HOW WALL STREET’S RENT-SEEKING VAMPIRE SQUID SUCKS ALL LIFE OUT OF THE ECONOMY
In economics there is the notion of economic rent—payment in excess of what is required to mobilize factors of production. For example, such rents accrue to those who have “cornered the market”—by artificially restricting supply of some resource, they are able to dictate usurious terms to buyers. We call them “rentiers”.
Here’s the point that is critical to understand: the rentier performs no useful function, and the economic rent can be eliminated without reducing the supply of the resources needed for production. This is why J.M. Keynes advocating “euthanizing” the rentier. As you know, “euthanasia” means “mercy killing”—you kill to reduce pain and suffering. Keynes was serious about this—his recommendation came in the final chapter of his great General Theory, as one of his two fundamental policy proposals. (For completeness, the other was a “somewhat comprehensive socialisation of investment”.
Advocacy of “mercy killing” does raise the question: in whose interest do we kill the rentiers? Obviously, it is not in the interest of the rentier class—they are perfectly happy to suck unnecessary economic rents that strangle the economy. Think of the idle class of feudal lords, whose sole purpose of existence was to consume what they did not earn. Nay, we euthanize them to release the entrepreneurial spirit of capitalism. As Adam Smith explained, the interests of the feudal lords were opposed to the interests of all other classes in society.
Today’s equivalent is Wall Street. It serves no interest other than its own. It adds economic rent to all economic activity in our society, sucking the lifeblood out of the economy. Wall Street is our rentier class. If you want to visualize today’s rentier, there is no better example than a Bob Rubin, a Hank Paulson, or a Jamie Dimon, each “wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money” (as Matt Taibbi put it).
As Wall Street’s grip tightened over the past four decades, economic growth stuttered. We first got the Great Stagflation, and then the serially bubblicious economy that inflated debt at the expense of jobs and incomes. The Vampire Squid financialized everything and buried all economic activity under mountains of debt: Developing nation debt; Junk Bond King Michael Milken and LBOs; Charles Keating and his Quintet of Crooked Senators (Hello, John McCain! Read the details of Keating’s attempt to put a contract on my colleague, Bill Black). And then it all really got fun with the Greenspan/Bernanke Duo’s stoking of Wall Street’s biggest bubble of all time—the US era of The Great Moderation that layered Americans under mortgage debt, home equity loans, credit card debt, student loan debt, health care debt, and car loans.
I’ve already written a lot about Wall Street’s financialization of everything—way beyond housing, to auto ownership, college education, “peasant insurance” (your employer takes out a bet that you’ll die earlier than your life insurance company thinks), and “death settlements” (anyone can place that same bet). Back in 2008 I wrote about how Wall Street had financialized commodities, creating the biggest commodities price boom in human history .
Beginning with the “reforms” of 1999 that unleashed financial markets—and especially US Pension Funds—Wall Street began funneling “Managed Money” to commodities markets. At first they were buying the real, physical, commodities and hiding them away in storage—much like the Hunt Brothers had done back in the 1980s trying to increase economic rents through the Big Squeeze on silver. The problem was that this drove up storage prices—all the storage facilities were full.
So Wall Street moved into futures markets—buying paper claims to commodities physicals that they had no plan to ever exercise. Essentially these were one-way bets that commodities prices would only go up. And indeed they did. Not surprising when you figure that total money under Wall Street’s management was orders of magnitude greater than the sum total of the global supply of most commodities (to be clear, some commodities markets are huge—soy, petrol, wheat, corn—but the dollar values of the rest are relatively small; remember that two relatively dim-witted offspring were able to corner the entire silver market at least for a while).
And so, as I argued in 2008, Wall Street managed to boost commodities prices by several standard deviations above the mean (these are those black swan sort of numbers—once in 10,000 years) to create the biggest and widest commodities bubble of all time.
And then a funny thing happened. Rep Stupak and Senator Lieberman started an investigation (helped by Mike Masters; I was also approached to look into the bubble—which led to my 2008 piece). US Pension Funds freaked out, realizing that if their members found out that the main driving force behind the explosion of gasoline prices was Pension Fund speculation in commodities futures there would be hell to pay. They pulled out one-third of their funds and oil prices fell from $150 to $50 a barrel practically overnight.
With the investigation undercut, managed money started to flow back into commodities and the speculative bubble was rebooted. Even Goldman estimated in 2011 that speculation accounts for a third of the price of a barrel of oil. (See the FT piece cited below.)
Never content with its piece of the pie, Wall Street got into the storage business. In a terrific (and all too rare) piece of reporting, the NYTimes has exposed the scam created by Goldman Sachs to corner the aluminum market. You’ve got to read this for yourself, but I’ll summarize the main point. Goldman bought Metro, a storage company in Detroit that handles a quarter of the market’s supply of aluminum. Before the Squid took control, Metro had 50,000 tons of aluminum in storage; under Goldman’s management that has increased to 1.5 million tons.
Based on that growth you might think the aluminum business is booming, right? Well, no. Producers who need aluminum cannot get it—it is all bottled up in Goldman’s warehouses. The typical wait to get an order filled by Goldman’s facilities has grown from six weeks to 16 months.
And here’s the kicker. Goldman doesn’t own an ounce of the aluminum—it merely stores it for the owners. When the owners demand their own aluminum, Goldman claims it cannot be found. This is like depositing your family jewels at the local bank, but when you go to retrieve them, the bank claims it has misplaced your safety deposit box. And so you wait for 16 months.
But it gets better than that, of course. The Squid charges the aluminum owners for the entire 16 months it takes to locate the metal bars—which are actually pretty hard to misplace since each weighs 1500 pounds and they are all stacked in nice neat rows.
Industry rules require that storage facilities must move a minimum amount of metal out of warehouse inventories—the idea is to stop speculators from simply hoarding them to drive prices up. So Goldman has its forklift drivers continually move the metal from one warehouse to another like very heavy but shiny hot potatoes. Ninety percent or more of the metal leaving a warehouse is destined for another of Goldman’s warehouses—not for the producers desperate to actually use aluminum for some productive purpose.
Goldman’s forklift drivers assured the NYTimes reporters that they could (of course) locate anyone’s metal “in a couple of hours, at most”. The 16 month delay is designed to increase Goldman’s economic rents—with the cost of storage added-on to the cost of aluminum destined for production. Thus, Goldman’s extra profits come at the expense of everyone else, which is the very definition of the rentier that Keynes wanted to euthanize.
Note that if you looked at Goldman’s warehousing “services” you’d conclude they are a miserable failure since they’ve increased wait times twenty-fold and greatly increased the cost. We normally think of “finance” as “greasing the mighty wheels of commerce”, but in Goldman’s case it captured the warehousing business to purposely gum up the works.
A Goldman spokesmodel disingenuously argued that Goldman’s warehouses neither own nor trade in the metals, as if to imply that it has no interest in, nor ability to corner the aluminum market. But, of course, that is the beauty of this particular scam. Unlike the Hunt Brothers, who got wiped out when they couldn’t meet margin calls when they tried to corner the silver market, Goldman corners the aluminum market without risking a dime of its own.
As always, though, Goldman screws you six ways to Sunday. Not only does Goldman get to collect all the rents generated by bottling up the aluminum in storage, it also gets even more rents from the inevitable rise of prices that result from its storage practices. That is because Goldman also runs one of the big commodity futures indexes, managing Pension Fund money that helped to drive the speculative bubble in commodities in the first place.
In the latest scam, Goldman has planned to team up with fellow Squids JP Morgan and Blackrock to corner the copper market. The SEC has decided to allow these three “banks” (I use the term loosely) to control 80% of the supply of copper.
You see, Wall Street does not do banking any more. There’s not enough economic rent in that. So over the past three decades they have pushed the nation’s regulators, like the SEC and the Fed, to allow them to stick their tentacles into every nook and cranny of our nation’s economy, creating and funneling economic rents that strangle the economic system. In case after case, the regulators take an exceedingly narrow view of their responsibility as they allow “financial” institutions to take control of our energy supply, our food supply, our water supply. This passage from the NYTimes article is particularly instructive:
According to public documents in an application filed by JPMorgan Chase, the Fed said such arrangements would be approved only if they posed no risk to the banking system and could “reasonably be expected to produce benefits to the public, such as greater convenience, increased competition, or gains in efficiency, that outweigh possible adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interests, or unsound banking practices.”
By controlling warehouses, pipelines and ports, banks gain valuable market intelligence, investment analysts say. That, in turn, can give them an edge when trading commodities. In the stock market, such an arrangement might be seen as a conflict of interest — or even insider trading. But in the commodities market, it is perfectly legal.
“Information is worth money in the trading world and in commodities, the only way you get it is by being in the physical market,” said Jason Schenker, president and chief economist at Prestige Economics in Austin, Tex. “So financial institutions that engage in commodities trading have a huge advantage because their ownership of physical assets gives them insight in physical flows of commodities.”
So the regulators will approve extension of the Squid’s tentacles so long as it does not increase risk to the Squid. Indeed, the regulators look to the advantages created for the Squid as it pokes its blood funnel into the real productive part of the economy—to suck information it can use to manipulate markets to its own advantage.
Which, of course, is exactly what Wall Street does, as it rigs all markets. From energy to LIBOR to Muni bond markets to credit default swap pricing and to currency exchanges. Every day, another scandal and arranged settlement hits the paper. Here’s the latest on President Obama’s “favorite banker”, Jamie Dimon and JP Morgan’s rigging of energy markets . Or here’s one on the rigging of CDS markets. And here’s the classic Matt Taibbi piece, arguing Wall Street has rigged everything.
The FT also ran a good piece yesterday on Wall Street’s meddling in metals and other commodities. Barclay was fined $470 million for manipulating California’s energy market; JP Morgan is next in line for a big fine. Morgan has moved heavily into oil physicals, importing 31 Million barrels in the first quarter of 2013. Goldman and Morgan Stanley are in a class of their own with respect to outright ownership of power plants and oil tanks because they were allowed to buy these as investment banks, and got their special status grandfathered when they were handed bank charters to give them continued access to cheap funding via FDIC coverage.
However, Citigroup also got special privileges back in 2003 (Gee, I wonder if Bob Rubin greased that wheel?) when the Fed allowed the “bank” to buy physical commodities like oil, gas, and grains on the argument that these are “complementary” to their derivatives trading. Yes, indeed. In fact, since they’ve now placed derivative bets on everything, all markets are now “complementary” to their book.
The silliest justification for all this madness is that allowing “financial” institutions to get into the “real” sector, they gain access to “information” on markets. The argument goes like this: if I’m going to provide finance to fracking frackers, it is good for me to actually be in the fracking business because that way I get real world information about the fracking market.
By that logic, of course, there is no business that is not the business of Wall Street. Heck, if you are going to actually be the financier to drug runners, tax cheats, money launderers and terrorists, you ought to be allowed to directly get into drug running, tax cheating, money laundering, and terrorism!
Why separate the mobster’s banking from the mobster’s criminal enterprise? Combine them and let the synergies bloom.
Further, and this is the real point, you can greatly increase the economic rents if you allow a handful of Banksters to run every aspect of the economy to their own benefit. They’ll rig all the markets and reap all the rewards. Everything is rigged, as Taibbi argued. And we are screwed, as I’ve said.
The nation’s top financial cops will not stop this. The threat of Congressional investigations is not sufficient. As Keynes understood, there is only one way to stop Vampire Squid rentiers: Euthanize them by driving a stake through the heart of Wall Street.
34 Responses to “HOW WALL STREET’S RENT-SEEKING VAMPIRE SQUID SUCKS ALL LIFE OUT OF THE ECONOMY”
Spot aluminum is down 40% in the past two years. This is how GS controls the market? What am I missing?
Excellent piece, Randy, and maybe I can add a few thoughts
You're right that it's 'passive' pension fund money which has driven the correlated financialisation of commodity bubbles.
But this is in fact the complete antithesis of the active speculative money which aims to make a transaction profit from buying and selling, not necessarily in that order. These risk averse 'muppets' have been sold on the concept of 'inflation hedging' by investment banks, and their motivation for holding these quasi equity 'long only' positions is not to make a profit, but rather to avoid a loss.
If you check out the 'spike' to $147/bbl in 2008 you'll see from the COT reports that it was due to neither active nor passive investors, but rather to a market coup by the usual trading suspects, who still had a balance sheet to play with,and used it to screw a trader who was caught short of the market.
Since the death of the financial system in October 2008 zombie banks have no longer been capitalised to take anything more than short term proprietary positions (even if the regulators permitted)..
This meant that they were only too happy to offer inflation hedging to the herds of investors who observed ZIRP, and the FED printing $gazillions and decided to get into anything but the dollar, income-bearing or not.
So we saw inflation hedgers merrily creating correlated commodity bubbles and the very inflation they aimed to avoid. You couldn't make it up, but the banks could, and they did.
In my home ground of the oil market we saw the Saudis (who were desperate having seen oil fall to $35/bbl) extend their geopolitical bargain with the US after the new (Wall Street) President was elected.
The achieved this through using prepay contracts on a massive scale to lend crude – via JP Morgan – to the legions of muppets in passive funds who lent them dollars interest-free in return.
The outcome – using the prepay contracts reintroduced by Enron ten years earlier – was to re-inflate the crude oil bubble, and since then we have seen oil prices pegged, through being supported at levels satisfactory to the Saudis, and capped at levels which did not endanger Obama's re-election.
Ask yourself cui bono from high oil prices? It's the producers, stupid.
The truth of it is that for the last 8 years or so, firstly through a private sector manipulation from 2005 to 2008 (concluding with a spike), and since 2009 in a state sponsored episode, we have seen perhaps the greatest market manipulation in the history of commodity markets, which makes Hamanaka's 10 year copper market peccadillo look like a village tea party.
This has led to a transfer of wealth from energy consumers to producers on a cosmic scale. It's not been all bad – particularly for the planet – but this episode is now coming to an end as prices revert to reality because inflation hedgers have given up waiting, and headed off in search of yield to stocks and buy-to-let property.
It is my case that the distorted WTI/Brent differential on the one hand, and the divergence between oil and gas prices on the other, are prima facie evidence of this financialisation of crude oil, and now that the Brent/WTI differential is pretty much back to normal, I think that the oil price might also once again converge with the natural gas price at 'buyer's market' levels in a world awash with oil.
Re: Euthanize them by driving a stake through the heart of Wall Street.
Uh huh. And just how do you propose that we do that?
Euthanize them? That will never happen because (a) the rentiers' actions do not cause a measurable damage at the micro level and to anyone in particular but are rather an intangible burden to most parts of society; and (b) all those who could prove wrong-doing are either in on the trade or lack the financial muscle, clout and willpower to pursue this.
How do you euthanize something when the target owns the chemicals and the delivery system and the people who are supposed to do the euthanizing?
Ah, yes, the "free market" at work. We musn't mess with it.
Great piece Randall 🙂
Seems to me the Euro system is another Rentiers' scam, by design.
The solution is simple. If you do not actually produce it or refine it you are not allowed in the market. The commodities market exists for producers and refiners to discover price. Participation by anyone else is speculative and a market distortion. End of story.
Rig me three times, shame on me.
I've been following Matt Taibbi's work for a while now. It's by following him that I discovered Yves Smith, and (more recently) through her that I discovered MMT (and you). This is seriously scary stuff that our new aristocracy is doing.
I have a relatively naive (and slightly tangential) question: how does "economic rent", "rent-seeking", and "rentier" compare with the non-economist's understanding of rent?
You wrote that the "rentier performs no useful function, and the economic rent can be eliminated without reducing the supply of the resources needed for production" but most people can think of "useful functions" of renting vs buying, and assume that the things they want to rent are cheaper for it. Most people only have a direct understanding of "rent" as it pertains to renting or leasing expensive property (real estate, rental cars, heavy machinery) or rarely used goods (carpet steam cleaners, all of those big power tools you might need twice a decade that you can rent from Home Depot). For an individual or corporation, it sometimes makes sense to borrow or save for capital purchases and sometimes is better to rent. It's almost always better to rent the rarely used equipment. Although there might be other more equitable or efficient ways of achieving the same end, one might say that the lender is providing the services of simplified financing (where the lender assumes most of the risk) or spreading out the cost over many users.
I'm guessing the answer has something to do with "by artificially restricting supply of some resource, they are able to dictate usurious terms to buyers". In a highly competitive environment, the rent on an apartment couldn't easily be set dramatically higher than what someone else half a mile away is charging for a similar apartment or the monthly mortgage payments, and the same dynamic would work for cars or steam cleaners.
Is it only when the supply is restricted by someone cornering the market that they shift from (maybe entirely bad) lenders into a vampire squid rentier? Or are all lenders doing no more than rent-seeking?
For those of the Financial Oligarchy who are already caterwauling at the prospect of a rentier's rebellion, I suggest they look up, read and understand, the Michael W Masters report to congress on how Wall Street inserts itself as an unwanted, unneeded and zero value-added "middle man" between the actual producers of critical commodities and their customers.
In wartime what they do is, correctly, called profiteering and is considered treason.
"Goldman estimated in 2011 that speculation accounts for a third of the price of a barrel of oil". This is not what Goldman said. They said that *at that moment* speculators had driven the price of oil to unsustainable levels and it was due to drop. Can you give me an economist's explanation of how it's possible for speculators to drive the price of a commodity that they haven't cornered to a price persistently 1/3 higher than the "natural" price (if such a thing exists)? I'm curious.
I'm not arguing against the view that the rents extracted by the financial industry are excessive. I do wonder whether they're just rents that have been there all along, only better hidden at the producers or another intermediary. And if you're going to argue against commodity speculation (which a pension fund might characterize as diversification into inflation-resistant assets), you need to explain what should replace it as a means to provide risk reduction to producers and consumers.
It's easy to see the difference. Just ask yourself what (if any) value-added is provided by Wall Street's use of FED-provided free/easy money to hoard critical commodities — and what would happen if Wall Streets "profiteering" were simply to go away — and prices be set between producers and consumers — rather than with the participation of unneeded, unwanted and unnecessary self-appointed "middle men" roles that CFMA enabled Wall Street's vultures to occupy
To CJ and some others on commodity pricing. I agree that prices (ALL prices of output) are “set” or “manipluated” or “administered” or “rigged. I’m not a “demand and supply” economist–that is pure nonsense. Saudis are the marginal oil suppliers and operate to ensure that prices do not fall “too low” (approx $80 a barrel or you kill the high cost producers) nor “too high” (which spurs conservation and substitution to oil alternatives) which is probably below $140 (and probably much below now given all the fracking frackers). Speculators however have free range in between. And yes, Pension funds are special kinds of speculators, only making one-way bets (prices will rise) by allocating say 5% of portfolio to index funds. I wrote about all of that in my 2008 piece. Read it for details. It follows the brilliant work of Mike Masters, who called it perfectly (to my mind).
To Kevin and other unnecessarily defeatist defeatists: Easy enough. Criminal indictments against the top 4 banks and the top 3 management at each of them. Markets will do the rest, shutting down Wall Street and driving a stake through the hearts of the Vampire Squids.
Time to start taxing wealth rather than (or in addition to) income.
Sorry, that doesn't work. Since most producer-consumer transactions in commodities like Al and oil happen outside the exchanges and don't involve Wall St., they're not significant middlemen. In any case, they can only be a middleman when other counterparties *choose* to trade with them in the middle. They aren't "self appointed". Coke and Anheuser Busch can go directly to Alcoa.
Moreover, they're very far from cornering the market (GS's warehouse held something like 2% of annual production). And since the price of Al and copper have fallen over the last year, this "hoarding" doesn't seem to have worked out too well for the banksters, if that's what they were doing. But in any case it's not. GS doesn't own the Al they've been storing.
As for whether commodity speculation adds value, that's apparently been a long-running debate, but there's a fair amount of evidence that it reduces price volatility (and therefore risk to both producers and consumers). Some research is here: http://www.isda.org/speeches/pdf/Onion-futures-Annex.pdf
Boondoggle (appropriate handle): Read the article. Yes there are some big users who avoid Goldman’s warehouses, but prices rise for ALL USERS as the article makes clear. Nice try, No cigar.
Prof. Wray: lovely piece.
I think you are a little unfair to the feudal elites — they provided a measure of protection to their peasants against foreign attacks, economic and political stability. They built big ole castles and forced peasants to develop some of the world's most successful crop rotation technique; they constrained the power of the church, to an extent, and defended local economic interests (think Reformation). They built windmills. Hell, even estancias produced real goods. Awful luck, no doubt, if one was, say, an Albigensian, or a Jew, or a highlander driven off the land, or, of course, a slave. But the feudal elite contributed a darn site more to the economy than Wall Street, or the City, or even little old Bay street.
What a great article. Just fabulous.
Check out Michael Hudson's descriptions of rentier to answer your "relatively naive (and slightly tangential) question." He also has some great interviews on the real news network explaining it as well.
His website is michael-hudson with a hyphen.
That's a good point.. wonder how no one followed up on that for the NYTimes piece. The price did shoot up considerably in 2010-11 after Goldman bought the business but then dropped off completely from there. They don't give any data in the piece really other than a reference to a rise in "premiums".
Re: Easy enough. Criminal indictments against the top 4 banks and the top 3 management at each of them
I'm not a "defeatist." I am not aware of a solution. There is a difference. I hate stupid moral hammerlocks.
Look, Bill Black has made the point ad nauseum that in his day there were many arrests and indictments of banksters. Today, a far, far worse scenario, and not one. So it isn't "easy" except in cloud cuckoo land, or as a pure abstraction. Who, precisely, has the power and the motive to secure those criminal indictments at all, let alone "easily?" Of course the way to stop criminals is to imprison them. Getting them there is not easy. It is very difficult. To note this simple fact is not "defeatism," it is intelligent and realistic.
Ten years ago I told friends that the Americans had had their government hijacked. No one believed me. Most Americans still don't get it. It's a nation in denial.
The Liberal Elite has Betrayed the People They Claim to Defend
Chris Hedges interviewed in a several part series at Real News Network
Jerry et al: Ever hear of the GFC? Yes Goldman managed to push prices up for a while, but the deepest recession since the Great Depression depressed demand. However, in spite of falling demand (heck, beer sales FELL in latest numbers!) and record inventories, Goldman’s manipulation of markets managed to keep prices of commodities (mostly) up. You are doing the wrong comparison, of course, to see what Goldman’s shenanigans have cost the economy. You need to compare prices to where they would have gone without Vampire manipulation–not where they were.
Interesting article. However, it misses the really interesting question which is: How did Wall Street ever become a rent seeking industry? The answer in my view is state intervention, especially in the sphere of the monetary and banking system. Financial market institutions are just companies and not "blood sucking vampires" as Prof Wray suggests. They can only extract excess profits if the state provides suitable conditions.
The point is that pension funds etc are not in fact 'betting' on a rising price by taking a risk in expectation of a transaction profit. They do not expect a profit: they fear a loss and they act in a diametrically opposite way to speculators
ie passive investor motivation is not greed, but fear.
They are therefore 'hedging inflation' by offloading the risk of a fall in the dollar relative to (say) the oil price. As the smart boys at Goldman Sachs realised as long ago as 1995 when they set up the GSCI fund, their profile is precisely the opposite profile to the oil producers who use forward sales/futures to hedge by offloading the risk of holding oil in favour of the risk of holding dollars.
That is why the use of the word 'speculation' for inherently risk averse passive investment is misleading.
It is also the reason why the dominant presence of Index funds and Exchange Traded Funds in any market literally kills the price formation in that market – as Mike Masters pointed out,without necessarily rationalising it the way I do – because the motivation of loss avoidance conflicts with the purpose of a market based upon the making of transaction profit.
CJ: if you will actually look at my 2008 paper you will see that I follow Mike Masters in terminology: There are three main types of participants in commodity futures markets:
hedgers, traditional speculators, and index speculators. Table 1 offers
a useful classification of each by function. The allocation of a portion of
the portfolio to commodity futures in order to diversify risks is undertaken
by the index speculator. These are typically hedge funds, pension funds,
university endowments, life insurance companies, sovereign wealth funds,
and banks.Most importantly, index speculators only take long positions—
it is a buy-and-hold strategy.
Surely you jest. The feudal elites were parasites and they regarded the masses under their swords as their rightful property. The "protection" they provided had nothing at all to do with the welfare of their captive populations but everything to do with preventing a loss of control over them to foreign parasites. The value above subsistence produced by the labor power of captive peasants was appropriated in its entirely by the feudal lords.
Cold: Agreed. The “protection” they provides was similar to that provided by the Mafia. Sure they’d protect you from rival gangs but the rent you paid to them was to prevent them from burning your hut and killing your children.
How did Wall Street become a rent seeking industry? It has been rent seeking (to excess 🙂 only within the past 15 – 20 years. For most of the 20th century, certainly after 1934, there has not been "vertical integration" of financial services. Some separation was structural, due to limits of technology, logistics and distance. Some was imposed by "the state" in the form of Glass-Steagall and other laws.
At first, that appears contrary to your conjecture, Tejas552. It isn't though. A framework of regulation was imposed in 1933 and 1934, by the SEC with insurance from the FDIC. Let's not even involve the Federal Reserve, as it had a narrow and specific role, unlike now.
The U.S.A. experienced a secular bull market (with a few hiccups in the 1980's) for over 60 years. Yes, there was oversight from the state, but it was sane, unlike Dodd-Frank. The latter is so complex, with so many exemptions granted for special cases… well, I don't see how it can be implemented.
….to be continued
I hope Wray will do some reporting on Keynes' second recommendation dealing with a "somewhat comprehensive socialization of investment."
Another paper dealing with this problem is "How Big Is Too Big? On the social efficiency of the financial sector in the United States", by G. Epstein and James Crotty, UMass/Amherst, PERI.org.
Credit Suisse Bank's report World Wealth Report. which is based on reliable academic research, states that 44% of the world's wealth is in the hands of 1% of the world's adults, and 84% in the hands of 10% of the adults. You may think this is an efficient allocation of capital, after all someone has to be responsible for the surplus of humanity's labor. The sole problem is that consumers with cash are needed to prod production, but the competition for profit requires the continuous reduction in wage income. Humanity is struggling to get around this dilemma.
The 1% definitely do not have the consumer base to motivate the productive allocation of their abundant capital resources. But what should they care, their job is accumulation not philanthropy.
So now the world has more unused surplus than it knows what to do with itself, and voila "derivatives". We invent an elaborate way to put those resources to work, for everyone's benefit.
I write a blog, and I wrote an essay Finance the Destroyer in which I report the
growth of financial corporate debt between 1998 to 2008.
— http://benl8.blogspot.com/2012/05/finance-is-dest… —
"Between 1980 and 2008, 28 years, the economy's output per human, GDP per capita, grew by 67%.
The inflation adjusted GDP had increased by 2.26 times, from $5.8 trillion to $13.2 trillion.
Total domestic debt increased by 4.34 times — about double the rate of growth, signaling a train wreck if anyone had been watching — from $11.8 trillion to $51.6 trillion.
So debt increased at double the rate of economic growth.
Financial Corporate debt grew from 20.7% to 120.0% of GDP — by a factor of 5.8.
Household debt grew from 50.2% to 96.6% of GDP — by a factor of 1.9
Non-financial business debt grew from 52.9% to 80.0% of GDP — by a factor of 1.5.
Government (federal and state) debt grew from 38.7% to 64.7% of GDP — by a factor of 1.7.
(I chose to use 2008 as the end year because financial corporate debt peaked in that year.)
I used BEA figures for GDP and Flow of Funds figures for debt components."
I repeat, what was Keynes talking about with "socialization of investment"?
ben: short answer: not completely clear what Keynes meant. Certainly he wanted a higher ratio of public investment to private investment. And he wanted control over the return to scarcity to reduce the reqd rate of return on private investment. Best to read is Skidelsky