Sunday, August 9, 2009

(Vainly) In Search of an American Godard

Had I not mentioned Godard a few weeks back in this blog, I would have ignored the comments of A. O. Scott, the chief film critic of the New York Times, about John Hughes being “our Godard”. But I had, and there he was, writing a posthumous review about a director that he said was the “auteur of teenage angst”.
Especially for those of us born between the Gulf of Tonkin Resolution and the Bicentennial, the phrase “a John Hughes movie” will instantly conjure a range of images, including the smooth, pale faces of a bevy of young actors.

But I don’t think I’m alone among my cohort in the belief that John Hughes was our Godard, the filmmaker who crystallized our attitudes and anxieties with just the right blend of teasing and sympathy. Mr. Godard described “Masculin FĂ©minin,” his 1966 vehicle for Jean-Pierre Leaud and Ms. Karina, as a portrait of “the children of Marx and Coca-Cola.” Mr. McCarthy and Ms. Ringwald, in “Pretty in Pink,” were corresponding icons for the children of Ronald Reagan and New Coke.
Note the pretentious reference to the Gulf of Tonkin Resolution. It is meant to give the discussion a political bent. Scott could have easily said “Kennedy assassination” or the mid 1960s; a few years would have made no difference in a time line that was intended to establish a generational reference point. But he says “Gulf of Tonkin Resolution” that, for those who know, stands for government duplicity – an outright lie in order to escalate a war.

Why is he saying that?

Because Godard is political. But not one in 10,000 adults in the U.S. who came of age during the Gulf of Tonkin Resolution have heard of it or know what it signified. The proof is Scott’s own writing. Look, for example, at his analogy, meeting Godard’s witty, immediately-accessible contrast of Marx and Coca-Cola with a meaningless and nonsensical contrast between Ronal Reagan and New Coke. The man knows nothing about Godard or his work.

John Hughes was the director of this generation. Breakfast Club, his magnum opus, is a sophomoric and pretentious movie about mall rats – all white, of course – whining about their “angst”.

So, why mention Godard at all? Why not just compare Hughes to say, Spielberg – John Hughes was the auteur of teenage angst the way Spielberg is the auteur of extraterrestrial angst.

The answer is that the lack of a U.S. Godard is embarrassing. Scott invokes Godard’s name in the same spirit that the New York Times writes about “New York intellectuals” and finance professors speak of Modern Finance Theory. These are things that one wishes existed because their absence is embarrassing.

But they do not exist. American Godard, New York intellectuals, Modern Finance Theory – where they ought to be, there is a big hole.

I cannot do too much about the other holes. But I intend to plug the one about finance theory.

Meanwhile, let me know if you are looking for a good movie. I fancy that I know a thing or two about movies.

Monday, August 3, 2009

Bad Actors, Bad Economists

Paul Krugman is hot under the collar. He has just discovered that speculators – of “bad” variety, to be sure, or as he calls them, “bad actors” – have been making money off the markets. It is good to be out of coma, Mr. Krugman.

The liberal columnist’s beef is with high frequency trading – he says it does not help “capital allocation” – and one oil speculator who is reportedly due $100 million in bonus thanks to profits he made for his company, a Citigroup subsidiary. Krugman writes:

Just to be clear: financial speculation can serve a useful purpose. It’s good, for example, that futures markets provide an incentive to stockpile heating oil before the weather gets cold and stockpile gasoline ahead of the summer driving season.

But speculation based on information not available to the public at large is a very different matter. As the U.C.L.A. economist Jack Hirshleifer showed back in 1971, such speculation often combines “private profitability” with “social uselessness.”

The fiction of speculators’ useful function was concocted by the commodity exchanges in the late 60s and early 70s, as they were getting ready to step into vacuum created by the collapse of the Bretton Woods regime. It was then passed, through the intermediation of grants, to hollow men of academia who sold it as economic theory. That is what Milton Friedman parroted until he died. That 40 years later Krugman repeats the nonsense verbatim shows how far the discipline has progressed. Actually, the word is regressed.

So, just to be clear: Capital in circulation does not generate value. Hedge funds, mutual funds, exchange-traded funds, proprietary trading desks, investment banks, merchant banks, buy-out firms, market makers, exchange specialist, stock brokers, bond salesman, FX traders, day traders, high-frequency traders, insider traders, derivatives traders, options and futures traders, arbitrageurs, hedgers, credit default swaps writers, take-over artists – all these groups do not produce any vale whatsoever, in the sense of adding a dime to the country’s GDP. Their activities merely help realize the value that is created in the production process.

But that is only one error in an article littered with conceptual errors, all of which are linked by a common thread that is theoretical poverty. Krugman does not know that the subject of finance is movement of finance capital. Absent that knowledge, he looks around and sees people who look corrupt or mean by virtue of trying to make money in ways not done before because the old ways of making money are arbitraged away. So instead of analyzing, he harangues, never suspecting, for example, that high-frequency trading is the logical endpoint in a system where speculative capital has been constantly shortening the trading horizon. He goes on:
Now, you might be tempted to dismiss destructive speculation as a minor issue – and 30 years ago you would have been right. Since then, however, high finance – securities and commodity trading, as opposed to run-of-the-mill banking – has become a vastly more important part of our economy, increasing its share of G.D.P. by a factor of six. And soaring incomes in the financial industry have played a large role in sharply rising income inequality.

There is no such thing as destructive speculation, Mr. Krugman, if you are going to compare it against “productive” speculation. There is no such thing as high finance. Or low finance. Or just-about-the right-height finance. There is no such as thing as run-of-the-mill banking, unless your idea of banking is shaped by the reruns of It’s a Wonderful Life. There is only finance capital that, in the aftermath of the breakdown of Bretton Woods system, stepped in to introduce discipline to the markets. “Government regulate markets by decree; finance capital does by through arbitrage,” I wrote in Vol. 1 of Speculative Capital.

That is why 30 years ago, you could “dismiss” what you call speculation because finance capital was in its nascent form. It then grew – as it had to, to compensate for the falling spreads – to the point that it now dominates the U.S. financial markets and, from there, the tempo of the broader economy. Hence, its increasing “share of G.D.P by a factor of six”. That is precisely the definition of finance capital. It is capital in circulation, grown to a point that, in a tail-wagging-the-dog set up, influences the direction and cycle of industrial capital.

To understand what is taking place around us, we have to master the basics. Enough of mystification and hazy notions of high/low finance that betray a break in thought. Here is from the opening page of the upcoming Vol. 4, as an example of writing where words have meanings:
Finance capital is capital in the circulation, as distinct from the production, phase.

In Vol.1, in developing the concept of a security, we followed an entrepreneur who set out to raise $10 million for the purpose of producing “widgets”. He successfully presented his ideas to potential investors who agreed to give $10 million in start-up funds. With that money, our entrepreneur built the plant, bought the raw material and hired the workers and generally set the production process in motion. The first batch of the widget was ready after the prescribed 9 months.

At this stage, while the production cycle, defined technically, in terms of creation of widgets, is complete, the full cycle, defined socially in terms of the return of capital to its starting point, is not. That is because the widgets are not yet sold. That part is critical. The company’s investors who provided the initial funds, the workers and the creditors who extended credit for the purchase of raw material, do not want widgets. They want money. To satisfy them, the widgets must be sold. It is only through the sale – the conversion of the widgets to money – that their embedded value and thus, the company’s profit, will be realized.

The conversion of widgets to money closes the overall cycle of production and allows for the start of a new cycle. It is through its ability to repeat these cycles that the entrepreneur’s business is a “going concern”, meaning that its operation could continue to an indefinite future. So the role of the sales is absolutely critical to the existence and survival of the enterprise. No businessman was ever unaware of this.

But sales present a challenge to the entrepreneur because it must be affected by buyers over whom the entrepreneur has no control.
Here, we have the genesis of finance capital. See if you can begin with it and arrive at the current crisis. Everything will then be crystal clear.