Derivative World Sucks Real World Dry.

 

THERE OUGHT TO BE A FUNCTIONAL ETHICS IN FINANCE. HERE IS WHY.

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Abstract: the leaders of the USA have diverted, through otherworldly derivatives and exaggerated compensation for themselves, so much capital in a socially and economically useless way, that the economy could only falter. Larry Summers, the plutocratic genius, has been in command of the wrecking of the ship of state for 30 years.

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"I did not run for office to be helping out a bunch of fat cat bankers on Wall Street." says Obama. So far, though, it’s exactly what has happened. If you run for office and then eat poison, of your own volition, it means you ran for office to eat poison.

Obama and his little helpers HAD to save the banks, and even the bank holding companies. As institutions. They did not have to help the individuals who created the problem, but that is what they have done so far. Actually saving those who caused the problem, some of whom belong in prison, is the one thing the administration should not have done. (Since those who promoted and encouraged torture are not under investigation, but still role models or professors of the American justice system, this goes with the territory, namely poor actors are left in place, as sacred icons).

More than G. W. Bush, and arguably, more than anybody else, it is Larry Summers who created the problem. After all, he was on the scene before Rubin. (See Annex on Summers.)

Summers was internal economic affair advisor at the WHITE HOUSE under Feldstein, chair of Reagan’s economic advisers. He was twenty something, then Harvard made him a full professor at 28 years of age. Of these things American genius is made. Ten percent short term unemployment rate, a stalled economy, a disappearing middle class, the rich so rich that they get money from the poor: this is Summers for you.

"What’s really frustrating me right now is that you’ve got these same banks who benefited from taxpayer assistance who are fighting tooth and nail with their lobbyists up on Capitol Hill, fighting against financial regulatory control" Obama added. The word "bank" has to be considered carefully here. What Obama means is actually the upper management of said banks.

The bottom line is that finance is supposed to be the link between savers and entrepreneurs. Savers save, producing capital. Then entrepreneurs are lent said capital. In the 1920s, this failed: banks invested in Wall street, then lost a lot of money, as Wall Street crashed due to overproduction, and the rise of tariffs by 50%, which collapsed international trade. The Banking Act of 1933 was passed to outlaw the practice of having banks play at the casino of Wall Street.

Why? Because there is actually a limited quantity of capital. Capital is produced, through the fractional reserve system, as a multiplier of how much banks are allowed to lend, relative to the reserves they keep. The looser the regulation, the greater the multiplier, the more capital is created, true. But still, in the end, the capital is finite.

Notice that THE VERY EXISTENCE OF THE REGULATION OF THE MULTIPLIER BY THE STATE MAKE BANKS INTO AN ARM OF THE STATE. So, basically BANKERS ARE CIVIL SERVANTS. Banks are given a fiduciary prerogative, and duty, that of creating money, a function the state used to have, for a few millennia, and nobody else had, under the penalty of death. Modern bankers investing in derivatives are basically counterfeiters. The fact is they don’t really own that money, they were entrusted in creating it, they have no right to lose it all, especially after paying themselves bonuses, and profits for a few individuals at hedge funds and the upper class attached to them exclusively.

Indeed finance became, thanks to the deregulation work of Rubin, Summers and Greenspan, under Clinton, not just as bad as in the 1920s, but much worse. In the 1920s, banks could just invest in stocks, which are ownerships in companies, something real. Financial derivatives did not exist .

The craziness of the 1920s was outlawed by the Banking Act of 1933 ("Glass-Steagall"). Rubin, Greenspan, Summers repelled the Banking Act.

It was actually the committee to sink the world. Or more exactly the committee to make the world irrelevant. The committee to derivate the world. Indeed, the difference with the 1920s is that an extra worldly concept, that of financial derivatives, had blossomed and disconnected with all economic justification, although it connected with completely fraudulent contracts, that all top bonus bankers knew very well were fraudulent.

Derivatives are bets on the evolution of the price of whatever. Derivatives, thus, can be whatever. Differently from a real casino, which is regulated, and where one knows what one is betting about, Summers (see his inspiring face higher up and lower down), was adamant that derivatives ought not to be regulated.

Why did Summers think that? Well, why does the crocodile thinks the way it does? Well, Summers does not hide rotten carcasses up the river bank; he is way more sophisticated than that, but, otherwise, just the same. Same morality: I eat you, therefore I am. A genius, plutocratic style.

Summers lives on top of the world, he owns mansions, made at least eight million dollar income in 2008, the American oligarchs think he is a genius, and the president of the USAs eats in his hand and coos. Summers would say what Obama did say:"Look where I am!" (Namely you are nothing, I am everything, the mark of someone who has decided the measure of man is the measure of power, on other men, thus forsaking all what makes the genus Homo special; hence the comparison with crocodiles above; crocs don’t a civilization make, they just eat their way through it).

Derivatives are only justified if and only if they play the role they were originally made for as they evolved around Chicago, long ago: as insurance for commercial operators. ALL AND ANY OTHER USAGE OF DERIVATIVES OUGHT TO BE OUTLAWED. Or regulated away, whatever.

As I said, capital is limited. Big banks have been investing most of the world’s capital in bets not connected to the physical world, and did so while it was not justified as insurance. Total world yearly GDP is about 50,000 billion dollars. Before the crash of 2008, the total derivatives market was about 600,000 billion dollars. Now it has been reflated, and it is about 800,000 billion dollars. Yes, about 16 times world’s GDP. In other words, the world has become hostage to something that does not exist. Any small negative fluctuation of that world that does not exist, that world of derivatives, will, and did crash completely the real economy. Moreover, if there is no negative outcome but further "profits" in the derivative world, it means that more capital will be diverted there, starving further the real world.

The situation, as it is, is grotesque: the collaborators of Roosevelt who outlawed the violation of its fiduciary duty by the banking industry in 1933, would have found the present situation not just way worse than what they outlawed, but completely demented.

For example American International Group, AIG, sold derivatives posing at insurance, without making anything resembling sufficient provisions. Nor could it have. Those private engagements were honored by poor people in the USA , because so decided the Wall Street operators at the White House.

In particular, 12.9 billion dollars went given to Goldman Sachs, in the name of the American People. Goldman then called that a profit, and used all of it for bonuses (total government gifts to Goldman Sachs were several times that). Goldman Sachs is not a poor homeowner, incapable of paying his debt, but, it, and its kind, are the future paymaster of a lot of the individuals leading the American government.

Ethics was not invented to please philosophers. Ethics did not come out of God. Ethics comes out of what is customary (its etymology says). In other words, it has got to be sustainable. WHAT WE HAVE NOW, THE ENTIRE MONEY OF THE WORLD SENT BY CORRUPT CIVIL SERVANTS (ALL WHAT BONUS BANKERS ARE) TO A DERIVATIVE WORLD IS NOT SUSTAINABLE, SO IT CAN’T EVER BECOME CUSTOMARY, SO IT IS NOT ETHICAL.

If Obama wants bankers to finance the real economy, as they are supposed to do, it’s no use begging them to do so. Instead, it’s time to become ethical.

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Patrice Ayme

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Annex 1: DERIVATIVES RUIN THE ECONOMY, SO DO EXAGGERATED TOP EXECUTIVES’ COMPENSATIONS:

The US pay czar limits the pay of executives at companies receiving a bailout. Without undercutting the ability of the firm to secure talented management.  ”It’s a delicate balance!  Very difficult indeed.”  To which Sherry Jarrell replies: "Well, Mr. Czar, difficult for you, maybe, but a piece of cake for the labor market.  That’s exactly what the labor market does, day in and day out, quite naturally.

Compensation should not be the purview of an appointed administrator serving at the pleasure of the executive branch of the U.S. Government."

But I say:

1) Self referential loops have proven a problem in logic. Should not they be a problem in the market, or is it that the market has nothing to do with logic?

The CEO class, in the USA, is self referential.

2) Europe has now more big companies than the USA. Still, big European executives are paid at least ten times less than their USA equivalents. How come the market is so different in Europe? Is the fact that more compensation in Europe goes to talent located on lower rungs of companies, related to the higher performance of European companies in the last decade? After all, the total compensation being finite, paying more for talent at the CEO level means paying less for talent just below.

An interesting aside is that CEO in the USA are much taller than average. Are size and compensation the only way they can dominate their subjects?

A few years ago, Renault was all set to buy General Motors. At the last minute, though, Renault executives learned that GM executives intended to pay themselves more than ten times what Renault-Nissan executives were paid. So Renault scuttled the deal. US taxpayers are left with the bill: more than 60 billion dollars, no? (And GM will fail within a year or two.)

It is true there are markets, and they can deal. But they are more or less free.

There are not just markets. There are also classes too, and they can dominate, with extra market mechanisms. The CEO class in the USA sits on each others’ boards, determining each others’ compensations. In some other countries, this sort of incest is more limited (in others, it’s worse: China). In Germany, union representatives sit on boards.

Generally those who really love their jobs will do them for free. Too much compensation is actually a distraction. And bad markets, thus exists. They are not just bear markets, they can lead to captive markets, and oligarchies…

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Annex 2: In crocs we trust:

Why He Falters

A plutocratic genius, Summers has long been considered by the reigning oligarchy a top U.S. economic brain. As head of the National Economic Council (NEC), Summers exerts maximum sway over U.S. economic policy as the top White House economic adviser during the worst economic crisis since the Great Depression. That was a long time coming, since Summers and company worked hard dismantling the USA as Reagan economic advisers.

The former Clinton Treasury secretary’s name topped the list for a return trip to head the Treasury department in 2009. Instead, that slot went to a Summers’ protégé: New York Fed Chairman Geithner.

Tags: Derivatives, executive compensation, Summers