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Want more reasons why the financial sector is bad for us?


8:55 am - June 1st 2011

by Left Outside    


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First, from Felix Salmon:

File under “things you never knew the Fed did during the financial crisis”: an $80 billion loan scheme known as ST OMO, which was so obscure that even Barney Frank had no idea it existed when he required the Fed to turn over its lending data in his Dodd-Frank bill.

These loans were insanely cheap — the interest rate on them was as low as 0.01%, even as the Fed’s main bank window was charging 0.5%. Ivry has looked at these charts very carefully, and by measuring how tall the bars are he’s worked out how much money each bank borrowed at any given time; Credit Suisse topped out at $45 billion, for instance.

So much for Walter Bagehot’s advice to lend freely at a penalty rate! Banks get into trouble and receive secret loans. Sods.

Next, citing approvingly Adam Smith’s warning that “people of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices,” the London Banker (via afoe) documents the concentration of power, and information, within the financial sector.

Four global banks are intermediaries in 85 percent of OTC derivatives transactions. The same banks dominate prime brokerage. The same banks own large equity interests in the now demutualised exchanges, clearinghouses and even warehouses of the global markets. Naturally, the same banks dominated underwriting of securitised assets.

The implications have scarcely been grasped of what this portends in terms of the information asymmetries and the opportunity to manipulate markets without risk.

We have banks insured against loss by the world’s government and central banks, a small number of firms dominate the sectors they operate in.

This means they can gather much more information than anyone else, and rig, or take advantage of, movements in the market in excess of any honest return on their investments. Gits.

Worst of all (you didn’t expect it to get better did you?), banks don’t learn from their mistakes:

Overall, our results show that financial institutions that are negatively affected in a crisis do not appear to subsequently alter the business model or to become more cautious regarding their risk culture. Consequently, the performance in one crisis has strong predictive power for a crisis which starts almost a decade later.

Risky, arrogant, molly coddled, powerful, conniving, cheating, bankers.

They wonder why people don’t like them.

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About the author
Left Outside is a regular contributor to LC. He blogs here and tweets here. From October 2010 to September 2012 he is reading for an MSc in Global History at the London School of Economics and will be one of those metropolitan elite you read so much about.
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Reader comments


“even Barney Frank had no idea it existed”

Legislator ignorant when he writes law really isn’t an argument in favour of more legislation.

2. Luis enrique

LO did you see follow up post by felix called fed vs bloomberg. Seems initial reaction to “secret” transaction might have been a bit overblown

Sorry, I would disagree that banks don’t learn from their mistakes, they have learnt quite well that whatever they do and whatever the negative consequences, the taxpayer will bail them out.

Another reason why the collective noun for bankers is “wunch”.

There is wide agreement that it would be better if Britain’s economy was less dependent on financial services. The trouble is that no one has any sharp policy ideas of what to do about it – or what to do about the gap in tax revenues that would result from a shrunken financial services sector.

London has an envied global reputation for its pool of skills and expertise in financial services which attracts inward investment by foreign banks. It is challenging to identify any comparably strong attraction in other parts of Britain for other kinds of business. The sad fact is that in Britain internationally valued skills and expertise available at competitive earnings are rather thinly spread. On the evidence, we are weak in even basic literacy and numeracy. It is now transparently clear after the recent trashing of Manchester United by Barceleona, that we aren’t as good at football as we passionately believe we are.

New Labour has a lot to answer for – but then Tony Blair was distracted by running all those wars he engaged Britain in.

6. Chaise Guevara

Hmm. An article claiming to show that the financial sector is bad for us, but which fails to compare the sector’s good points against its bad point, culminating in a generalising rant…

I think a more accurate title would have been “I hate the FS sector! I hate it I hate it I hate it!”

I think a more accurate title would have been “I hate the FS sector! I hate it I hate it I hate it!”

Well… they did crash they global economy, escape scot free, and kick up a fuss when people suggested they might take some of the blame.

I’m well aware of the importance of a well functioning financial sector, I don’t think a financial sector in which banks don’t learn from their mistake and receive colossal subsidies is a functioning financial sector.

I could wax lyrical about the advantages a functioning venture capita industry brought to California and New York after the second world war, or the importance 101 other useful things a functioning financial sector brings, but that isn’t really the issue at the moment, is it?

Tim,

Complaining that the actions of a certain government department is complicated and should therefore avoid oversight, isn’t a particularly good insight. If something is hard, then try harder.

Why does the financial sector, the heavily subsidised, heavily oligopolisitic, heavily protected financial sector make those on the right go weak at the knees and abandon their principles?

“they did crash they global economy”

They did? Did anyone tell Turkey, China, India? That growth should stop?

In fact, as a real question, one to which I don’t know the answer, did global GDP actually fall?

“Why does the financial sector, the heavily subsidised, heavily oligopolisitic, heavily protected financial sector make those on the right go weak at the knees and abandon their principles?”

Because we read the suggestions of the likes of Murphy, Oxfam, the EU Parliament, for regulation of the financial sector and think that no regulation is better than that regulation.

9. Chaise Guevara

@ 7 Left Outside

That doesn’t explain my two main points: 1) the title is not justified within the article and seems horribly inaccurate (though I realise that it may not have been written by you), and 2) your closing words are childish and offensive.

Imagine someone wrote an article explaining the bad points of immigration, using only factual claims, then ended with something like “Thieving, skiving, low-skilled, culturally backward immigrants. They wonder why people don’t like them.”

It’s just, well, not cool.

Shit! Pretend the last 5 paragraphs aren’t a hyperlink.

7.

Tim,

Complaining that the actions of a certain government department is complicated and should therefore avoid oversight, isn’t a particularly good insight. If something is hard, then try harder.

Tim tried to make this argument on his blog the other day.

Some weird nonsense about how because we don’t understand something in the economy, we should just leave it be (presumably to carry on creating harm and damage).

Such are the standards of rigour for your average neo-liberal economist.

Chaise Guevera at 9 can simply be summed up as “waah! stop picking on us!” and ignored as such.

30% Paul Krugman, 30% Brad DeLong and 10% Arnold Kling.

?? Bearded, fat, balding and Jewish?

“Some weird nonsense about how because we don’t understand something in the economy, we should just leave it be (presumably to carry on creating harm and damage). ”

No, on my blog I was making a much more specific argument.

In order to be able to plan the economy we need to know how it works. What connects with which and how they influence each other.

Will Hutton stated that we’ve recently found out that we know much less about such things than we thought we did.

And yet Hutton then leaps to the idea that we should plan the economy more as a result of our new found ignorance. That’s what I was making fun of.

“average neo-liberal economist. ”

For the umpteenth time: I am not an economist. Left Outside here has more academic chops as an economist than I do.

15. Chaise Guevara

@ 10 Left Outside

It wasn’t intended to be equivalent – I was just picking a group that you would probably feel more inclined to defend than attack.

16. Chaise Guevara

@ 12 BenM

“Chaise Guevera at 9 can simply be summed up as “waah! stop picking on us!” and ignored as such.”

I have to say I’d love to know who “us” is supposed to be in that statement. The OP doesn’t have anything to say about me or anyone who looks like me. But it is kind of funny that I ask the OP to present their argument in a more mature way, and your response is one appropriate to a five year-old.

17. Watchman

So what Left Outside is saying is that a sector made up of a small number of large companies (as it is regulated, which automatically increases the entrance threshold and makes it more logical to amalgamate than to compete), backed by government guarantee so there is no consequence to failure, is a bad thing.

Actually, I don’t think many people will disagree with that (even if some take issue with the tone). So perhaps we need to ask what to do about it, since taxing them won’t work (just more costs (ultimately passed to the consumer) – so less incentive to competition at least in the short term).

So what Left Outside is saying is that a sector made up of a small number of large companies (as it is regulated, which automatically increases the entrance threshold and makes it more logical to amalgamate than to compete), backed by government guarantee so there is no consequence to failure, is a bad thing.

Thank you!

Pretty much, I would take raging rightwing treatment of the financial services over what we have anyday.

I want to gather as many stories of failure, subsidy, malfeasance as possible to rub in the rights face and ask “these are your champions?!”

I know that sounds adversarial, but politics is, and although it’d be more ponyforeveryoneish if it wasn’t, sadly it is.

So what Left Outside is saying is that a sector made up of a small number of large companies (as it is regulated, which automatically increases the entrance threshold and makes it more logical to amalgamate than to compete), backed by government guarantee so there is no consequence to failure, is a bad thing.

Whereas a sector made up of one extremely large company backed by government funding so that there is no consequence to failure is a good thing, and must be defended at all costs.

Whereas a sector made up of one extremely large company backed by government funding so that there is no consequence to failure is a good thing, and must be defended at all costs.

Show me the NHS caused recessions and I might take the argument more seriously.

Secondly, there are consequences to failure, they’re just much less severe than in a “pure market.” Although there’s never been, and cannot be, such a market in healthcare, so again, I’m not entirely convinced by the strength of your analogy.

Likewise Chaise,

The point is not that nobody should attack any other political constituency if you won’t attack all.

Politics is adversarial, I’ll defend migrants and attack the financial sector for easily rationalised reasons. Not every 500 word blog post should be balanced. Balance is bullshit.

21. Watchman

Left Outside,

Thank you!

Pretty much, I would take raging rightwing treatment of the financial services over what we have anyday.

I’m not surethat what I describe is raging right wing, so much as standard free market (there is nothing logically imcompatible with being left wing and free market).

I want to gather as many stories of failure, subsidy, malfeasance as possible to rub in the rights face and ask “these are your champions?!”

Odd idea – because the answer will be ‘no, we thought they were yours?’. The banks are in some cases state owned and in other cases state guaranteed – they are more left than right. In actual fact though they are examples of corporationism, whereby government and business come together at the expense of the voters/consumers, which is not a particularly right or left-wing thing, but simply a bad thing.

I know that sounds adversarial, but politics is, and although it’d be more ponyforeveryoneish if it wasn’t, sadly it is.

No problem with adversarial politics, but this risks being misdirected tribal politics. If you really have a problem with the banks, surely it is better to make common cause with those of us on the right who do as well (i.e. all free marketeers, small state supporters etc)? Assuming that we are part of the problem, when we see it as well, is hardly going to help anyone other than the banks is it?

No problem with adversarial politics, but this risks being misdirected tribal politics. If you really have a problem with the banks, surely it is better to make common cause with those of us on the right who do as well (i.e. all free marketeers, small state supporters etc)? Assuming that we are part of the problem, when we see it as well, is hardly going to help anyone other than the banks is it?

There are certainly those on the right who share my position, but they are few and far between. The right (and I include the labour right in this) are thoroughly under the financial industries thumb.

If you permit me a little Gramsci, the idea that the financial services sector is the wild west, free market sector of the economy has become hegemonic.

Most on the right will back interference with the financial services sector on fairly conservative grounds, keep the state out.

But they fail to realise, because pro-finance ideology is hegemonic, that the state already intervenes heavily and we need a much better sort of intervention.

The left, probably by chance, are already quite displeased with the financial industry because of various anti-hierarchical, egalitarian, anti-corporatist value. That is why my arguments come from the left and are directed at the right.

I want to convince the right by weight of evidence that something is rotten in the state of finance. Asking politely won’t work.

23. Chaise Guevara

@ 20 Left Outside

“Politics is adversarial, I’ll defend migrants and attack the financial sector for easily rationalised reasons. Not every 500 word blog post should be balanced. Balance is bullshit.”

Who’s talking about balance? My point with the immigrants analogy was that if I saw a post about immigrants that talked about them like that, I wouldn’t just want to disagree with the politics behind it, I’d consider it a very unreasonable way to behave. Politics is indeed adversarial, but that doesn’t mean you have to resort to petty name-calling and sweeping generalisations.

Politics is indeed adversarial, but that doesn’t mean you have to resort to petty name-calling and sweeping generalisations.

Yeah, gaylord…

Sorry, bad joke.

I think generalisations are useful, the ones above “risky, arrogant, molly coddled, powerful, conniving, cheating” are entirely accurate. They’re not even the most offensive synonyms I could have used.

25. Chaise Guevara

@ 24 Left Outside.

Generalizations are never “entirely accurate”. That’s the whole problem with them.

Again: what if I talked about “thieving immigrants” and defended myself on the basis that some immigrants commit theft? Nothing to do with comparable claims to victimhood. Would you think that was a reasonable thing to say, or would you think I was making an unpleasant sweeping generalisation?

The right accuse the left of childish, kneejerk banker-bashing, and you’re giving them completely justified ammo.

Left Outside,

There are certainly those on the right who share my position, but they are few and far between. The right (and I include the labour right in this) are thoroughly under the financial industries thumb.

If you permit me a little Gramsci, the idea that the financial services sector is the wild west, free market sector of the economy has become hegemonic.

I’d agree here – but I wonder who pushes that line and why. Might be some interesting things down that route.

Most on the right will back interference with the financial services sector on fairly conservative grounds, keep the state out.

But they fail to realise, because pro-finance ideology is hegemonic, that the state already intervenes heavily and we need a much better sort of intervention.

I’d disagree with the intervention – a clear framework to protect investors is fine, but anything beyond that just increases costs and makes it easier to be an oligarchy – but the hegemonic ideology is indeed something to challenge (mind you, I would say that – I hate hegemonies).

The left, probably by chance, are already quite displeased with the financial industry because of various anti-hierarchical, egalitarian, anti-corporatist value. That is why my arguments come from the left and are directed at the right.

I want to convince the right by weight of evidence that something is rotten in the state of finance. Asking politely won’t work.

Speaking as somone of the right, I’d say a reasoned rather than an adversarial case will work – attack the bankers but present them as a danger to all, left or right, rather than as the heroes of the right. Tribalism is hardly rare in right wingers, and attacking something whilst associating them with the people you want to convince is simply going to make them want to protect those you are attacking through association. Better to disassociate the banks from any position and make the hegemonial narrative disconnected from political currents (albeit I’d argue the banking hegemony is inherent in the EU for example). To break the banks particular position (and remember that to do this is to risk financial insecurity in the short term) requires setting everyone against them, not setting us against each other. We can argue better intervention against withdrawal of state support till the cows come home, but perhaps we should agree to attack the uncompetetive oligopoly that dominate banking first?


Reactions: Twitter, blogs
  1. Liberal Conspiracy

    Want more reasons why the financial sector is bad for us? http://bit.ly/lX4sZl

  2. Paul Wynter

    Want more reasons why the financial sector is bad for us? http://bit.ly/lX4sZl

  3. Watching You

    Want more reasons why the financial sector is bad for us? http://bit.ly/lX4sZl

  4. David Dubost

    Want more reasons why the financial sector is bad for us? http://bit.ly/lX4sZl

  5. Ellie Mae O'Hagan

    DO I! RT @libcon Want more reasons why the financial sector is bad for us? http://t.co/wfjLO0T

  6. sunny hundal

    DO I! RT @libcon Want more reasons why the financial sector is bad for us? http://t.co/wfjLO0T

  7. Pedro

    “@libcon: Want more reasons why the financial sector is bad for us? http://t.co/3kwnTkP” << This. Is. Labour. #InFuckingSane

  8. Left Outside

    Want more reasons why the financial sector is bad for us? | Liberal Conspiracy http://t.co/xJYJUnD via @libcon





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