails, only two things in combination have a chance.

The first is inevitable chance working against hubris: the "accident" by which bad policy works its black magic, creating disaster and debacle.

The second, and the really critical element, is the intelligent idea.

We have the first -- the "accident" of financial crisis brought on by bad policy -- but I don't feel any assurance that we have the second, the intelligent idea.

The ideas that I have seen discussed -- including the ones associated with the Democrats in Congress or with Larry Summers and Ben Bernanke and Secretary Paulson -- mostly suggest that all the available ideas are patented and trademarked tools of the plutocracy.

Popular discussion centers on the "housing bubble" and the Democrats want to devise a plan to help the banks, while seeming to help homeowners.

Chairman Bernanke seems sure that the originate-to-distribute model can be patched up and on the road again, just as soon as his regulators have given the bankers a stern talking to, on the subject of how important is sound risk-management.

The libertarianism of the economics profession bars the door to sensible thinking about the regulatory function. The economists, literally, train themselves to think about something else.

Without the intelligent idea to light way, the aftermath of bad policy leading to debacle is just more bad policy leading to the next debacle further down the slope of decline and disorder.

[Winslow R.]

These international elite draw their power from access to the lender of last resort in as many nation's as possible.

That access was provided by the primary dealers in the U.S. as well as limited commercial banks.

Limited international elite access has been blown open to the entire plutocracy by Ben Bernanke's adjustments in the monetary mechanism, a move in the 'right' direction, but these moves reek with favoritism.

The end goal is not reached until all citizens are able to access the lender of last resort in their country of origin, to borrow currency as their birthright to the limit of whatever that birthright is worth.

Monetary policy is a nonpolitical policy with huge impacts on the economy. To remain nonpolitical, it must be applied equally to all.

[An Argentinian]

Bruce W., I think I agree with your viewpoint but it seems rather abstract to me. Can you give an example/s of such "intelligent ideas" and how they changed things?

[save_the_rustbelt]

Wealth usually trumps politics.

And if we crash the structure too hard we might all live to regret it.

Squeeze but do not strangle.

[OhNoNotAgain]

"Squeeze but do not strangle."

Exactly. Hold the threat of regulation over their heads, and use it enough to let them know that you mean it. It's basic human nature.

Oh, and never allow for a majority Republican rule ever again.......

says...

"Financial Superclass", "Financial Nazis", "It'd be lovely to see these parasites brought down.", "These international elite"

You guys need to be careful. Anne is very sensitive to such language. I'm sure when she wakes up she'll have a thing or two to say. Something along the lines of....

"Lies, lies, lies."

[donna]

The only way to re-distribute the wealth is to re-structure the economy. As long as we are all about inflating assets and impoverishing people so that the rich can benefit, as opposed to actually creating new sources of wealth, there is little that can change.

We need to stop fighting wars over limited resources and figure out how we're going to restructure our society so we can all benefit again. It is a difficult, complex problem that can't be solved without getting us off the oil teat and finding some new way we can all communicate with each other without the reactionary and inflammatory language we tend to use.

What is beyond the oil economy? That is the real question.

[Bruce Wilder]

An Argentinian: "Can you give an example/s of such "intelligent ideas" and how they changed things?"

In another sphere, I would say the great debacles of the World Wars and the Great Depression were crises that might illustrate the notion.

The two World Wars and the Great Depression were the products of "successful" conservative/reactionary politics, to wit the collapse of civilization into violent and pointless chaos. In some respects, the First World War was the long delayed effect of having a privileged feudal aristocracy stymie key political and economic reforms from 1848 onward; in other respects, WWI was just the feudal aristocracy doing the same stupid stuff they had always done, but with bigger armies and bigger guns.

The Second World War was the product of a raw reactionary conservatism taking an encore -- the attitudes, authoritarianism, the racism and anti-semitism, the resentments and irrationality (without the the calming hand of a complacent, risk-averse, titled nobility feeling something at stake).

The Great Depression, too, was a product of economic reactionary conservatism: worship of the gold standard, extreme concentration of wealth and dispersion of poverty, the callousness of Mellon's "liquidate!", the stupid insistence on laissez faire.

In each case, the disaster came, as a consequence of the policies pursued by reactionary conservatives. And, the extent to which things were much better in the world after 1945, I think, is attributable to the emergence of intelligent ideas, ideas about how the world worked (and could work) that enabled people to acknowledge that the disasters were consequences of choices made, that enabled people to learn better ways of behaving, design better institutions to manage economy and society, domestic and international.

You can trace the emergence, ebb and flow of intelligent ideas in the 20th century: Woodrow Wilson's 14 Points down through the League of Nations to the founding of the United Nations, for example. Or, the populist assault on the gold standard through the Progressive establishment of the Federal Reserve, to the abandonment of the gold standard in the crisis of the 1930's and the Federal Reserve Accord of 1951. Keynes, Viner, J.R. Hicks, Alvin Hansen.

In the foundering of Wilson's ideals and the bitter critique of Keynes, one can see how far the treaty negotiations at Versailles, fell short in the ideas department. Contrast that with FDR, Truman and Marshall and others in the aftermath of World War II. Contrast the idea of Europe, which has led to the steady expansion of the framework of the European Union -- clearly a big advance over the Concert of Europe on the model of the Peace of Westphalia.

Intelligence is a broad term for the abilities to reason abstractly, to analyze, to plan, and, above all, to learn.

An intelligent idea is an idea about how the system of the world works, that allows us to learn more about how the world works, and to plan to make the world work better.

The clearest examples of intelligent ideas belong to science: Newton's Principia or Darwin's Natural Selection. (Compare and contrast Darwin with "Creation Science" and a clear point of contrast is how "Creation Science" cuts off investigation and learning. When a political principle, program or imperative cuts off investigation and learning and acknowledgement of reality with pious invocations, be suspicious, be hostile.)

An intelligent idea germinates, I believe, in circumstances apart from crisis, conflict and revolution. Political revolution and ideas intersect, because revolutions need ideas, and because revolutions arise in reaction to the resistance of ideas. Maybe, revolutions clear away obstructions to new thinking, but I tend to believe the new thinking follows its own course; the debates of political conflict, dominated by intellectual mercenaries and partisans is as apt to be destructive as instructive.

In short, I don't expect the crises of conservative debacles, and any subsequent revolution, to generate new ideas. But, if there is to be any kind of positive outcome for debacle and revolution, it depends on the quality of the ideas lying around. When people are free to think anew and act anew, they must have intelligent ideas at the ready, if they are to think anew and act anew effectively and productively.

When Andrew Jackson, fresh from his political revolution, destroyed the Second Bank of the United States, his foolishness was founded on a superstitious fetish for "hard" money, which would do Ron Paul proud. He did not "intend" the Panic of 1837, or the five-year depression that followed. The Whigs, under Henry Clay, intended a response in the form of Federal spending for development, but the Whig program foundered on Harrison's ill-health and Tyler's libertarianism. No where were the kinds of economic ideas that made sense of the Great Depression of the 1930's, and shaped consensus on a diverse range of policies in subsequent years, from Farm price supports to Glass-Steagall to the TVA and Columbia River projects. In retrospect, we can see that some of the Intelligent Ideas, like cartelization under the National Recovery Act, did not make a lot of sense; and some other ideas, like combining massive deficit spending with massive forced savings, came in practice before gaining any measure of intellectual acceptance.

I realize I have only been waving my hands and pointing. But, it is only a blog comment, after all.

[Bruce Wilder]

Ben Bernanke: ". . . the turmoil in credit markets underscores some important principles for bank risk management, including the value of proper risk identification and measurement, the need for robust and objective valuation methods, the importance of preparing for liquidity disruptions, and the critical role of strong oversight by senior managers. With renewed attention to these principles and the restoration of strong incentives for sound risk management, institutions should be able to overcome the difficulties we have seen in the recent application of the originate-to-distribute model and begin to use it successfully again. Equally important, improvements in banks' risk management will provide a more-stable financial system by making firms more resilient to shocks. Supervisors must insist on effective risk management and provide as much support as possible for the implementation of needed changes."

Shorter version: Ideas? We don't need no stinkin' ideas!

[Winslow R.]

"Third, the accumulation of financial reserves in the Persian Gulf, Russia and China underscores that the centre of gravity in global finance is also shifting. ... The top creators of great new personal fortunes are in China, India and Russia. It seems unavoidable that the transatlantic elite ... will be rivalled in influence by the Asian contingent – a group that has as little appetite for the ... the values and priorities of the western financial superclass. "

Their values are different because they still retain political power! There is a political superclass in every undemocratic society waiting to join the western financial superclass. Once Russians, Chinese etc. start to lose political power in Russia, China etc., they will shift their resources into the international monetary control system as they are already starting to do (look at morgan stanley's and goldman sachs's struggle to buy banks in China and vice versa)

What amazes me is even as this superclass shifts resources into the international market, they are able to retain sufficient political resources to allow them access to the monetary resources at the lender of last resort in multiple countries. Its as though there is/was a bargain struck between domestic bankers and international bankers with the acquiescence of the CB's/IMF.

In the recent cycle, many domestic U.S. banks, bond insurers, and a few investment banks got hit hard. I'm not sure if they even realize now what happened. My guess is the stupid/unconnected rich gave/are giving a lot of money away to the smart/connected rich right now. Just ask Bear Stearns/Countrywide/Citigroup/ML execs. I'd start looking at those that ducked the punch (Goldman Sachs) if they want to find out who helped the internationalists spike the drinks.

I hear real estate brokers are moving from California to Dubai as that is the next (already) hot market that needs to be 'served'.

http://en.wikipedia.org/wiki/Tax_heaven

Perhaps this all does lead to some sort of stability as the internationalists have little reason to start a fight when they all have so much to lose. I think they are coming to the realization that they need to reach a consensus quickly before political opposition grows too great for their relatively weak political power to restrain.

Citigroup sends Rubin hat in hand to the internationalists, payup (and recapitalize me) or else. Public outrage is on display in MSM to provide encouragement to open the wallets.

[reason]

Leverage and limited liability. We need to understand how it is that so much wealth has become so concentrated in so few hands, despite the fact that many of these plutocrats don't actually produce anything. I think leverage is the key. We need to deleverage our society.

In the 1980s a number of the take-over barons ended up actually in jail. I'm a skeptic of the leveraged take-over ideology, to me it doesn't make sense, because it believes that financial experts know more about running businesses than the experts in those businesses do. It privileges hubris over experience. Maybe they are right, or maybe they are wrong, but surely the proof is in the pudding. If they set up a new competing business from scratch, and run the old business to bankrupcy (as has happened with airlines for instance) then I will give them credence and will know that consumers at least have benefited. But taking over and consolidating existing businesses using leverage - it just DECREASES competition and gives no evidence of competence.

[reason]

So I guess the point above - restrict leverage - never let it build to such levels again. And make hostile takeovers harder. And strengthen anti-trust laws and enforcement (and change IP laws to reinvigorate competition).

[a]

If you wanted to rein in the financial superclass, then you would have let BearStearns go bust. Otherwise, you're just chipping at the edges.

[hari]

The global paradigm shift has taken place and a more *intelligent idea* is, in fact, in play right now in emerging Asian markets.

Namely, FTA and closer Monetary Cooperation.

The Asean countries want now to link-up with mainland China, India and Japan with a view to creating their own *affluent society* based on their concept and values. There is a lot they can do without external interference.

Meanwhile, as I argued (earlier) after G-7 meeting in D.C. on how to proceed with *regulatory financial regime*, it seems Fed/ECB are now collaborating on reinforcing banking liquidity and credit worthiness under Basel II. There is a lot going on there we don't read in the press.

(Calvinist) Dutch Finance Min came out with a cabinet decision to set a threshold on CEO salary - ie. 1 Million ($ or Euro?). Germans are also discussing same issue at the political party level. It's possible that Sarkosy might just decide it's a great issue to promote when he takes over EU Presidency for six months starting next July. Turmoils in French banking sector doesn't discourage him to take on the entrenched money elite (inspite of his ideology).

I suspect Fed/ECB will now cooperate across-the-board to rein in inflation pressure - contrary to Marks assumption.

[Lafayette]

Too big for its own britches

This article is replete with wishful thinking. It opines notions that are simply not in play, as regard basic assumptions that remain true.

Change, however, is in the air. The history of elites is one of their rising up, over-reaching, being reined in and supplanted by a new elite. Several recent developments suggest that the financial crisis could signal the high-water mark of power for this group.

There is NO change in the air. That can only come with a concerted effort, in the US, to increase marginal tax rates that Raygun Ronny took an axe to, much to the delight of Wall Street.

The consequence of which is near rampant Income Inequity.

there are encouraging, if preliminary, signs of a push towards more effective collaboration between governments – the first steps towards creating the much needed checks on global markets..

So preliminary as to be unobservable.

The collaboration that can be seen is in Basle 2 and some tough-love talk at international meetings of Finance Ministers. But the former is stalled and the latter is just hot air.

Basle 2 depends upon risk-models (regarding capital instruments) that have proven to be woefully inadequate by the industry itself. So … ? What’s the alternative? Not in sight, not yet, anyway.

First, the crisis is prompting a re-regulatory drive.

Oh, the author is a personal friend of Paulson and sits in as advisor on Paulson-Bush meetings?

This PotUS is a lame duck. Nothing will be done to alienate (even further) the Republican constituency in an election year. Nothing can happen regarding this matter without the buy-in of the US.

On the international front, not many people even talk about Financial Controls after the subprime mess, largely because there is no tangible way of making them work. There are loopholes everywhere – like well meant but totally ineffective embargoes.

What would be required is something akin to the GATT agreement and the WTO. At least, when there is a gripe, the signatories of GATT bring it before the WTO which, as an intermediary, arbitrates a resolution.

Such a mechanism does not even exist in International Finance, because GATT cannot get a handle on the Service Industry and the WTO is focused on getting an Agricultural agreement behind it. Besides, it may be that the WTO is not even the right body. It is, after all, a “trade body” and not a “finance institution”.

Basle would be a better candidate to arbitrate matters that arise from uncontrolled/unauthorized international financial speculation. This would require all countries participating to put up a multi-billion dollar bond, and fines administered by being paid out of that bond in reparation of damages.

That is the only way get an “ouch” out of an Controls Mechanism. Countries must know that what their nationals (either Investment Bankers, or their cohorts in crime, Assessment Agents) do wrong may cause them to have to Pay the Piper. Only then will they police the controls in place – were those controls ever devised.

Elites make billions on markets whether they go up or down and their institutions win government support while the little guy loses his home

Sad, but true. still, how many of the elites have been asked to fall on their swords? A handful of BigNames … most of whom find enforced retirement is not all that bad. At least they leave the rat-race behind them – their net worth in VERY sound condition. (Anyone know of fines having been imposed? I don’t.)

It seems unavoidable that the transatlantic elite ... will be rivalled in influence by the Asian contingent – a group that has as little appetite for the ... the values and priorities of the western financial super-class.

This sentence is positively mystic. What makes the author think that the emerging financial potentates in the geographies mentioned are not every bit as rapacious as those on Wall Street or the City of London?

Uh, uh …. the rot is in the system. The new class of super-rich is simply the symptom of a capital market the nature of which is too big (and too Transnational) for its own britches.

[jult52]

This comments section needs some weeding. I'm actually very interested in whether Wall Street compensation - which I thik is excessive to the point of ridiculousness (and I speak as a Republican) will decline in the future. I see no evidence that it will do so on the basis of the article. The key in my mind is whether innovative financial thinking will continue to drive Wall St success or whether innovation will slow and commoditization of product lines (which will happen very quickly in an idea-driven area like finance) will occur. Unfortunately, Rothkopf makes a succession of overbroad, probably incorrect arguments. (Worldwide regulatory cooperation? I smell a collective action problem, besides the obvious logistical hurdles.)

Lafayette - there is no mathematical way steeper progressive taxation could have remedied even the growth in inequality in the 1980s, let alone the growth of inequality since 1990. You're making a long-debunked argument.

Someone compared to people working in finance to "Nazis" at the beginning of a thread? What does it take to be deleted here?

[Jay]

"Someone compared to people working in finance to "Nazis" at the beginning of a thread? What does it take to be deleted here?"

Jult its called free speech. It is actually quite useful information to others to let these idiots spew such mindless b.s. It lets one imagine somebody sitting in front of their computer with a tin foil hat on. Anything else they say will then be taken with a grain of salt.

The more pertinent question is what does it take to get Anne on a tirade here. Welfare king gets her wound up, but financial nazi is ok. Go figure.

[bob]

>> Someone compared to people working in finance to "Nazis" at the beginning of a thread? What does it take to be deleted here?

I'd suggest you take your delicate constitution over to Myspace.

Any time you cry out for a net nanny to remove scary pixels from you monitor they are more than happy to censor for you.

And what they have ended up with is a forum that is so bland and boring it's a sleeping pill.

[bob]

>> >> Someone compared to people working in finance to "Nazis" at the beginning of a thread? What does it take to be deleted here?

There have even been some posts here that were a little hard on Mark he he never said a word about them.

Thats a very good sign if your looking for a REAL free speech website.

And people generally want to be able to practice free speech when they come to a forum.

[hari]

However b.s. is NOT *free speech*. It's sign of degenerate mental constitution and an ainability to discern value of discourse in this thread + complexity of subject matter.

Mark has *outlawed* some who have tried to get me to intervene and argue their case....(they not know from whence I originate either!).

[hari]

@ Lafayette -

You make some good argument and observations. However you've to accept that it's almost impossible, at this point in time, to put the genie back into the bottle. What alternative(s) are then left from a policy perspective?

My hunch is that Fed/BB is pulling bit-by-bit away from Paulson/Treasury inability to rein in *speculative bubble* created mostly by hedge funds and investment banks - commodities bubble is a case in point right now. ECB/Trichet are concerned about the escalating inflation pressure and if they can utilize monetary policy to blunt it, Fed will have to cooperate.

Mark is claiming no sign of Fed monetary bias focused on curtailing inflation, per se. However, I suggest there is more than adequate cooperation across atlantic basin to rein in inflation, as far it is within their capacity to blunt it with commodities price(s).

Contrary wise, neither mainland China nor India are in a position to contain their galloping inflation. It's around 8.5% now in India and more or less same in China. India's main policy approach right now is to contain domestic prices for steel, cement, food sector.

None of them can succeed on their own or alone to contain global inflation. There must be ways and means to establish global cooperation on inflation targetting policy, me thinks.

[Andrew]

there is no mathematical way steeper progressive taxation could have remedied even the growth in inequality in the 1980s, let alone the growth of inequality since 1990. You're making a long-debunked argument.

A bold and daring statement.

Also complete and utter nonsense.

As to the financial elites, hedge funds avoid regulation by only allowing millionaires to invest, because presumably they are either sophisticated or wealthy enough to handle the risk.

In reality, however, it is not only the wealthy whose money is at risk. Indeed, if you live in the U.S. there is a 100% chance that you have invested in a hedge fund. There are over $300 billion state and local gov. dollars invested in hedge funds, to say nothing of the money people have put in the bank that went right out the back door. As many above have pointed out, leveraging 20-300 times as much money as actually invested puts everyone at risk, and because you can never beat the market long-term (especially at the risk-level of a hedge fund) they will all eventually lose your money.
Again, as many here have said before, the borrowing needs to be regulated.

As far as I'm concerned, the real problem is not that the elite colludes with the government, it is that the elite is the government. Executive branch regulators are recruited directly from the upper echelons of the industries they regulate, and the industries recruit from the regulators. Congresscritters and capitol hill staffers have the lobbying-jackpot revolving door, while industries write the laws which govern them. Everyone wins. Well, everyone except the plebes, but who cares about them?

[dd]

There will be no meaningful regulation of the financial elite especially since Princeton churns out them out like hotcakes:
"What's the fastest way to become a hedge fund millionaire? According to several aspirants, it may be getting a degree from the Bendheim Center for Finance at Princeton University. The center, founded by the Federal Reserve chairman, Ben Bernanke, in 1999, offers undergraduates a certificate program in finance and also grants masters and doctorate degrees. It includes courses in mathematical finance, econometrics, probability, and other topics that are, in essence, just the ticket for those wanting to join the hedge fund gravy train."
http://www2.nysun.com/business/princetons-finance-program-a-popular-alternative/

[dd]

"Princeton's Finance Program A Popular Alternative to MBAs"
Better link:
http://tinyurl.com/5lykqv

[anne]

"There is no mathematical way steeper progressive taxation could have remedied even the growth in inequality in the 1980s, let alone the growth of inequality since 1990. You're making a long-debunked argument."

Rubbish....

[Lafayette]

jult: The key in my mind is whether innovative financial thinking will continue to drive Wall St success

You think evidently that the subprime mess, by which realty-based toxic waste was sold forward to the world by New York Investment Bankers, was a "success"?

Curious moral values ... what planet do you live on?

[Lafayette]

Who is policing the police?

hari: However you've to accept that it's almost impossible, at this point in time, to put the genie back into the bottle.

The gini is indeed out of the bottle.

But if we are to avoid a repeat of the sub-prime mess, I know of no alternative but to exact that Investment Bankers have more capital requirement to offset the "Structured Investment Vehicles" (don't you just love the simplistic beauty of that acronym, which is otherwise known as "toxic waste"?). Preferably before they offload the junk to world investors.

Also, they've got to get a handle on the assessment agencies (The Dunn & Bradstreets) who were evidently in cahoots with the Investment Bankers, not to have had an in-depth look at the actual basis of the SIVs to which they gave the green light.

Prune the managers from the management that let it happen. Why not? Find some other able bodies, preferably ones with heads on their shoulders, that will abide by a new set of rules.

How to do the above? As I said, I suggest that only a WTO-type organization for Finance (possibly the BIS in Basle), conceived by international treaty, which requires nations to police the capital requirements is workable. Transgressors must be fined or put out of business, or the mess will happen again.

Perhaps in another form, but it WILL happen.

[Eric Dewey, Portland OR]

Actually, I've thought this was one of the more cogent and on-point discussions I've seen on this blog (at least of those that I could actually follow as a non-economist).

The stream points up an interesting observation for me: viewpoints focused on the US, the challenges to it's financial and regulatory system, and the steps it needs to take to recover have a very different tone and quality than those that take a more global view (like hari's above - and some of us have done a little research on whence you may have originated, and are grateful to be able to find your thoughts here).

hari's point about regulatory cooperation across the Atlantic being in a better position vis-a-vis inflation is a very good one - I can tell you that the banking world is looking very closely at how to implement Basel II and wondering what the effects of the current financial mess will do to change those plans.

But does the ability to restrain inflation necessarily equate to power in a financial elite, particularly long-term? It seems to me that Asia, with its vast untapped markets is more likely to exert long-term financial power if they can maintain their ability to focus on innovation in information technology.

Since the dangerous concept of the number zero originated in the east, it seems likely that Asia will be able to innovate their way to power.

More worrisome to me will be their political development. China is still quite a repressive regime, and India continues to struggle with the ancient caste system. Will the link between economic and political liberalization hold up in the next 100 years?

[jult52]

Lafayette - I wasn't making a normative moral judgement. Simply stating that innovative ideas are what drives sky high Wall Street compensation.

[hari]

@ Eric Dewey PO -

First, don't worry about Asian emerging markets domestic political setup. It's - will not - be a constraint on policy going forward ( without going into details).

Second, imagine Fed/ECB decide to *involve* China and India (why not also Brazil?) in formulating their anti-inflation macropolicy with focus on food prices and whatnot.

Third, from previous experience, we know financial elite(s) are *up today and down tomorrow* - market prunning goes on relentlessy!

[I just got Soros offer of his new theory of global economics on-line...He's surely someone who knows what he's talking about when it comes to currency speculation. Soros is talking about paradigm change/shift and emergence of a new global financial structure and so on].

Fourth, global economic stability is a desirable policy framework in which to focus on developing international division of labour and comparative trade advantage based on unit labour cost - a non-inflationary environment - in order to evolve a new global economic policy frmework. It doesn't have to mean OECD countries regressing while Asian emerging markets overtake their share of global markets. I don't think that's the way policy makers think in Asian capitals. They're fundamentally hooked to sharing FDI and technology transfer and benefiting from economic expansion regionally.

Fifth, if you read AGs book, he's also proposing joint efforts are now the way forward in a globalized world.

[jult52]

Also, they've got to get a handle on the assessment agencies (The Dunn & Bradstreets) who were evidently in cahoots with the Investment Bankers, not to have had an in-depth look at the actual basis of the SIVs to which they gave the green light."

Dun [sic] & Bradstreet has nothing to do with credit ratings. It's done by Moodys and S&Ps and another couple of less prominent raters. And they're called ratings agencies, not assessment agencies.

[hari]

I don't think US Treasury/WH will find it easy now to drive a set of global negotiations (eg. WTO > after our GATT Rounds) to regulate Services Sector, per se, and financial services, in particular. Why?

IMO the leverage is not there anymore to impose a US/OECD type of negotiations. It won't even get started because of fundamental political/economic differences in political perception of what is desirable and what not.

Lafayette is right to argue that it's the way forward to multi-lateralize the regulatory system. But will it sell?

[Lafayette]

Minions who made millions

jult: And they're called ratings agencies, not assessment agencies.

Yes, thank you (mightily) for the grammatical corrections.

Aside from this nitpicking, what have you (concretely) to offer, aside from assuming (wrongly) that Wall Street has been a tremendous "success".

For instance, tremendous success for whom; Paulson and his minions who made millions or the poor guy who is losing the shirt off his back -- not to mention his home?

Come again? What planet did you say?

[Lafayette]

burps like a bubble

hari: It won't even get started because of fundamental political/economic differences in political perception of what is desirable and what not.

Frankly, I have to agree with you.

The general will, that was necessary to create the WTO, is simply not there. Now that the sub-prime debacle is supposedly behind us, all will be forgot till the next time.

But, I am sure of this: That next time, I promise you, WILL happen. Be on the watch for it.

If it looks like a bubble and burps like a bubble, it's ... not Alka Seltzer. ;^)

[Eric Dewey, Portland OR]

Multi-lateralism is clearly the best solution. But our species is not noted for selecting best solutions, only those that are most workable for those who have the authority to make decisions.

Good to hear from a reputable source about how the Asian policymakers are thinking.

BW's political point remains, however, that for political change (equivalent to creative destruction) to occur, both a political disaster and an intelligent idea for replacement must be in place.

Is this the disaster? Or has intervention softened the blow enough to allow the existing elites to argue successfully that it was a tempest in a teapot?

[Lafayette]

Interesting paper from the BIS, here, titled,"Customer suitability in the retail sale of financial products and services "

Abstract: This report considers how supervisors and regulated firms across the banking, securities and insurance sectors deal with the risks posed by mis-selling of retail financial products, including related regulatory requirements, both with regard to disclosure of information to retail investors and requirements on firms to determine whether recommended investment products are suitable for such investors.

A broad range of supervisors provided details of the regime in their respective countries. These supervisors included sector-based, functional regulators and integrated regulators. For the purposes of this report, we refer to an integrated regulator as one who regulates banking, insurance and securities activity.

Bingo!

[macburger]

There's been a lot written about how the Fed's recent communication on bubbles represents a change in policy for the Fed where bubbles will be attacked more aggressively,but they've always said regulatory and supervisory steps were needed to moderate financial markets, the big change would be for the Fed to use interest rate policy to manage bubbles

Who are you kidding?

The Fed always said regulatory steps were needed? Proof please..

Under Greenspan? Bernanke?

The economist profession is in full ass-covering mode to cover their butt, and that of the Fed. Fed apologists always used the "interest rate policy to manage bubbles" as the straw man argument to avoid doing anything at all about bubbles till now - all the while being dead set against any regulation.

That strawman argument has been used repeatedly by the Fed and their economist bootlickers
- for refusing to take action, so that the pigs could continue feeding
- for suppressing critics of Fed policy, by easily knocking that argument down
- for covering their butts, so that they can pretend they never heard any other points

And surprise! They are going to set up the same argument and knock it down again.

Now you claim that the Fed has been regulating all along? That they were always 'for' regulation? Which imaginary world are you living in? HOEPA passed in 1996, and used in 2007? when the horses had all left the barn? Greenspan steadfastly refusing to regulate anything?

Greenspan must be tried for treason and shot. The economist profession must be tarred and feathered - all of them. Let posterity sort them out.

[Mark Thoma]

"Who are you kidding?

The Fed always said regulatory steps were needed? Proof please..

Under Greenspan? Bernanke?"

Is that (proof) supposed to be a hard challenge? Bernanke in 2002 under Greenspan - saying just what he is saying today, which is my point:As you know, the Fed has two broad sets of responsibilities. First, the Fed has a mandate from the Congress to promote a healthy economy--specifically, maximum sustainable employment, stable prices, and moderate long-term interest rates. Second, since its founding the Fed has been entrusted with the responsibility of helping to ensure the stability of the financial system. The Fed likewise has two broad sets of policy tools: It makes monetary policy, which today we think of primarily in terms of the setting of the overnight interest rate, the federal funds rate. And, second, the Fed has a range of powers with respect to financial institutions, including rule-making powers, supervisory oversight, and a lender-of-last resort function made operational by the Fed's ability to lend through its discount window. By using the right tool for the job, I mean that, as a general rule, the Fed will do best by focusing its monetary policy instruments on achieving its macro goals--price stability and maximum sustainable employment--while using its regulatory, supervisory, and lender-of-last resort powers to help ensure financial stability.

Let me discuss the two parts of this recommendation in a bit more detail. The first part of the prescription implies that the Fed should use monetary policy to target the economy, not the asset markets. As I will argue today, I think for the Fed to be an "arbiter of security speculation or values" is neither desirable nor feasible.1 Of course, to do its job the Fed must monitor financial markets intensively and continuously. The financial markets are vital components of the economic machinery. Moreover, asset prices contain an enormous amount of useful and timely information about developments in the broader economy, information that should certainly be taken into account in the setting of monetary policy. For example, to the extent that a stock-market boom causes, or simply forecasts, sharply higher spending on consumer goods and new capital, it may indicate incipient inflationary pressures. Policy tightening might therefore be called for--but to contain the incipient inflation not to arrest the stock-market boom per se.2

The second part of my prescription is for the Fed to use its regulatory, supervisory, and lender-of-last-resort powers to protect and defend the financial system. In particular, alone and in concert with other agencies, the Fed should ensure that financial institutions and markets are well prepared for the contingency of a large shock to asset prices. The Fed and other regulators should insist that banks be well capitalized and well diversified and that they stress-test their portfolios against a wide range of scenarios. The Fed can also contribute to reducing the probability of boom-and-bust cycles occurring in the first place, by supporting such objectives as more-transparent accounting and disclosure practices and working to improve the financial literacy and competence of investors.3 Finally, if a sudden correction in asset prices does occur, the Fed's first responsibility is to do its part to ensure the integrity of the financial infrastructure--in particular, the payments system and the systems for settling trades of securities and other financial instruments. If necessary, the Fed should provide ample liquidity until the immediate crisis has passed. The Fed's response to the 1987 stock market break is a good example of what I have in mind.4

I have expressed these two principles in rather simple terms; they could be elaborated much further. Taken together, they provide a strategy for policy that has a number of advantages: It keeps monetary policy focused on the appropriate goal variables, economic activity and inflation. It is transparent and easy to communicate to the public. It does not require that central bankers be systematically better than the market at valuing financial assets nor substitute policymakers' judgments of company prospects for those of investors. Finally, and crucially, it is a robust strategy, in that--although it certainly does not eliminate all economic and financial instability--it protects the economy against truly disastrous outcomes, which history has shown are possible when monetary policy goes severely off the track.5

[macburger]

Bernanke in 2002 under Greenspan - saying just what he is saying today, which is my point:

That's talk. Talk. Talk is cheap. What got done?

What exactly occurred from 2002 to 2007 when fraud ruled the mortgage market?

Talk?

What lay behind the steadfast refusal to use HOEPA and other regulations?

If we go by Bernanke's speech in 2002, he believed and committed to what he said, then he knowingly participated in this racket by failing to do what he was supposed to do. Not ideological delusions, not ignorance, not incompetence, but abetting.

What exactly did the Fed do ?

To quote Bernanke himself from the above speech The Fed and other regulators should and that they stress-test their portfolios against a wide range of scenarios.

What did they do since 2002 to 2007? If they had done just that - insist that banks be well capitalized and well diversified - will the Fed be bailing out the pigmen today?

[macburger]

And it is bailing out the pigmen - here is the ECB waking up. Are we pretending that the Fed does not now this kind of thing goes on here? After having opened the window to all kind of garbage in exchange for treasuries?

http://us.ft.com/ftgateway/superpage.ft?news_id=fto051520081851524453&page=2

ECB liquidity scheme fears

By Paul J Davies and Norma Cohen in London and Anousha,Sakoui in Vienna

Published: May 16 2008 03:00 | Last updated: May 16 2008 03:00

The European Central Bank yesterday voiced its "high concern" at growing evidence that banks are exploiting its efforts to unblock the frozen funding markets by using its liquidity scheme to offload more risky assets than it envisaged.

Yves Mersch, a governing council member, said the ECB was now "looking very hard at whether there is not a specific deterioration of collateral" which the central bank is accepting in return for funds.

He was speaking amid signs of some banks creating low-rated assets specifically so they can be traded for treasuries at the European Central Bank.

Central banks have become important in providing funding for difficult to sell mortgages on what is intended to be a short-term basis while securitisation markets remain froze

.....
Investment bankers who work in securitisation say that their main business is structuring bonds that are eligible for ECB liquidity operations. Some analysts have concerns about whether the bonds being created will ever be saleable if markets recover.

"There is moral hazard . . . and we are not in the business of taking over the market," Mr Mersch said. "That means there must be an exit strategy."

[Lafayette]

Learning Mandarin

Hari: Soros is talking about paradigm change/shift and emergence of a new global financial structure and so on

He's talking about it. That doesn't mean it will happen.

For the moment, all we see is a massive transfer of capital from the western developed societies to the eastern underdeveloped societies. Which has raised living standards in the latter. That has brought about a great deal of goodness, despite what many say in the West.

But, when it comes to real productive capacity, where does it still reside? In the West; namely Europe and the US. And so, that capital exported comes back in either equity/bond acquisitions or property acquisition or investment or just parked in the money-market. Meaning what?

That there has been a transfer of ownership of the means of production, but not necessarily its replication and substitution. The Europe and the US need not fear that innovation or even invention will suddenly wither on the vine -- even though they have every reason to fear continued competition from low-end manufacturing in the Far East.

In the process, the Financial Mechanism has been the vehicle of transfer (of ownership), but it has not transformed itself. E.g., Saudi Arabia may own tons of BMW stocks, but it is not about to start producing BMW cars any time soon.

Any sovereign fund looking for ROI cannot avoid Europe or the US (and several other countries). Because the inherent risk in the others is too great to invest too much capital. Some, but not really all that much.

When we look at FDI, the same countries remain the principle beneficiaries. Those countries with stable governments, the rule of law, a good degree of economic stability and a consumer market that functions adequately. And, oh yes, a highly efficient capital market (to look after their assets).

It is not that easy to find countries that fill all five requirements in this supposedly new "globablized" world of ours. There's no need to rush out tomorrow and learn Mandarin.

Soros is simply repeating the same Theory of Multipolarity that has been so fashionable in Europe. For the US, which has believed since the end of WW2 that it alone pushed the levers of World Capitalism, that message is new and perhaps ominous.

For the rest of the world, it is accepted as an idea whose time has come.

[Lafayette]

Jult: Simply stating that innovative ideas are what drives sky high Wall Street compensation.

For all the “innovative ideas” that our Golden Boys have concocted, not one, neither all together, for whatever good they have done them personally, can compensate for the destruction caused by the sub-prime toxic waste.

Which was not terribly innovative. It was more copycat than anything else. Some bright nerd on Wall Street said “Well if Fannie Mae and Freddie Mac can monetize their debt to obtain more funds to lend, why can’t we?” And the rest of Investment Banking in Wall Street said, “Hey, what a great idea! Why didn’t WE think of that before?”

Of course, since they are inbred nerds, they got the implementation all wrong.

Lafayette - there is no mathematical way steeper progressive taxation could have remedied even the growth in inequality in the 1980s, let alone the growth of inequality since 1990. You're making a long-debunked argument.

This is patently ridiculous.

Steeper progressive taxation, applied to Social Investments, could have had then and can in the future have an immediate and lasting effect on Income Inequity.

If you don’t believe that, come to Europe, I’ll show you how progressive taxation spent on state expenditures not only rebuilt a war ravished Europe but created one of the best Health Care systems on earth, a more fair educational system, and less detrimental long-term unemployment.

I’ll grant that a lot of that expenditure was wasted, but better that waste on an attempt at bettering the well-being of citizens, than pissing it way in a useless war over in the sandbox from which its children return in body bags.

Blinding oneself to that prospect only serves one purpose, the further accumulation of wealth by an even smaller proportion of the population. Which results inexorably in a plutocratic nation.

One is left to presume that consequence is your preference.

[kthomas]

Yeah, I was also suprised Monsieur Lafayette made that statement.

[Eric Dewey, Portland OR]

The honorable Marquis might also perform the courtesy of acknowledging the support of the Marshall Plan in rebuilding Europe and may have created an economic environment that eased the initial burdens of the state taxation that has, admittedly, done so well by it's citizens...

[Bruce Wilder]

I agree with macburger: the Fed does have a policeman's role, not with regard to asset markets, but with regard to the markets for loans.

The present crisis is not the result of a malfunction in the housing market, but in the mortgage market, and it was a malfunction, which involved a combination of many fraudulent and predatory practices. That the Fed was looking the other way raises questions in my mind about the integrity of Fed leadership. That they make speeches, in which they fail to even acknowledge the reality of financial fraud, let alone the primary role of financial fraud, indicates to me evidence of a moral awareness of guilt.

[Bruce Wilder]

Awareness of guilt, and an intention to perpetuate fraud as a matter of policy.

[Patricia Shannon]

Bruce Wilder says
The present crisis is not the result of a malfunction in the housing market, but in the mortgage market, and it was a malfunction, which involved a combination of many fraudulent and predatory practices.

I would say that is not wholly true. Part of the problem is the increase of the price of houses above what the market could sustain, caused by people believing that housing prices would continue to go up,and that it was therefore rational to buy at those prices. If you disagreed, you would be severely criticized.

Just note what happens when someone suggests that the retirement of large numbers of baby boomers that is starting will cause stock prices to burst. People jump on that idea and insist it won't happen. Is that wishful thinking, or people who are trying to keep stock prices up long enough for them to make their own profit?

[Patricia Shannon]

http://www.sciencedaily.com/releases/2008/05/080515113259.htm

Having Less Power Impairs The Mind And Ability To Get Ahead, Study Shows

ScienceDaily (May 16, 2008) — New research appearing in the May issue of Psychological Science, a journal of the Association for Psychological Science, suggests that being put in a low-power role may impair a person’s basic cognitive functioning and thus, their ability to get ahead.

One reason change is so hard, although desirable.

[Lafayette]

ED: The honorable Marquis might also perform the courtesy of acknowledging the support of the Marshall Plan

Acknowledged.

As long as you acknowledge that it was not done out of any particular sense of munificence but because General Marshall (Chief of Staff of the Armies) was impressed by the Russian Bear on Europe's borders.

The communists had fought bravely in Italy and France to liberate their own countries, and as a result their parties were VERY popular just after the war and well into the 1950s and 1960s. It was the smart thing to do.

Of course the victors write the history books after a war, but the locals remember what really happened.

As Europe evolved into a workable democracy and a functioning economy, guess who became Uncle Sam's major trading partner? At least Marshall knew the consequences of Social Investment (rebuilding infrastructure), something America took for granted after the war.

Yet another bird that has come come to roost.

[Lafayette]

PS: caused by people believing that housing prices would continue to go up,and that it was therefore rational to buy at those prices. If you disagreed, you would be severely criticized.

Isn't such a belief akin to the "cognitive dissonance" that you referred to earlier in a discussion here?

The refusal to believe in a logical outcome because it does not correspond with what we want as an outcome?

[hari]

Future Scenario - potential changes in site!

As a major (OECD) economic power, Japan has recently agreed in a joint-statement during Pre. Hu's official visit (early this month) to focus on improving Asian regional trading and financial markets, as well as currency alignments.

I've given it a policy interpretation in order to visualize a scenario in which Asian emerging markets (Asean, China and India) along with Japan focus on their expanding regional macropolicy to (1) establish a FTA (2) developing Asian equivalent of a (convertible) bond market (3) cooperate towards establishing a EU type regional supranational entity (to replace Asean Sec).

It's unlikely US/EU/OECD would or should disapprove of such a regional development. What is fundamental is to strengthend the legal and institutional framework of a counterparty representing emerging Asian bloc in the global economy. Once such a regional economic development gets underway, in a serious political accomodation with Japan (including Asian Development Bank), the rule of law under international economic cooperation is easier to establish with US/EU and rest of the world.

Now, don't think this is an original idea from me! I've been following mainland China think-tanks, and those in India, to see how their intellectual stuff could be translated into a global policy context.

[hari]

read...potential changes in sight!

[hari]

Asian currency alignment with Euro/Dollar is imperative for stable economic development in the emerging markets. Thus it is a serious political imperative, and might take a lot longer (than one might like) before a *common currency* can be agreed upon and operationalized. I think.

[jult52]

Lafayette:

1) The Gini coefficient has been rising in Europe as well as the US. You have not presented any argument that actual average tax rates can ever be high enough to combat the rise in inequality. (Well, except for a Warsaw Pact scenario. I grant you that a 95% tax rate would do the trick. I'll grant you that.) See Mickey Kaus' analysis of the issue in "The End of Equality," which found that even average tax rates in Sweden in the 1970s would have been insufficient to neutralize US pre-tax increases in inequality just in the 1980s.

2) Wall Street innovation: It's a truism that new intellectual advances in finance drive innovation and high compensation. The fact that there have been problems in the mortgage securitization market doesn't negate that general truth. And the avg guy isn't losing their home due to advanced financial technology. They are losing it because they can't afford the mortgage. Financial services shareholders are in a different place; they are losing plenty because of mistakes in the mortgage market and in risk analysis in general.

3) My quip about assessment vs ratings agencies was to point out that you don't know what you're talking about. For example, you are going to have to demonstrate in detail that the development of securitization sprang from Fannie Mae & Freddie Mac. I am open to this idea but am skeptical. It certainly needs to be shown and not asserted.

4) About the general issue of whether Wall St compensation growth will retreat to levels more in line with other industries, I hope they will but am skeptical. And Rothkopf's arguments - that "regulation" will achieve this end - are unconvincing talking head points. You tell me that there will be many fewer innovative products introduced in finance, then maybe I'll start to be interested.

[Eric Dewey]

Lafayette, I'm more than willing to acknowledge that the Marshall Plan was not based on munificence alone, and that the Communists fought bravely and represented an honorable alternative post-war path.

The critical point for purposes of this discussion is that the Marshall Plan is an example of a financial elite taking (or being prodded to take) a substantial political and economic risk to "do the right thing", when a coldly "rational" and quantitative economic analysis could easily have swayed the argument against such aid.

Would the factors that led to such a decision be quantifiable (beyond the cynicism required in game theory)? If they were, would they ever be considered sufficient to sway such decisions in future?

I don't know - but I suspect that the answers to those questions would show the direction in which a humanist economics (as opposed to a purely mathematical one) could take us.