Scientific Sense Podcast

Saturday, October 24, 2015

Real finance

Recent observations by a previous Fed chairman that it is puzzling why one would advocate a reinstatement of Glass-Steagall act because he could not see how the crisis in 2008 would have been avoided had it been in effect, is symptomatic of regulators who are good tacticians but not strategists. From Princeton to Wall street, financial institutions and their regulators still believe intermediation is “God’s work.” Academics, slaves to economics text books from last century, still believe financial intermediation is integral to markets and the economy. If the former chairman is intellectually honest, he may want to revisit the transcripts from Jackson Hole in 2005, before spewing wisdom. The one who came before him, who spewed infinite wisdom for many decades seem to have finally realized, “something was wrong.” He is still selling wisdom at $75K per pop. Meanwhile financial malls, that do everything but intermediation, with a skewed incentive to take risks for their bonuses that depend on the upside potential emanating from their actions and they are generally not accountable for the downside risk, invest into fooling both the academics and the regulators.

Although the chairman may be an expert of the depression era, what he may be missing is that the modern economy needs very little finance as we know it. Any financial activity, that does not have a direct connection to real assets and real investments, adds no value to the economy. Real assets today comprise of only two things – real estate and intellectual property. Financial intermediation in the former can now be done by the internet and it does not require “God’s men,” behind oak desks in the penthouses. And financing needed to develop and nourish IP is not something the mega banks have any clue about. They are dinosaurs with a ridiculous combination of disparate businesses with conflicting incentives that still pose a systemic risk to the entire population.

Glass-Steagall is a necessary condition to eliminate the greed of the ignorant and I am sure “God” will approve.

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