On "On Regulation."

[elfs]

It's funny; I wrote a draft of my previous entry, "On regulation," yesterday. Today, Paul Krugman links to a paper from a year ago showing that the rise in both the market and personal incomes over the past eight years is so strongly weighted by the financial market and "financial barons" that the rest of us may as well have been standing still.

All that success was all an illusion. As Karl Denninger wrote,

The "shadow banking system", including ratings agencies, investment banks and hedge funds, were engaged for years in the intentional misrepresentation of credit quality. In conjunction with those who were bought and paid for to provide these grossly-inflated "ratings" (the famous "we'll rate a deal securitized by cows" quote in sworn testimony before Congress), the banks, issuers and traders of this debt gamed the ratings (and reserve) system so they would not have to hold back as much in reserves as would have been required on the actual underlying credit quality. That is, they said that there was less risk in these loans than really existed.

Why is this important?

Because by under-reserving on purpose these entities obtained a capacity to loan (and for you to borrow) that did not exist, and as a result, there was more money available to lend - lots more and at a much cheaper interest rate - than should have been the case.

In addition this deception radically accelerated the velocity of money (credit) in circulation, which in combination with the fraudulently-created credit created a classic asset inflation.

Since money and credit are fungible - that is, they both spend exactly the same (your credit card and $100 in 20 dollar bills spend the same way at the store; they both buy exactly the same amount of goods or services) this had precisely the same effect in the economy - and on you as a consumer - as the banker literally walking over to his color copier and running off $100 bills by the truckload. [emphasis in the original]

What pisses people like me off more than anything else is the knowledge that for the past five years these people have been taking cash out of the system, converting wealth into cash, destroying wealth while exploiting a system that wasn't generating much new wealth. The "new barons of finance" were fraudsters through and through, most of them still have their cash, and not one of them has done a perpwalk.

It's entirely possible than no one will, too. They'll leave the system with enough cash, enough assets, to never need to lift a finger again except perhaps to pick their own noses. Most of these financial wizards showed less moral backbone than your average McDonalds workers, and will suffer almost not at all for their sociopathy.

We're now members of the Pwnership Society. We've been pwned.

Comments

[scyllacat.livejournal.com]

This is so weird. I mean, I'm smart, but I'm pretty ignorant of economics. I just have a sort of old-fashioned distrust of manipulation of buying and selling that gets too far away from actual stuff. This is the sort of thing that has made me wary for years. But mostly, I just snorted in disgust when people tried to explain "futures investing" to me, and assumed the profit-takers were a small segment of the population. I never dreamed they could collapse the whole system. And if I HAD, I couldn't have understood well enough to back it up with facts.

Find the people who aren't seeing this with 20/20 hindsight, but actually knew the falsity and scope of it before it got to this point. Then ask their advice, or just follow THEM around and do what they do.

Pwnership indeed. It rolls into my problem with bullies and other assholes--if the people who are cheating the game are ruining the game for everyone and taking home all the marbles, what do we DO about it? Sure, we'll change the rules of the game, but can we get our marbles back? Will we ever feel like we're part of an honest game again? Will we ever trust anyone we play with?

[shunra.livejournal.com]

Check out Nomi Prins and her (amazing) book Other People's Money. She wrote it back in 2004 and it covers the whole thing.

A quote about CDOs, for example: "CDOs were the perfect homes for junk bonds issued by speculative companies, because they mixed really risky companies with the more conservative ones in one big structure, providing a kind of camouflage. Also, because investment management companies were eager to make their own fees for managing these structures, the more junk bonds the bought in CDOs, the more they could make in fees."

As to what she's doing... she turned to journalism and wrote a novel. I'm not sure if that is (all in all) the best solution for everyone.

The book, though, is a must read. It was when it came out. It is doubly so, now - not least because not all of the problems referenced in it have exploded. Yet.

[scyllacat.livejournal.com]

Thank you. *adds to Amazon wish list, while noting it's quite affordable*

[heofmanynames.livejournal.com]

Exactly. This sort of thing - entirely aside from the economic & financial repercussions - strikes at the very heart of civil society as a workable concept. If we can't find functional, upward-angling answers to the problems posed by predators in civli society soon, we may miss a once-in-a-lifetime opportunity to build better this time....

You were up very late, my baby - I hope you got enough sleep....

[heofmanynames.livejournal.com]

Don't think I commented, but I very much enjoyed your riff on regulation. Maybe I just like knowing that your take-home on things is so often so close to mine.

[elfs.livejournal.com]

Yeah, and it's a take-home message. Soon to be a take-to-your-cardboard box message.

But thanks. Just saying out loud what nobody in the press has asked yet: Where's The Perpwalks?