“At base, having a small elite with vast wealth is good for the poor and the middle class.”
A Bain Capital Partner’s Worldview - Ed Conard interview
How do you open dialogue with a sociopath? IS there much common ground? When is it worth looking for overlap with an electron microscope? No component in a complex system can fully comprehend OR RANK the options available to the complex aggregate - any more than any given neuron can express the group intelligence of the human CNS. But they can get some idea, with enough compromise & interaction.
At some point, chicks with dominant balances have to throw out bullies who are deaf, dumb & blind to aggregate options, no matter their personal attributes. No attribute of a system component has scalable meaning sans the operational ability to coordinate within the aggregate. In other settings, we lament extreme personal success & group failure as "cancer."
“A lot of people don’t realize that what happened in 2008 was nearly identical to what happened in 1929,” he says. “Depositors ran to the bank to withdraw their money only to discover, like the citizens of Bedford Falls” — referring to the movie “It’s a Wonderful Life” — “that there was no money in the vault. All that money had been lent.”
Is this grossly ignorant, or contemptibly slick treason? Given enough time, the two always converge. He next argues for guaranteed "bank" bailouts, regardless of how or why they fail - while not bothering to discriminate between commercial banks, investment banks & hedge funds.
The biggest flaw I sense in Ed Conard's "mathematical" approach to so many emerging unknowns, is his assumed predictive power. There's always a lot of math that is exquisitely & laboriously applied to flawed concepts.
Diverse talents emerge unpredictably from massively recombinant sexual reproduction - as his own, humble beginnings in a Detroit suburb show. Only known way to parse that talent - so far - is, as the Marine Corp says, to generate both quality & pace of decision-making by distributing decision-making. Since decision-making so often means denominating transactions with fiat currency, an economy with options thereby adapts best by distributing group income in a way that is optimally adaptive, so that talent & local options always meet, ASAP. There's no set theory explaining how "optimal" evolves over time - just that it must adapt quickly to unpredictable, aggregate context. Income disparity means not giving emerging talent enough income to buy what it is capable of consuming, or inventing.
I wonder how he feels about estate taxes. What if his own kids have no talent or drive whatsoever?
Wednesday, May 9, 2012
Flawed, Ignorant and Dangerous
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8 comments:
"How do you open dialogue with a sociopath? "
LOL! Too good Roger!
resp,
Of course, there is a very straightforward way to have a system in which bailouts are automatic: the government could just take over the banks entirely. You never need a bailout, because no bank is ever insolvent. Each bank is just a government office that lends the government's liability directly. Every loan made, and thus every deposit balance entered on on account ledger is automatically a liability of the Federal Reserve system and the US government. The bank doesn't issue its own IOUs and then borrow the government's IOUs after the fact. Bank lending is thus analogous to "spending" and loan repayments are government receipts, just like taxes, so excesses of lending over repayment are just a form of government deficit. A bank might be poorly managed, running a deficit larger than people higher up in the system deem desirable - in which case that management is replaced. But the bank is not owned by people who manage it independently of government, and are permitted to extract sizable profits for the service. So it's like Bedford Falls indeed - where both the Bailey Building & Loan and Potter's Bank is put out of business as a separate private concern, but where George and all of the other people of Bedford Falls, then assume citizen control of those two banks and all of the others.
If the fellow from Bain Capital doesn't want to go this direction, because he thinks there is social value in decentralization, localization and competition, then he needs to accept that that means we need to decentralize large capital holdings and and distribute them among smaller local banks. Because if it's just a choice between two different systems of concentrated centralized capital - one run by a democratically elected government and one run my unaccountable private money barons - then I go with the government system.
No reason to have the govt actually run the banks, just hire them as agents/contractors for risk assessment and other banking functions, with govt providing the capital and setting the interest and term structure. Bankers would then be salaried contractors instead of creators of capital. There could still be private investment banking, too. There are lots of ways to structure a financial system. What's the rationale for private creation of the govt's unit of account anyway?
I agree Tom. But I think that's close to what we already have. That's why I think some of the recent MMR-influence talk about private sector "creation" of money is overblown. What private sector banks create is just IOUs. Those IOU's are not just denominated in the government's official unit of account, they are IOU's for the "money-things" that the government issues. If I have a deposit balance at a commercial bank that was created by that bank in advancing me a loan, I can go in and demand physical currency - and they have to give it to me. If I am a commercial bank and make a payment to another bank, then the payment is settled and clear through by reserve account, meaning that some of my reserves, which are also money-things issued by the government, get transferred from my reserve account to the other bank's account.
I guess the motive for private sector setting its own t=rates is that the competition for different kinds of loan products should be good for consumers in general.
Dan, the flaw in the game really became obvious with the virtually unrestrained expansion of borrowing for consumption instead of investment. The basic idea is that ROI pays for the loan. Consumer borrowing just consumes and requires payment from income unrelated to the loan. That is an unsustainable process that has gotten out of hand.
Of course, there are problems with excessive lending for investment, which generally culminates in a build of malinvestment that can't service the loan. Then there is economic contraction.
Couple this with excessive consumer borrowing and the run up in private debt becomes disastrous. The way the game is structured it is up to the banks to act prudently or "face the consequences." When facing the consequences is taken off the table through govt guarantees, implicit and explicit, the result is guaranteed.
This is becoming a real problem because whoever has the dominant financial sector will dominant the global economy. So countries are now run for their financial sectors. It used to be what's good for GM is good for America. Now it is what's good for Goldman, Chase and Citi is good for America.
Recipe for catastrophe.
Yes, Tom, and unfortunately the recommendations of many mainstream economists just seem to be to keep it going. Every indebtedness cycle can be followed by an extraction cycle in which the creditors just collect on the debts without extending more credit.
And just when I thought that Romney wouldn't have a chance against Obama because he comes across as too friendly to the rich, his fellow former Bain Capital partner comes to his rescue
I agree that banks should be centralized, however, there are many complications that simply run the system into failure. This is not a failure with how the system would be established, there is always a way to figure out logistics, but rather with the people running the system not having the same incentive structure once it is implemented. As we've seen with every firm since the dawn of man, "it is not profits that drive people to not act on their constituents behalf, but the restriction on profits". Furthermore, this applies on a firm level as well as an individual level. Such restrictions on profits lead to inefficiencies within the firm, as well as poor incentives for employees. We've seen this manifest in all government agencies and regulated utilities. Unfortunately in US culture, it is impossible for the majority to understand that what is best for everyone is also best for them, and thus social cooperation should act as a proper incentive. If this was recognized then such a goal would be easily ascertainable, but incentive structures in their current state to not permit such selflessness. A centralized bank is the best system, but not when the people running the system require Pecuniary compensation which does not nesecarily mean they are better off. I want to believe that such a goal is within our reach, but it would require a major value revamp.
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