To make matters even worse, some of this vast income is being taxed at just the 15 percent capital-gains rate.The Huffington Post
Piketty Is Right: These Wealthy Men Make Billions For Basically Doing Nothing
Mark Gongloff
I wouldn't hardly call managing risk doing nothing, since it is highly intense, intellectually challenging and demanding of time, not to mention risky. The question really is how necessary it is and what contribution it makes socially and economically other than increasing nominal wealth. Primary investment is obvious productive or the investment is lost. However, financial investment?
Risk management is an effect of capitalism, which is based on risk assumption in both productive or primary investment and financial or secondary investment. The assumption is that unlimited speculative gain from both types of risk assumption is the required incentive to drive entrepreneurial investment in capital formation, or at least provide the optimal incentive. What this assumes is that there is no economic rent involved.
36 comments:
Government bailouts suggest that risk management is a fantasy. And thanks to Bill Black, we know that some of these wealthy men were quite busy.
He's talking about hedge fund managers in this post. Hedge funds aren't yet backed up by government.
https://en.wikipedia.org/wiki/Long-Term_Capital_Management
"with the fund liquidating and dissolving in early 2000"
"Long-Term Capital Management did business with nearly everyone important on Wall Street. Indeed, much of LTCM's capital was composed of funds from the same financial professionals with whom it traded. As LTCM teetered, Wall Street feared that Long-Term's failure could cause a chain reaction in numerous markets, causing catastrophic losses throughout the financial system."
Sounds like the kind of situation "risk management" is supposed to avoid.
That's the downside of capitalism. Risk/reward is at the center of it as the principal driver.
When you make billions there is no risk, only reward.
One principal driver for capitalism is the failure of most small businesses. Not "too big to fail".
Btw, where's the QEG? Raising Nikolai Tesla from his grave would bring great benefit to society.
The proliferation of hedge funds, bank bailouts, multi-$trillion derivatives markets, algorithmic trading systems and what Warren Buffet refers to as financial weapons of mass destruction are a natural by-product of the evolution of the fiat system since the abandonment of Bretton Woods in 1971. The ability of Wall Street market participants in the 1% to game the system is fueled by volatility. Why was there no interest rate and/or foreign exchange derivatives in the early 1960s? Not enough volatility, that's why. Many derivatives markets would become as obsolete as buggy whips if the dollar was re-linked to gold. Here's Bill Clinton's take on the subject when he spoke at the Peterson Foundation Fiscal Summit about 4 years ago.
https://www.youtube.com/watch?v=nlDwqLOOwJk&feature=player_embedded
"When you make billions there is no risk, only reward."
Read the article. Many hedge fund managers are not successful and their clients lose money. The losing managers make money from fees.
"One principal driver for capitalism is the failure of most small businesses."
Entrepreneurs face investment risk. If there are creditors involved, they face default risk.
A reason that many choose to be employees is to avoid risk, although there is always a risk of losing one's job.
Even those purchasing default risk-free government securities like US Treasuries and British gilts face interest rate risk.
It's just about impossible to avoid risk in capitalism and the theory is that those taking on most risk have the opportunity for the greatest reward. Reward is risk-weighted.
Everyone has to take risk into account, that is, "manage risk," and some people get paid to manage risk for others.
Capital markets and financial markets spread the risk.
Governments may provide backup to risk to prevent excessive damage socially or to the financial or economic system, or as a matter of cronyism.
"Btw, where's the QEG? Raising Nikolai Tesla from his grave would bring great benefit to society."
Took it down after Dan Kervik debunked it as a scam.
"Many derivatives markets would become as obsolete as buggy whips if the dollar was re-linked to gold."
From what I read, going to 100% reserve or a gold standard would just drive shadow banking and finance, which is more difficult to regulate.
"From what I read, going to 100% reserve or a gold standard would just drive shadow banking and finance, which is more difficult to regulate."
May not be necessary to go to full gold convertibility. Average price of gold 1992-1996 was $372.67 and very stable. Average US budget deficit during same span of time was \3.7% of GDP. Fed/Treasury could allow interest rate to float freely while monitoring an equilibrium gold price to inform them when to increase or decrease fiscal stimulus.
Read the article. Many hedge fund managers are not successful and their clients lose money. The losing managers make money from fees.
These are people who face no threat to their lifestyle regardless of the investment decisions they make. I have zero sympathy for them.
Entrepreneurs face investment risk. If there are creditors involved, they face default risk.
Seeing your hard work go down the drain can be harsh, but bankruptcy is more lenient than the debtor's prisons of the past.
A reason that many choose to be employees is to avoid risk, although there is always a risk of losing one's job.
It is impractical for everyone to be an entrepreneur. Receiving wages in exchange for labour is usually the only option.
It's just about impossible to avoid risk in capitalism and the theory is that those taking on most risk have the opportunity for the greatest reward. Reward is risk-weighted.
The evidence suggests there is inconsistency between the two.
Capital markets and financial markets spread the risk.
They're supposed to, but it is quite obvious that they do not. Deregulation has increased economic instability and the opportunity for fraud. Yet the theories that favor deregulation continue to be pushed. We recognize the problem of moral hazard, but fail to address it.
Financial risk shouldn't threaten an economy - its just money. Money can be conjured, squandered or destroyed with ease.
Capitalism is based on scarcity of everything but labor, which is in capital's interest to keep abundant through chronic unemployment to the degree of defining unemployment as voluntary and assuming that there is a natural rate of unemployment.
Capitalism assumes a scarcity of capital including both real capital and financial capital, which includes "money." This is why banks are the primary creators of money rather than governments.
Owing to its cyclical nature, capitalism periodically self-implodes and uses government as a last resort to "save our way of life."
Capitalism does not require scarcity. The more money customers have, the easier it is to sell at a profit. There are more 'winners' and fewer 'losers' in an economy suffering from abundance.
And where does the money come from? Debt.
Under capitalism, that's private debt in which the owners are the creditors and the workers are the debtors, owing their soul to the company store.
Of course it doesn't have to be this way, but that's not capitalism either. In the mindset of capital, any deviation from a market state is socialism.
It didn't used to be this way, and it was still called capitalism. Credit cards were a novelty.
And before credit cards, the vast majority of people had a lower standard of living than most do now, or at least until the crisis hit. I lived through this and it was a very different scene back then.
The elite were in charge but very few were concerned about inequality then because their lives were improving post-Depression and WWII, and it seemed assured that their children's lives would be better than the parents and the grandchildren's even better. In fact, the middle class rose to an unprecedented level leading up to the crisis, leading lives that were only led by the rich when I was a boy. Just about everyone and bought into the myth of unlimited growth and continuing progress and increasing prosperity. No one cared much about how well the richer were doing, since they were satisfied with their situation.
But nothing continues forever. and people get used to a certain standard of living and when their expectations are crushed, then a reaction sets in. We are seeing that now. Moreover, the reality is stark. The bulk of the gains since 2009 have gone to a tiny minority, and it seems that everyone else is either sinking into an abyss or standing the edge of it.
:Looking back, the conditions that led to the reversal were sown along with the seeds that led to the expansion. that is, the neoliberalism that was initiated by Carter and propelled by Reagan. As the debt-income ratio began to build up, it should have been obvious that the process was unsustainable, but only a few saw it coming. The experts were preaching the Great Moderation instead. So the crisis and aftermath was a great shock, even though it was just a return to situation normal in the history of capitalism, as PIketty's data shows.
Then the role of debt became much more significant a driver of growth than income as the economy became increasingly financialized, the bargaining power of labor was curtained, global labor became more and more fungible, and the whole context shifted with the fall of communism, leaving capitalism as the undisputed victor. Capital could again assert its prerogative over labor, as it had prior to the Great Depression and then WWII and aftermath, which as PIketty observes, was an aberration.
Then the mixed economy began to be challenged by an elite that decided that compromise was no longer needed and a mixed economy could be dispensed with. Then the push was on to return to a purely capitalistic economy.
As the economy becomes more capitalistic, advanced capitalism sets in and wealth concentrates owing to the effect of economic rents. Competition is supposed to limit profit as well as wages, and eliminate economic rent. But there is no perfect competition in a society with institutions where those institutions are controlled by a power elite.
The story of credit is also a significant part of the overall story. Prior to the advent of the credit card with Visa in the Sixties and its proliferation in the Seventies, most credit was extended to business or through business expense accounts, e.g., Diner's Club and American Express. but these were not actually credit cards in the modern sense, in that the balance had to be paid monthly.
Workers depended on home mortgages and the down was 20% excepting veterans eligible for FHA, and vehicles were bank financed. Store credit was payable in full in thirty days. That was it for consumer credit. Most consumption was funded by income or financed short term with store credit. Impulse buying was limited, and most people lived on a strict budget limited by income, maybe supplemented by some interest and dividends.
For most people, credit for consumption was either tight or non-existent. Credit cards changed that dramatically, allowing just about anyone to purchase just about anything in the heyday. It wasn't even necessary to apply for a card. Banks just sent them out in the mail. This is when the consumer society really took off.
Problems arose when people became dependent on credit, which was their own fault, of course, but the lenders have to take some responsibility, too, not only for extending credit loosely but also sucking people into the lifestyle.
But this was the age of financialization. It didn't end well, and now it's unclear what the future direction is with credit. It seems that the economy can't live without it but hasn't learned to live with it either.
Contemporary capitalism has become extremely rent-based, and it's unclear how this is going to play out. Suffice it say, we are in a rough spot now, to say the least.
My sense is that economic rent is an outcome of late stage capitalism and will be one of the factors that leads to change. The project of primarily Western globalized capital capturing rents from just about everyone to feed the lifestyle of the superrich doesn't seem viable to me socially and politically, even if it is economically. But there seem to be insurmountable problems with financial cycles that bring the whole project into question economically, too.
If late-stage capitalism is credit-based for demand, and Minsky's financial instability hypothesis holds, then it seems that we are entering the endgame for neoliberalism.
Restore real incomes to consumers and the need for individual lines of credit will diminish.
I doubt that the obstacle to this is economic. Having a consumer economy remains popular for a lot of folks. And the credit card companies remain profitable...
I think that most people agree that the the issue is capital share and labor share. According to neoclassical economics there is no economic rent and each receives its marginal product. That's the neoliberal view.
How to adjust capital v. labor share in the "free market" is the question, when the purpose of capitalism is capital formation. It's in the interest of capital formation that the labor share is less. See Michal Kalecki, Political Aspects of Full Employment.
One could say something like "collective bargaining" though trade unions. But that is regarded as anti-capitalist. Engels, writing after the passing of Marx, did not see the solution in trade unionism but the uniting of workers internationally, but he regarded trade unions as a precursor to this worker solidarity. This has not been lost on the ownership class.
The increasing improvement of machinery, ever more rapidly developing, makes their livelihood more and more precarious; the collisions between individual workmen and individual bourgeois take more and more the character of collisions between two classes. Thereupon, the workers begin to form combinations (Trades' Unions) against the bourgeois; they club together in order to keep up the rate of wages; they found permanent associations in order to make provision beforehand for these occasional revolts. Here and there, the contest breaks out into riots.
Now and then the workers are victorious, but only for a time. The real fruit of their battles lies, not in the immediate result, but in the ever expanding union of the workers. This union is helped on by the improved means of communication that are created by modern industry, and that place the workers of different localities in contact with one another. It was just this contact that was needed to centralise the numerous local struggles, all of the same character, into one national struggle between classes.
Communist Manifesto, Ch. 1.
Some other interesting aspect of the Communist Manifesto in light of present discussion. Some of these goals have already been achieved or are being advocated today:
These measures will, of course, be different in different countries.
Nevertheless, in most advanced countries, the following will be pretty generally applicable.
1. Abolition of property in land and application of all rents of land to public purposes.
2. A heavy progressive or graduated income tax.
3. Abolition of all rights of inheritance.
4. Confiscation of the property of all emigrants and rebels.
5. Centralisation of credit in the hands of the state, by means of a national bank with State capital and an exclusive monopoly.
6. Centralisation of the means of communication and transport in the hands of the State.
7. Extension of factories and instruments of production owned by the State; the bringing into cultivation of waste-lands, and the improvement of the soil generally in accordance with a common plan.
8. Equal liability of all to work. Establishment of industrial armies, especially for agriculture.
9. Combination of agriculture with manufacturing industries; gradual abolition of all the distinction between town and country by a more equable distribution of the populace over the country.
10. Free education for all children in public schools. Abolition of children’s factory labour in its present form. Combination of education with industrial production, &c, &c.
When, in the course of development, class distinctions have disappeared, and all production has been concentrated in the hands of a vast association of the whole nation, the public power will lose its political character. Political power, properly so called, is merely the organised power of one class for oppressing another. If the proletariat during its contest with the bourgeoisie is compelled, by the force of circumstances, to organise itself as a class, if, by means of a revolution, it makes itself the ruling class, and, as such, sweeps away by force the old conditions of production, then it will, along with these conditions, have swept away the conditions for the existence of class antagonisms and of classes generally, and will thereby have abolished its own supremacy as a class.
In place of the old bourgeois society, with its classes and class antagonisms, we shall have an association, in which the free development of each is the condition for the free development of all.
Communist Manifesto, Ch 2. Emphasis added.
Unions are a natural outcome of the antagonisms between labour and capital. They are an intrinsic part of capitalism.
The antagonism between the elites and the rest of society can be settled through democracy. If the people see the need for a manifesto, they can vote one in. The elites have always feared the tyranny of the majority. So they try to control the economic narratives. They try to control politics.
70 years have passed and Kalecki's article remains timely.
Bob, you are a socialist and don't seem to realize it. :)
Maybe we are all socialists and just don't realize it :)
I'm a misfit.
That's my point. Most people are buffaloed by the propaganda that capitalism is good and we have a capitalist system. Actually that's not the truth. We have a mixed economy that part capitalist and part socialist. The owners try to tilt the balance their way, and the people mostly go along in some periods and in other periods demand more of tilt their way.
Let's look at the history. Feudalism gave way to capitalism as capital goods (factories) replaced land as the chief factor of production in the shift from the agricultural to the industrial age.
Simultaneously on the political front, the monarchies and aristocracies of the late feudal period were challenged by the American and then the French revolutions that replaced the hereditary hierarchical governments with consensus democratic republican governments.
Liberalism was on the rise, both economic and political. From economic liberalism came capitalism, and from political liberalism came democratic republicanism.
Economic liberalism and the associated political liberalism of the time produced the idea of the market state under laissez-faire, which was approximated by the England described in the work of Marx & Engels, for instance, in which former tenant farmers were "transferred" into the labor market to work in factories.
This resulted in a reaction broadly called socialism, with communism one of the competing varieties, which argued for putting people ahead of money and machines.
To counter this, social liberalism was instituted, and Otto von Bismarck instituted the welfare state with a social safety net to counter the growing social unrest that threaten the old order. England also followed with social legislation to alleviate the harsh conditions of labor. After WWI, the order was overthrown for the most part, and liberalism became the norm. A result of the Great Depression, the welfare state emerged as the confluence of social, political and economic liberalism in democratic republics with mixed economies that were neither purely capitalist nor purely socialist.
With the rise of neoliberal socio-economic theory as the dominant Anglo-American political philosophy under Thatcher and Reagan, the shift away from a welfare state mixed economy toward a market state with a capitalist economy began in earnest and then affected other countries as well, owing to the economic power of the US and GB combined. When the Berlin Wall fell, Germany was reunited and the USSR dissolved, the way to jettison the welfare state seemed open and the push is on to globalize under a capitalist system. Trade unions, "socialized medicine," the social safety net, had to go, government had to butt out, and publicly owned assets needed to be privatized. We are now in the midst of this thrust.
(Continued)
(continuation)
Classical economics was based on the transition from feudalism to capitalism and the agricultural to the industrial age. One of the chief concerns was eliminating economic rent. Economic rent derives from power, and power from privilege, and privilege from government that promotes cronyism, or as Marx would say, a class structure. In order to move beyond the residual of feudalism, economic rents had to be be reduced if not eliminated. So the base case of classical economic was this transition between systems, giving more attention to industry and commerce than land and agriculture. Classical economics ends with Marx in the late 19th c.
Classical economics was replaced by the emergence of neoclassical economics, characterized by marginalism and formalism. Economic rent is no longer regarded as important. Government is regarded as anti-market. The base case of neoclassical economics is the market society. It is the basis of economic liberalism as the political theory of the market state. This emerged as neoliberalism.
Keynesianism is the reaction to neoclassical economics and the market society, reasserting the institutional and economic importance of state institutions, and therefore government policy. Keynesianism is economics of the welfare society as a mixed economy, with aspects of capitalism and socialism underlying a socio-economic theory opposed to economic liberalism and a political theory opposed to neoliberalism as a theory of the market state.
Most people's views are "Keynesian" in the sense that they favor a mixed economy rather than an exclusively or predominantly capitalist economy. Most people are workers and they favor a social safety net, for example. Many people are much more socialistically inclined than they may realize, and when they profess to be for "capitalism," they means something quite different from economic liberalism ruled inexorably by "the law of the market" and "just deserts" regardless of social outcome.
As we enter the global age and the world economy with different cultures, socio-economic and political systems forging a new pluralism, it is important to note research suggesting that Americans are much more individualistic than others. Attempting to generalize from the American experience is therefore inviting erroneously conclusions about underlying assumptions having to do with ideology, e.g., one's conception of "human nature."
Presuming that since humans "naturally" act "rationally" in pursuing individual preferences is one thing. Presuming that these preferences are similar or even compatible is another. Humans are not all "rational" in the same way.
And before credit cards, the vast majority of people had a lower standard of living than most do now, or at least until the crisis hit. I lived through this and it was a very different scene back then.
So did I, some of it, and I strongly disagree with some of the picture you paint. Sure, there was a bit of progress in the "Great Moderation" = "Great Stagnation" but it is vastly oversold. Especially for the bottom 50%, there was no progress or things have become worse in absolute terms, not just relative ones.
The last few decades, the neoliberal era, in the USA were the worst for broad material progress since before the American Revolution. Worse than any such long period including the Great Depression. "The vast majority of people had a lower standard of living than most do now" is flagrantly wrong.
For instance, during the postwar era, there was no homelessness. At the end of Carter and then with Reagan, the difference was like turning on a light switch. A lot of people are too young to know this, or have poor memories.
Well, maybe we are talking about different parts of the country, but where I am familiar with conditions, looser credit made a huge difference in purchasing power and people made use of it, stepping up a notch or two in level of housing, owning multiple vehicles, eating out more often at restaurants and better quality eateries to boot, dressing more opulently. etc, which credit made possible. Not that they were necessarily profligate with it. It just gave them more ability to manage cashflow instead of saving up for everything. That really changes the mindset and puts one in a different category economically/
There was also declining class stratificaton, in the sense that the notion that "people of our class don't" ... drive that make of car, wear such and such, etc. People actually used to think like that. Society was more stratified. Poor people (read Blacks) could not even buy expensive cars, even if they could afford them and if they drove them they would be pulled over by the cops and questioned. Most of the poverty I saw was ghetto poverty that was pretty much structural and I don't mean only economic. It was social, and to a great extent it still is.
It is true that there was less homelessness, at least obvious homelessness like now. This would have been considered socially unacceptable then in many locales, other than Skid Row and the ghettoes. But jobs were more numerous, too, and even kids had jobs after school. Not only are jobs less numerous now, but also a lot of work that was available then isn't now. There were kids to cut your lawn, handymen to do odd jobs and the like. Thee were even shoeshine boys and people selling stuff on the street. But that is mostly a thing of the past.
The homelessness things is a bit more complex than often understood, too. Reagan pushed to close down mental hospitals not only for cost savings but also with the idea that people who were not a danger to themselves and others didn't need to be institutionalized. I am a bit of two minds on this, since I knew some such people and worked a bit with them. In their own minds, I would say that they preferred the freedom to lack of "care." They lived in shelters and received enough to live one in a minimal way and most seemed pretty happy with that arrangement. A few seemed to me to be too bad off not to be institutionalized, but I didn't ask them what they thought about it since I didn't think that I would get a cogent answer anyway.
I think a distinction should be made between a mixed economy and a socialist one.
Does mixed refer to the existence of public and private sectors? Or to the existence of a social safety net?
A Marxist would not view the public sector or social safety nets as constituting socialism. Capitalism is characterized by the private ownership of businesses, wage labour, and class relations (e.g. employer & employee). Some of these traits exist in the public sector, making them capitalistic, with the usual hierarchical management.
Socialist/communist generally refers to collectively owned businesses such as worker co-ops, where decision making is democratic. Workers and the communities they operate in are seen as the stakeholders and get to participate in decision making.
If an endeavor is not democratic, it is not socialist.
Another term used for strong government intervention and social programs is social-democracy. But Marxists would view social-democratic states as operating in a largely capitalist fashion.
I would think that most societies have a means to take care of those who are unable to support themselves. This may be formal or informal. Would ancient Sparta be an exception?
In capitalism, a large number of workers are forced by economic circumstances to rely upon wage labour in order to obtain income. A much smaller number of individuals, mainly owners, are able to obtain income through other means. The existence of unemployment necessitates the existence of a welfare state to provide a means of sustenance to all who have insufficient or no income. Provisions must also be made for those who are unable to work due to illness, age, etc.
The idea that an unregulated economy would provide sustenance for everyone is a leap of faith to say the least. Would charities no longer be necessary or would they replace the role of government social programs?
Those who went from being institutionalized to being homeless were not properly taken care of. A civilized society would fund intermediate or supervised living arrangements.
~
The availability of credit seems to have obviated the need for 'emergency savings'. If you have a source of income, that is.
Wth is democratic republicanism?
Strictly speaking socialism is public ownership of the means of production and capitalism is private ownership of the means of the production.
But in the eyes of neoliberals, any deviation from a free market society toward a mixed economy is "the road to serfdom," and Keynesianism is considered socialist.
"Wth is democratic republicanism?"
Where the electorate made of up all citizens get to choose among candidates selected by competing elites, who are committed to furthering the interests of the respective elites.
Strictly speaking socialism is public ownership of the means of production and capitalism is private ownership of the means of the production.
Strictly speaking then, feudalism and slavery is the private ownership of the means of production.
But in the eyes of neoliberals, any deviation from a free market society toward a mixed economy is "the road to serfdom," and Keynesianism is considered socialist.
Keynesianism is reformist. They wish to save capitalism. Neoliberals won't let them.
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