Financial collapse

October 19, 2011

I have some sympathy with the Occupy Wall Street people. It does seem that the financial elites are breaking the very system from which their own wealth is derived. In our futurist meetup we talked about “Lights in the Tunnel” and the idea that a consumer-driven economy will falter if you remove too many consumers through automation. Other factors also lead to the consolidation of wealth.

Here are some of my random thoughts on the topic.

  1. The repeal of Glass-Steagall by Gramm-Leach-Bliley seems to have had the effect of forcing the US Government to guarantee risky investments. The free-market sympathizer in me insists that FDIC should have been repealed right along with Glass-Steagall. Let banks do what they want, but don’t make the tax payers responsible for them. Removing risk clearly breaks markets. (God know why the Irish agreed to effectively do the same thing during their own recent housing bubble as outlined by Michael Lewis’ new book “Boomerang.” ) Then again, why not just bring back Glass-Steagall and keep the FDIC. It is sort of nice to have a stable banking system for depositors.
  2. All these protests including the entire Arab spring might just stem from high food prices. Note to dictators, just keep the masses well-fed and you can screw them any other way you see fit. Just build a strategic pork reserve like China. Of course controlling masses isn’t the only reason to care that people can eat. Maybe we should look into re-introducing some reasonable controls on commodity speculation that were removed by the CFTC in 2005. (I should become a policy wonk!)
  3. While we are at it, let’s introduce a Tobin tax to slow down those high-frequency-traders that are so objectionable.

Sedlacek has an excellent point about growth capitalism http://www.dailymotion.com/video/xlrqfp_tomas-sedlacek-growth-capitalism_news

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8 Responses to “Financial collapse”

  1. sjackisch said

    If the elites are actually determined to destroy the current economic system, then what are the alternatives? The current consumer-driven model isn’t really scalable anyway. Short term: US consumers are already crushed by debt. Long term: We only have so much earth to consume.

  2. I’m reading “Diary of a Very Bad Year”- worth checking out on this topic. I’ve been down by “Liberty Park” (ground zero for OWS, and, coincidentally, across the street from Ground Zero) three days this week. It’s hard to see this protest in quite the same light as the Arab Spring (see the interesting documentary “Tahrir” when it comes out to compare) but the tools enabling this kind of activism are similar. How being connected in various ways will affect us as social tech goes global is pretty interesting. That’s not a comment on the markets, but in the future it might be.

  3. I think the issue that you don’t address in your original post is the concept of ‘too big to fail’. To me this implies that the banks were able to create a web of interconnected transactions such that if they were allowed to fail, the whole system might collapse.

    The failure of a significant percentage of banks would be painful, but a collapse of the whole system would lead to death, hunger and disease. Bush letting Lehman Brothers collapse looks like him trying to call their bluff. Unfortunately they weren’t bluffing.

    Effectively they were able to hold the government to ransom, since it would be the government that would take the blame for the failure.

    As far as I can see, the only way to prevent from bankers from taking over society in this way is strong regulation.

    People blaming and punishing the government is the very best way to empower the banks to continue to advance their own interests at the expense of society.

    From this perspective, OWS, or at least focussing attention on the banks and thus creating political will that the government can exploit, is at least looking in the right direction.

    If one maintains a cynical view of government as being filled with self-serving opportunists, then it’s reasonable to predict that they’ll be happy to switch allegiances if the population demands it.

    I don’t really understand your follow up comment.

    • sjackisch said

      Thanks for the comments. In regard to my follow-up comment. Industries (whose leaders I refer to as “Elites”) already have relatively free reign to dictate their own regulations. This will probably just increase since the recent Supreme Court ruling that corporations can donate freely to political campaigns. These “Elites” seem to be optimizing regulations to maximize short-term gains for themselves (narrow-minded, short-sighted) without regard to the effects on the economic system as a whole. Thus it appears that the “Elites” are destroying the consumer-driven economic system currently in place. If there is no way to stop this process, the economy will transform into something else. This might mean the end of consumerism. But without consumerism, what do we end up with? Does that make sense?

      • It does in a broad sense. It seems to me that these elites don’t actually live in hidden fortresses, but are actually among us in Pacific Heights, Mill Valley, etc.

        I don’t think there is a particular conspiracy to make a bad world – just a lack of vision and nobody with a control point to fix things. To me that suggests that it could self-limit at some point when the deterioration starts to affect enough of the rich.

      • sjackisch said

        …or the US could just end up looking like the Global South as a “failed state.”

  4. Bill said

    Hi Scott,

    You suggested “why not just bring back Glass-Steagall”. In a sense Glass-Steagall has been brought back. It’s reincarnation is called “The Volker Rule”. Endorsed by the Prez months ago, it was just pased, right?

    What are the differences of the Volker Rule with Glass-Steagall. What are the plusses and minus of Volker Rule? What additional laws are needed? Do we need to repeal the Volker Rule?

    I remember feeling quite uneasy when Glass-Steagall was revoked. My uneasiness was unwarranted because it was followed by more boom times. But today, the uneasiness seems warranted. All in all, as lesson in identifying prescient vs not-prescient media sources, it would be interesting to review the discussion in the media when it was repealed. If anyone can obtain the text of these sources, I would be keenly interested.

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