In my International Political Economy course today we spent a good deal of time talking about the interplay between economics and politics, and how both impact modern markets. Since some of it was a bit detailed, below is a brief outline of some of the topics we discussed for my class. Those of you who are not in my class can read too ;-)
__________________________________________________________
In International Political Economy class this Monday we briefly discussed what happened when Congress created the 401k (tax deferred incentives to invest), and then encouraged, or allowed, other novel financial instruments to arrive on our economic stage. In the process Congress supercharged Wall Street's numbers, but what we really saw was the evolution and consolidation of what Peter Drucker called the "symbolic" economy, and what Kevin Phillips referred to as the beginning of the "financialization" of the American economy.
What did this mean for America? In a few words the American economy became increasingly dominated by trades in money, interest rates, futures contracts, and other "derivative" instruments. Trade in durable or manufactured goods has taken a back seat to these financial products. In fact, the American economy has been trading in these "symbolic" financial instruments to such a degree that they now represent at least 20 times (and perhaps 40 times) what we will produce and trade in the "real" economy this year (about $15 trillion).
In plain speak - and as economist Joseph Schumpeter might have put it - we are now living in a world where America's economic mandarins are playing monopoly rather than building them. This is the biggest difference between the Robber Barons of the past and our Robber Barons of today.
The Carnegies, Morgans and Rockefellers of the 19th century built steel mills, railroads, and other real industries which created real wealth. If they went bust at least they left railroads, steel mills, and other industries of substance. Not so with today's financial wizards. The Robber Barons of the 21st century are financial zombies bent on extracting rather than creating wealth. It's really that simple.
We can see the impact of America's economic transformation because of the emphasis on the financial sector, and how more and more Americans are seeing their wages squeezed (see graph below). Unfortunately, this has forced many Americans out of the middle class.
At the same time Americans are watching their incomes collapse Wall Street has been focused on safeguarding their empires of paper wealth, and finding new ways to pump up the market. This is one of the reasons we have seen a plethora of financial instruments created and traded. Not surprisingly, total volume traded on the NYSE has exploded since 1982 ...
As should be expected, with every fee-laden trade, and with every new expanded portfolio managed, Wall Street's financial mandarins have gotten increasingly wealthier. This explains, in part, the growing wealth gaps in America. But volume isn't everything. There's also this. Every time Wall Street's wizards created new ways to trade and then collapse the economy, Congress and the Federal Reserve have stepped in with an assortment of bailouts, money dumps, and favorable legislation to save their bacon.
WHAT WE'RE GOING TO DO THIS QUARTER (in part)
While many Americans don't understand the details of any of this, one thing is clear: Our economy is built around increasingly fuzzy financial instruments that take many shapes. This is part of what we'll be looking at this quarter. But we'll be doing this at a global level too.
As an example of how this works in the United States, when we look at home mortgage loans and other debt contracts (student loan, credit card debt, etc.), we find that they are no longer single documents holding all the information you need to know about a loan. Instead, debt contracts like home mortgages are sold, bundled, and resold (and resold again). Today most mortgage contracts that are bundled into securities and sold can only be understood if you can decipher this ...
While these mortgage backed collateralized debt obligations (CDOs) make money for market players, the thing to understand now is (1) how these CDOs created the environment for deregulation and shoddy lending standards, among others, and (2) how these CDOs pushed the financial industry, and our shadow banking system, to ask for more (shady) debt contracts.
These contracts lie at the heart of what brought the economy down in 2008.
The fact that we did little to fix the problems that caused the meltdown help us understand the nature of our new economy, and the broad outlines of our next market collapse. Also helping us understand our new economy is that, while all of this has been going on, the vast majority of Main Street has seen their wages decline precipitously since 1980 ...
Two key components of this new economy include the wonderful world of "derivative" markets and our extremely important "shadow banking" system (which GOP FCIC members pretended didn't exist in their 2010 report). If you can find the time, try and read the links.
These topics are among the many issues we're going to be looking at this fall. I'll have more to say about derivatives, our shadow banking system, and our symbolic economy as we move through the quarter.
- Mark
0 comments:
Post a Comment