Tuesday, October 27, 2009

What We Learn From the Financial Journalists

This past Tuesday, The New York Times was plugging the new book by its “merger and acquisition correspondent”, Andrew Ross Sorkin, big time. The book is called, Too Big to Fail: The Inside Story of How Washington and Wall Street Fought to Save the Financial System – and Themselves. That long and yet empty title is what you get when you try to include all the “hot” issues of the day in a single phrase. But the gimmick apparently works, or it could have been the heavy promotion: the book sold out in New York’s Barnes & Nobles.

I have not read the book, but from the excerpt in the Times, I know what is inside. Here is a passage:
Increasingly desperate that morning – “I feel like I’m playing Whack-a-Mole,” he complained to his peers – Mr. Fuld decided to call his old friend John Mack, the chief executive at Morgan Stanley, the second-largest investment bank after Goldman Sachs. After dialing Morgan’s New York office, Mr. Fuld was transferred to Paris, where Mr. Mack was visiting clients in the firm’s ornate headquarters, a former hotel on the Rue de Monceau.

After some mutual disparagement of the markets, the rumors and the pressure on Fannie Mae and Freddie Mac, Mr. Fuld asked candidly: “Can’t we try to do something together?” It was a bold question and Mr. Mack had suspected it was the reason for the call. While he didn’t believe that he’d be interested in such a prospect, he was willing to hear Mr. Fuld out.

“We’ll come over to your offices,” Mr. Fuld, clearly anxious, said.

“No, no, that makes no sense. What if someone sees you coming into the building?” Mr. Mack asked. “We’re not going to do that. Come to my house, we’ll all meet at my house.”

On Saturday morning, Mr. Fuld pulled up to Mr. Mack’s mansion in Rye, N.Y. Despite the beautiful weather, he was tense. He could already imagine the headlines if it leaked.

The Morgan Stanley team had arrived and was socializing in the dining room, where Mr. Mack’s wife, Christy, had put out plates of food she had ordered from the local deli.
What we learn from the above is that:
  • When Fuld called Mack, Mack was in Paris, in Morgan Stanley’s ornate headquarters, which was a former hotel on the Rue de Monceau.
  • Mack and Fuld knew each other.
  • Mack and Fuld did not like – or understand – what was happening in the markets.
  • Mack had a sixth sense, certainly a strong intuition. When Fuld reached him in Morgan Stanley’s ornate office in Paris, he “suspected” that Fuld was calling him for something important.
  • Fuld who had reached Mack in Paris to talk about his firm’s survival had not prepared a proposal or even an opening pitch. “Can’t we try to do something together?” is what he said, by way of proposing a merger involing about $2 trillion in assets.
  • Fuld was a simpleton, suggesting to go to Mack’s office. A child would know not to do that. (Paulson met with the Goldman Sachs board in Russia – when he was the U.S. Treasury secretary.)
  • Fuld was a quick learner. On Saturday morning, in front of Mack’s mansion, he was tense (although the weather was good) because he had learned that it was not good for him to be seen with Mack
  • Mack’s wife, who goes by the name Christy, had ordered takeout food from a deli in Rye, New York which is where she and her husband, Mack, live in a mansion – Mack Mansion, presumably.
Perez Hilton, meet financial journalism.

It serves no purpose to comment on this trashy, gossipy writing masquerading as financial investigative journalism, except to point to the way it is intended to drum up the sale. The tidbits that permeate the narrative send the subliminal message that the author is close to the center of power and hence, privy to knowledge and inside information. That association is the source of his authority; he knows the cause of the crisis because he knows the players whose actions influenced it. That it is precisely the opposite, that businessmen and traders could shed absolutely no light on the cause of the crisis, that the more nonsensical tidbits you hear or read about the less you would know, is something that neither Andrew Ross Sorkin nor those who bought his book will easily believe – or understand. The milieu in which these events take place stands against such understanding.

I caught a glimpse of Ross Sorkin on Charlie Rose. The host and guest agreed that the main lesson of the crisis is “ultimately” about the human failure. You know about this the-fault-is-not-in-the-stars thing, akin to saying that an airplane crash was “ultimately” due to the gravity. The author is a young man. He talks fast and confidently, the way confidence men do. He has no qualms or doubts about what he knows; how could he, having heard the behind-the-scenes drama from the movers and shakers, knowing what a lawyer was wearing to a weekend meeting and which highway Fuld's driver took on the way to New York?

Not to be too harsh on him, but he, too, while also a victim, is at the same time a part of the fraud that is continuously perpetuated on the citizenry.

If the young lions of financial journalism are bad, the old timers are scarcely better. On Friday, Ron Chernow, the author of a confused history of J.P. Morgan, wrote an Op-Ed Page piece in the New York Times in which he compared the current financial crisis with the crash of 1929. Here are three sample statements, followed by my comments:
For many participants, a whiff of sin only enhanced the stock market's seduction. Small investors imagined that the large speculators who dominated the exchange could, if necessary, levitate the market and prevent unpleasant crack ups.
The modern markets, too, thrived on the whiff of scandal. All Madoff investors were told – and passed it to others – that the “New York people had a system.”
Margin loans equivalent to one-fifth the value of listed stock poised the market on a tall but shaky scaffolding.
In the current criss, while the margin on stocks was one-half, the firms as a whole had margins in excess of thirty to one, six times higher than what was allowed for the individual stock investors in the late 1920’s.
Unlike the 2009 crash, the 1929 debacle didn’t topple major banks or corporations. It simply wiped out a generation of speculators.
The crash of 1929 only toppled speculators and not banks because in 1929, banks were not involved in speculation. In 2007, they were.

Chernow has no central argument, he has no point. His writing is a hodgepodge of anecdotes and false parallels and analogies that ultimately leave the reader frustrated and exhausted.

What these men want to offer, but cannot, is a coherent narrative of a crisis that has devastated much of the world's economies in the past two years. I explained the crisis in some length in the Credit Woes series. Since Lehman’s case, for good reasons, is intricately linked with the crisis, let me once again use it to highlight the things we need to know. Only then we will be able to understand the crisis. This is not a “case study” approach, but an analysis of a part that contains some critical aspects of the whole.

Lehman had $1 capital, its own money. It then borrowed $32 and use all the money to buy securities worth $33. The securities were pledged as collateral for the loan, the way you would pledge your house for mortgage. Unlike your mortgage, though, Lehman’s borrowing was short term; it had to be refinanced, i.e., renegotiated, every day, or every week or every month.

In 2007, the securities prices dropped – crashed, really. (As an example of the severity of the crash, Merrill sold some of its securities for 22 cents on a dollar.) The securities that Lehman had purchased for $33 were now worth, say $20. The lenders did not accept holding $20 worth of collateral for loans totaling $32. As per terms of the loans, they demanded that Lehman pay the shortfall, the $12. Lehman had only $1. It could not pay $12.

Under these conditions, the die was cast. Short of a government bailout – the Fed or the Treasury giving Lehman the life-saving $12 – there was no way the firm could survive. Paulson and Geithner refused. The firm went under.

Three questions must now be answered, one specific to Lehman, the other two, general:

1. Why was Lehman allowed to fail?

To the extent possible, I answered this question here and here.

2. Why did Lehman follow a suicidal business model, borrowing 32 times its capital?

The answer is that it had no choice. Had it not pursued that specific business model, it would have been forced out of business or taken over many years prior to 2008. That was the case with all broker/dealers; Lehman was by no means an exception. So it is nonsensical to speak of management failure, as the decision to increase the leverage was conscious and deliberate.

Now, why is this so, i.e., why are financial institutions forced to behave in this way, is the subject of Vol. 4 and especially, Vol. 5, of Speculative Capital.

3. Why did prices drop?

The answer does not involve buyers going "on a strike" or the market being flooded with the securities or irrational exuberance. It has to do with the transformation of values to prices, something very objective. It is a fascinating subject that must be developed from the ground up and followed to its logical conclusion. That is the subject of Vols. 4 and 5 of Speculative Capital.

Stay tuned.

Tuesday, October 20, 2009

What We Learn From the Businessmen

If you did not recognize the style of Death of a Deal Man, you do not know John Das Passos. If you are an American, that is doubly unacceptable. His is the only name you can utter when an anti-American foreigner claims that your country has not produced a single writer or artist of international standing. Das Passos’s U.S.A. trilogy is a masterpiece of fiction in form and content. Once in this blog I asked the philosophical question: What do we need to know about something so we could say we know it? When it came to people, Das Passos knew the answer; he gave it to us with an impossible mix of brevity and completeness that approached poetry. Read the biographies in the U.S.A. and judge for yourself.

I thought of Das Passos when I was reading Wasserstein’s death notices. Even the man’s obituaries were hurried, as if rushing to complete an about-to-expire deal. Deal making alone drove the narrative, as in this gem in the Wall Street Journal (Oct 15, p. C3):
A former editor of the school newspaper at the University of Michigan, Mr. Wasserstein long has had an interest in media deals.
Do not blame the reporter for bad writing. The corollary is absurd because it captures the absurdity of a life whose focus on deals distorted all the relations. Eugene O’Neill perceptively captured this affliction in Hughie’s small-time gambler, Erie Smith. In the dinner party of a puritan hostess, with her children present, Erie recounts the story of one his wagers in a horse race, reasoning that the children would love “animal stories.”

The unintended humor is not confined to the dearly departed. In the same week, I also read the news of the retirement of James Simons, the founder of Renaissance hedge fund who made billions in trading. The Times said that “many on Wall Street” still believe that Mr. Simon has a “supernatural talent for making money.” Now that is a juxtaposition of spiritual and the material that only a Rumi could pull off. How life’s extremities give rise to poetry!

And there was John Mack, the outgoing CEO of Morgan Stanley, telling a TV interviewer on Friday that “our focus” must be on the job creation. This, from a man known as “Mack the Knife” for his relentless cutting of workers always and anywhere he went.

Now that a few market indexes are up and the immediate danger of a collapse seems to have passed, the men of finance are returning to the limelight, assuming Rodinesque poses and availing themselves to awe-struck financial reports for insights about “what went wrong”. They might even be right about the direction of the dollar or the yield of the 10-year Treasury by next year.

But that is not finance as discussed in this blog. We will learn nothing about finance from these men because what they see is always the appearance and never the substance. We will learn nothing from a mouse about the working of the cosmos, even though it could consistently find the cheese, as if by a supernatural talent.

If you are a student of real finance, you are in the right place. Stick around.

Sunday, October 18, 2009

What We Learn From the Nobel Laureates

I had never heard of Oliver Williamson and Elinor Ostrom until they won the Nobel Memorial Prize in Economics this past week. So, what I know about their work is what I read in the papers. But that is sufficient; somewhere in this blog I wrote that everything you need to know is always right in front of your eyes!

Let us begin with Elinor Ostrom whose research, The New York Times tells us, led her to believe that something called the “tragedy of the commons” was inaccurate.
Ms. Ostrom concluded in her research that the “tragedy of the commons” was an inaccurate concept. Particularly in 17th- and 18th-century England and Scotland, the concept described villagers’ overgrazing of their herds on the village commons, thereby destroying it as a pasture. The solution often invoked was to convert the commons to private property, on the ground that self-interested owners would protect their pasture land.
Setting out to show that the tragedy of the commons is inaccurate is akin to setting out to show that Santa Claus does not exist. It is a curious starting point.

The idea of the “tragedy” came from a half-wit Texan by the name Garrett Hardin. His Wikipedia biography lists his “research” interests: overpopulation, immigration, race and intelligence – you get the idea. The Tragedy of the Commons is his magnum opus in which he argued that a shared social resource is doomed to exhaustion because the individual users will maximize their own interest at the expense of the long term social good. His conclusion: to avoid the ruin, the common property had to become private.

You see the angle. The Tragedy was published in 1968, just about the time when Milton Friedman was being pumped up to bamboozle the nation with his drivel.

So the good Indiana University professor wasted a good deal of time refuting something that did not merit a response. But what did she, herself, have to say on the subject?
Her most recent research has focused on relatively small forests in undeveloped countries. Groups of people share the right to harvest lumber from a particular forest, and so they have a stake in making sure the forest survives. “When local users of a forest have a long-term perspective, they are more likely to monitor each other’s use of land, developing rules for behavior,” Ms. Ostrom said in an interview.
Note the reference to “the relatively small forests in undeveloped countries” and earlier to the 17th- and 18th-century England and Scotland in the Tragedy.

The social system in a pre-Capitalist community is based on barter. In such a system, the members of the society use the common resource to satisfy their personal (including family) needs and not more. So, the common resource survives. Rules merely codify the individual uses that never exceed the capacity of the common resource.

With the rise of Capitalism, the society moves from barter to commodity trading. Now, the objective is no longer the satisfaction of the personal needs but the sale of the commodity for money – an open ended process that is limited only by the number of buyers. If the commodity happens to be fabric which is made from sheep wool, then to satisfy the demand for the expanding British fabric manufacturing, ever more sheep will have to be introduced to the pasture – far above and beyond its capacity. The result is first, overgrazing, and then the replacement of people by sheep. That is what caused the protracted Irish famines starting in 18th century. I thought this was known even to school children – but apparently not.

The Nobel laureate, who, by the way, is a social “scientist”, de-contextualizes the social system she is writing about, as if observing it in an imaginary Mister Rogers’ Neighborhood. That is why what she says comes across as simplistic, to the point of being childish. It is certainly irrelevant to our lives. Imagine we the people approaching Verizon or Chevron to ask for the management of our common resources, airwaves and oil!

For an adult’s take on the subject of the individual’s approach to a common resource within the given conditions, see Pontecorvo’s 1957 Wide Blue Road. You will learn more from this perceptive movie that all the works of all Nobel laureates in economics combined.

The work of Oliver Williamson, by contrast, is on a strictly contemporary phenomenon: the corporation. He discovered that, in the words of the same Times article, “large corporations exist because, under the right conditions, they are an efficient way to do business.” The Wall Street Journal (Oct 13, p. A19) explained his work in more detail:
Mr. Williamson showed that horizontal mergers of companies in the same industry – even those that increase market power and even those where the increase in market power leads to a higher price – can create efficiency. The reason is that if mergers reduce costs, the reduction in costs can create more gains for the economy than the losses to consumers from the higher price.
So Bruce Bid’Em Up Wasserstein was the agent of social efficiency. Also note Professor Williamson’s point of view in using the work “efficiency”. I earlier wrote about this view which is that of finance capital.

The most interesting part of the prize was the citation of the Award Committee that, perhaps innocently, but revealingly all the same, put the utterly incompatible works of Ostrom and Williamson next to each other to produce an anti-regulatory manifesto:
Rules that are imposed from the outside or unilaterally dictated by powerful insiders have less legitimacy and are more likely to be violated. Likewise, monitoring and enforcement work better when conducted by insiders than outsiders. These principles are in stark contrast to the common view that monitoring and sanctions are the responsibility of the state and should be conducted by public employees.
Bernie Maddoff could not agree more.

Thursday, October 15, 2009

Wall Street and the “Real Economy”

A never-ending subject of thoughtful deliberation among economic and finance professors is the relation between the “Wall Street” and the “real economy” – whether the woes in the realm of finance spill over to the “real economy”.

You can see why the simple question remains an impossible puzzle. The very first step in answering it would be to define finance and explain what is meant by the real economy – without quotation marks. That, the university economics cannot do. Hence, the endless discussions and points and counterpoints.

In Vol. 4, I take up this question in detail. Before then, here is a news item from the New York Times to highlight the relation between finance and the real economy. The article is about the massing of lobbyist to influence the new law overhauling the financial industry.
But since virtually every imaginable company could be touched by the comprehensive legislation proposed by the Obama administration, the surprisingly broad array of lobbyist trooping to Capitol Hill also includes advocates for airlines, pawnbrokers, real estate developers, farmers, car dealers, retailers and energy and telephone companies. They want to make sure any new oversight of the financial system does not lead to tighter regulations of their businesses or make it more expensive for them to finance their operations or hedge their risks.
By far, the most direct link between finance and industry is through money markets, where hundreds of billions of dollars of the corporate working capital are parked to earn a few basis points. Any loss of this capital directly impacts the production and could even disrupt it, as we saw in the aftermath of the Lehman bankruptcy.

The Death of A Deal Man

Bruce ‘Bid’em-Up’ Wasserstein was born a deal maker. He was born in Brooklyn, went to the University of Michigan, studied business and law at Harvard, did a stint at Cambridge, became a Knox Fellow and authored a book, but his true love was deal making. He was called smart, driven, a chess player, a strategist, a tactician, but all he wanted to do was make deals. “In the deal world, there was Bruce, and then there was everyone else,” people said. He thrived in the deal making frenzy and he made deals always and everywhere so everywhere he went turned into the Deal World – the Hamptons, his Midtown office, home, planes, trains, automobiles. “Let’s make a deal,” he would say. And he made deals fast and furious, so fast and furious that once he overloaded First Boston’s phone system. His deals were many and varied: Philip Morri’s purchase of Kraft and General Foods; Ichan’s assault on AOL Time Warner; Kraft’s potential takeover of Cadbury; KKR’s takeover of RJR Nabisco; Texaco’s acquisition of Getty Oil; ABC’s sale to Capital Cities. Sometimes things did not work out. KKR’s takeover of Nabisco was a fiasco. Texaco’s acquisition of Getty led to a $10 billion court judgment. But through the thick and thin Bruce remained undeterred. He made deal making an art, made it a street fighter’s game, made it lucrative for himself and corporate raiders and greenmailers. He created the “Pac-Man defense” and “front-end loaded two-step tender”, built his own firm, sold his own firm, tried merchant banking, returned to deal making and accumulated immense wealth, but his true love remained deal making. On Wednesday, Bruce died. He left a wife, 3 ex-wives, 8 children, a tangled estate and an untold number of undone and as yet to be conceived deals behind.

Wednesday, October 14, 2009

Financial Regulation, Theoretical Poverty (2 of 2)

In a perceptive line in The Critique of Dialectical Reasoning, Jean Paul Sartre writes that “the future comes to man through things in so far as it previously came to things through man.”

The idea is not new, but Sartre expresses it more eloquently than others. What he is saying is that, in the course of his material activities, man creates tools and organizations whose very presence compels him to act in a certain way, thus shaping the course of the history. Sartre’s example is a machine. “Thus, the machine demands to be kept in working order and the practical relation of man to materiality becomes his response to the exigencies of the machine,” he writes. Man is the product of his product.

As with machines, so with the financial systems. They, too, demand to be kept in working order. But unlike machines which are built on well-understood principles and can be relied upon to work in a precise manner, the working of financial markets remains hidden from the view because they are created in response to the exigencies of finance capital. Finance capital cannot itself create markets. It employs the regulator, the trader, the professor and the banker as its proxies to the do job. These men are endowed with a free will, but, unbeknownst to themselves, they do the bidding of speculative capital, building the markets to its needs and specifications.

Speculative capital is capital engaged in arbitrage. In Part 1, we saw how it logically and seamlessly develops from trading and hedging. Vol. 1 in its entirety deals with this particular question.

Arbitrageable differences are never large enough to allow for a comparable return with other forms of capital; it would be a gross inefficiency in capital markets if they were. So, speculative capital boosts its return through leverage, i.e., borrowing. Wall Street Journal, Oct. 16, 1995:
Before [February 1994], speculators had been borrowing at a short-term rate of like 3% and buying five-year Treasury notes yielding around 5%, a gaping spread of two percentage points that enabled some to double their money in a year. The math was tantalizing. Using leverage, an investor with $1 million could borrow enough to acquire $50 million in five-year Treasury notes. And the spread of two percentage points could generate about $1 million in profits on the $1 million investment.
There is, however, little money to be made in Treasuries; the article makes it clear that the golden opportunity was arbitraged away some time ago. To make money through arbitrage in the bond market, one has to go down the credit ladder. But the lower-rated securities could not be pledged as collateral for borrowing. Could the Fed, perhaps, help? The WSJ, April 1996, describing what the Fed called “one of the most significant reductions in regulatory burdens on broker-dealers since 1934”:
The final rules … will eliminate restrictions on a broker-dealer’s ability to arrange for an extension of credit by another lender; let dealers lend on any convertible bond if the underlying stock is suitable for margin; increase the loan value of money-market mutual funds from a 50% margin requirement to a ‘good faith’ standard … and allow dealers to lend on any investment-grade debt security … the Fed will allow the lending of foreign securities to foreign persons for any purposes against any legal collateral … It will also expand the criteria for determining which securities qualify for securities credit, a change that will sharply increase the number of foreign stocks that are margin-eligible.
This is saying that many securities that were not eligible as collateral could now be pledged as collateral – for more borrowing. What follows is not merely predictable; it is inevitable. WSJ, Sept 22, 1997:
Everyone who has even thumbed casually through the books of securities firms recently agrees they are more highly leveraged than ever.
You see the loop-feedback mechanism at work. Every phase of the process, from the rise of speculative capital, to broker-dealers borrowing more than 30 times their equity, takes place rationally. Even the collapse is rational, as it is the necessary outcome of the operation of a self-destructive force.

What would you do if you were the Fed chairman or the Treasury secretary under these conditions? The “practical” answer is that, Lehman aside, pretty much what they have done in the past two years. There was, realistically speaking, no other option.

Speculative capital, you see, not only eliminates the arbitrage opportunities but the policy options as well. Men can boast of their free will. But what defines freedom is the availability of choices. As the choices narrow, the freedom is curtailed. A man without choice is a condemned man. Speculative capital limits the choices by creating conditions in which any action not in accordance with its interest looks naive, irrational or radical.

Such an environment is ripe for the rise of men most concerned about looking naive, irrational or radical. They are the functionaries and palan-doozan whose policy decisions at all times remain preordained. When they deviate from the prescribed course, not so much due to courage but incomprehension, the ensuing storm publicly chides and corrects them. Lehman bankruptcy was the Exhibit A in that regard.

Nothing illustrates this subjugation of man to the dynamics of speculative capital better than the option valuation theory. As I showed in Vol. 3, the entire option valuation literature is fundamentally incorrect and based on a misunderstanding. An option is not a right to buy or sell. It is right to default. This is the very “scientific-mathematical outlook” which Paul Krugman pompously called “the true glory of our civilization”.

Under these conditions, when the actions of the players are influenced by a hidden force, the regulation of the financial industry can proceed on only two paths. It must either be in conformity with the needs of speculative capital, such as creating a living will for the institutions to go out of business without complications, or skirt the issue altogether, which is just about everything else, including executive bonus and consumer protection. If any provision of the law currently being written contradicts this general outline, the matter will be worth a second look. But do not bet on it.

But is it possible to “do something”, Mr. Saber, anything at all, about the situation? After all, you criticized Godard for being nihilistic. Between not succumbing to speculative capital and destroying the system altogether, do you have any bright ideas?

To that hypothetical question, I had a modest answer a while back. I humbly suggested that shorting Treasuries be disallowed. This would be tantamount to turning a floodlight on a vampire. It will not kill the beast but temporarily paralyze it.

Given the reality around us – the amount of trading that is centered around Treasuries, for example, and the liquidity that such trading provides to the financial markets – the proposal is too radical and thus, naive.

Thursday, October 8, 2009

Financial Regulation, Theoretical Poverty (1 of 2)

One of the issues being debated these days is the regulation of over-the-counter derivatives, the privately negotiated, customized contracts that exist in a legal world parallel to their standardized, exchange-traded cousins. The Financial Times was surprised that even the European industrial companies had come out against the regulation:
Some of Europe’s industrial companies have warned they could shift their financial hedging away from Europe if proposed reforms of the vase over-the-counter (OTC) derivatives markets go ahead as proposed by the European Commission ... The comments show that opposition to a key part of US and European proposals for reform of the financial system is gathering from an unexpected quarter: industrial companies.
The paper gave the reason for the opposition without, naturally, understanding the centrality of the issue to the current crisis:
Many companies use OTC derivatives, such as interest rate and currency swaps, to hedge routine business risks like fuel purchase and future pension liabilities.
This need of industrial companies for hedging is the genesis of the speculative capital, the latest and most versatile form of finance capital, that is born from the marvelously dialectical transformation of defensive hedging to predatory arbitrage. I was first to explain this metamorphosis in Vol. 1:
The most important point in the rise of arbitrage trading is that the practice develops logically from hedging and, on paper, is indistinguishable from it.

The purpose of hedging is preserving the owners’ equity. The hedger begins with an existing asset (liability) and seeks to find a liability (asset) which will offset its adverse price changes. The purpose of arbitrage, by contrast, is profit. The arbitrageur has neither an asset nor a liability. To that end, he looks for any two positions which will enable him to “lock in” a spread. The two acts are mathematically indistinguishable. What logically separates them is the purpose of each act which translates itself to the sequence of execution of trades. When done sequentially, the act is defensive hedging. When done simultaneously, it is aggressive arbitrage. Otherwise, the transformation of one to the other is seamless.
The sole subject of finance is studying the laws of movement of finance capital and its various forms such as speculative capital. The role of individuals, to the extent that it exists, is incidental.

The centrality of finance capital in studying finance is acknowledged – if only unconsciously and unknowingly – by the mouthpieces of the orthodox economics. They, who never tired of sounding off on the primacy of the individual and his supposed “free will” as an “economic agent”, these days talk of “jobless recovery”. Google the phrase and see how through sheer usage it has become an accepted term of discourse.

Writing in his column about the expanding army of the unemployed, Bob Herbert of The New York Times condemned this point of view without understanding its roots.
The Beltway crowd and the Einsteins of high finance who never saw this economic collapse coming are now telling us with their usual breezy arrogance that the Great Recession is probably over. Their focus, of course, is on data.
In the phrase “jobless recovery”, the news pertaining to the people is grim; there are no jobs to be had. Yet it contains “recovery”. So, what is it that is being recovered? The answer is: the agreeable rate of return of capital. The “data” measures the pulse and performance of capital, which the university professors study and comment about without ever understanding the larger issue surrounding it.

The outward appearance of the phenomena in economic life is deceiving. In fact, the appearances tend to show the opposite of what is actually taking place. Hence, the authority of the great thinkers of the classical economics who showed us the way.

The story-telling school of economics and finance that is in currency now concerns itself with the most immediately visible. Naturally, it gets everything wrong. Here is a full time professor of economics and finance at Yale explaining a crisis that has paralyzed much of the world for the past two years:
“The fundamental problem, as Franklin Delano Roosevelt said in 1933, is fear”, [Robert] Shiller, a Yale University Professor said. The great depression was deepened by a “sense of lost confidence and animal spirits that was a self-fulfilling prophesy. The worry is that we will have the same kind of issue rising again,” he said.
Even academics are beginning to see the superficiality of their theories; the long-present elephant in the room can no longer be ignored. The policymakers always knew it, which is why they practiced “pragmatism”. But in markets dominated by finance capital, pragmatism – doing the “proper” thing given the circumstances – is nothing but yielding to the diktat of finance capital. That is the part that neither the policymaker nor their critics who accuse them of “taking the side of their banker friends” understand. Like the focus on the data that Herbert criticizes, the problem goes much deeper.

I will return shortly with the second and final part of this piece.