From Forbes: “The top six bank holding companies earned an aggregate of $51 billion in pretax income in 2009. We’re talking about JPMorgan Chase, Goldman Sachs, Bank of America, Morgan Stanley, Citigroup and Wells Fargo. All of this pretax income can be attributed to their trading revenues of $59.7 billion. The proprietary trading operations of an oligopoly of banks, saved from disaster by Uncle Sam’s largesse and subsidized with cheap money from the central bank, was the single driving force behind the restoration of their fortunes and the renewed surge in their stock prices…..This astonishing performance underscores the casino the oligopoly has become. It bears testament to the payoff from the Wall Street bailout of 2008, which resulted in the elimination of competition and the concurrent strengthening of the few giants left standing.”
From this story by Tyler Durdan: “Of the 986 bank holding companies in the US last year, a total of 980 of them LOST MONEY.” This year 98 of those banks shuttered their doors.
This story put me in mind of the following article from John Robb which he gave us permission to republish. While most historians rate George W. Bush as the worst president in American history (and he is a worthy candidate), my vote has always gone to the ideologue Ronald Reagan. His administration was the one to decide to favor the wealthy over the rest of America in the mistaken belief that “a rising tide raises all boats,” which of course makes no sense. Reagan’s administration was the beginning of the end of the American Empire and the American economy. It was during Reagan’s administration that American’s GINI index began to climb into failed state and banana republic territory. Reagan declared war on America’s middle class and poor.
I’ve been reading John Robb’s Blog Global Guerrillas for years now and recommend it.
Wednesday, 17 September 2008
The global financial system is melting down. Our approach to decision making may have been the reason we are at this impasse today.
This gets us to the nexus of our current problem. The environment within which we make decisions is getting more complex, uncertain, and incomplete at a faster rate than the mental constructs we use to model it are being improved. To wit: ever greater amounts of novelty (for example: new technology) is being produced than ever before yet our strategies and methods are scarcely different than those we used half a century ago.
From the brief “Open Decision Making.” Read the entire thing.
The 20th Century’s central struggle was between the ideological systems that advocated governmental control of the economy and those that relied on market control. The market-based systems won. Why? In short, market-based systems made better investments, over the long term, than government managed systems. The lesson: systems with large numbers of decision makers, each with capital to invest, make better decisions.
As is often the case, the emerging victory of the market-based system created yet another problem/struggle. Specifically: is it better to trust that individuals empowered with growing salaries/wages will make the best investments for future economic success — or — is it better to grow corporate profits (at the expense of wages/salaries) and let capital markets invest the excess?
Between WW2 and 1974, while still engaged in a bitter struggle with Communism, the US hedged its bets on that question. Both individuals and the capital markets received an equal share of the benefits of productivity growth. Incomes rose mightily and we became broadly wealthy, mirrored by generous growth in the capital markets, relative to the start of the century. As a result of this shared decision-making system, smart investments in infrastructure, industry, education, and much more made America the economic powerhouse of the world. In short, we prospered.
However, the shared decision making system ended. From 1974 onwards, the rewards of productivity growth (economic expansion) went exclusively to the capital markets and not into income growth for individuals. This was likely done, although the mechanism is unclear, under the assumption that the discipline of capital markets produced better investment decisions than individuals. Regardless of the motive or the specific mechanism, where the flow of capital from American economic activity went, couldn’t be clearer:
• Median per capita incomes in the US are the same as they were in 1974 — there hasn’t been any income growth at all.
• In contrast, we have seen torrential capital accumulation / concentration and the capital markets have enjoyed a nearly 30 year run of unbridled expansion.
So, what were the results of this concentration/narrowing of decision making power in the hands of the capital markets? How did they invest thirty-four years of American productivity growth for the future?
As of this year, the final results of this American experiment in financial decision making are in. The allocation of this capacity exclusively to capital markets, rather than sharing that decision making with hundreds of millions of Americans, has produced a horrible result. Instead of investing the accumulated wealth of America in productive assets that yielded long term benefits, the money was invested in derivatives (illusory financial products) that yielded nothing of tangible value. In short, the narrow group of actors that operate within the capital markets made the decision to forgo the long and difficult process of growing investments in the tangible world in favor of the outsized returns available through investments in virtual products. That investment is now evaporating.
What it Means
Even under the most ideal conditions, it’s dubious whether the capital market’s decision making loop (the sum total of the intellectual product of all capital market participants) can even closely approximate the requirements of the rapidly evolving global environment we currently find ourselves in. In short, we are falling behind ever more every day. Given a situation where decision making is falling behind the requirements of the environmental reality, we can expect inevitable catastrophic failure at some point in the future.
Would we have been better off if the benefits of massive productivity growth over the last three decades had been shared with hundreds of millions of Americans? Of course. In fact, it is hard to see any other way, other than an open decision making process, which would be able to deal with the growing complexity of the modern world — from globalization to technological change to growing instability.
Can this be error be corrected? Probably not. Most Americans have fallen deeply into debt (mirrored by the US government) in an attempt to maintain lifestyles (or an illusion of progress). They don’t have the financial resources for any meaningful decision making power left and worse; there isn’t any recognition that a concentration of decision making was even a problem in the first place. In fact, given that most of the last 30 years of American economic investment is now vapor, it’s hard to imagine us avoiding economic catastrophe.
John Robb is an author, an entrepreneur, a former USAF pilot in special operations and author of the book Brave New War, in April 2007.
Robb proposed a new theory of warfare in his book called “open source warfare” which made the cover of Nature magazine (one of the world’s two most prestigious science magazines, the other being Science). He was named one of the “Best and Brightest” by Esquire Magazine, and invited to speak at a plethora of venues (the DoD, CIA, NSA, NIC, Highlands Forum, Center for Biosecurity, and many more).