Monday, May 5, 2008

Financial Arbitrage Capitalism

"However, unlike the earlier epoch of finance capitalism, the emphasis was not upon the capital development of the economy but rather upon the quick turn of the speculator, upon trading profits. ... As managed money grew in relative importance, more and more of the market for financial instruments was charaterized by position-taking by financial intermediaries. ... The main financial houses became highly-leveraged dealers in securities, beholden to the banks for continued refinancing. A peculiar regime emerged in which the main business in the financial markets became far removed from the financing of the capital development of the country. Furthermore, the main purpose of those who controlled corporations was no longer making profits from production and trade but rather to assure that the liabilites of the corporations were fully priced in the financial market. ... Today's managers of money are but little concerned with the development of the capital asset of an economy. ... I am even more convinced today than six years ago that a whole new financial system has evolved--and that it is definitely 'retrograde'. The title 'Financial Arbitrage Capitalism' is fitting for a Credit System and economy now dominated by an expansive 'leveraged speculating community' seeking profits from variations and permutations of 'borrowing cheap and lending dear'; by bond and investment fund managers whose entire focus is beating some indexed return; by rapidly explanding Wall Street balance sheets and influence; and by the entire wave of new Credit instruments, derivatives, and sophisticated models and strategies used for the paramount purpose of capturing 'above-market' returns and resulting in huge financial rewards. ... But reflationary policies and other assurances will not rescue the system, specifically because there is today nothing to stem the ongoing distortions to the underlying real economy. .. And, in the end, it's only real economy fundamentals that will determine the soundness and sustainability of a system's Credit and Financial Structure. ... Indeed, Washington's validation of the current dysfunctional Credit system structure could very well lay the groundwork for extreme global price distortions, volatiility and social/political unrest. ... Now, however, with acute inflationary effects prevailing throughout global markets for food, energy and commodities, one should be prepared for the likes of problematic supply bottlenecks and shocks, hoarding, trade frictions and interruptions, and generally a heightened geopolitical instability", my emphasis, Doug Noland (DN) at, 2 May 2008.

Right on DN! DN missed one thing, the system also "borrows short and lends long". Any one who lived through 1979-83's S&L crisis should know of the significance of this. Yves Smith has an excellent post discussing DN's article at, 4 May 2008. Howard Katz's (HK) 14 April 2008 post at has a good explanation of the source of our current difficulties. "Paper money cannot cause an increase in wealth". To think otherwise, to use Keynesian "analysis" is to live in the alchemist's world of making lead into gold. The "media ... accepted intellectual theories which preached (the economic version of) up is down, black is white and 2 + 2 = 10. ... But the Fed did not create something out of nothing. What it did was to rob from an under-class (savers, workers and commodity producers) ... In essence, modern economists ignore the losses to creditors, workers and commodity producers and report the gains to banks, large corporations, real estate speculators and Wall Street as the economy. This is what Bernake means when he says he is bailing out Bear Stearns to save the economy". Bush's appointing Hank Paulson and the rest of his crew of "Goldman Sachs alumni" to Treasury was horrible for politically disfavored Americans.

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