I mentioned the “cult of equities” earlier this morning; An article in the Atlantic on the Cult of Finance is making the rounds:  The Quiet Coup.

I found it very similar to Bailout Nation. If this sort of stuff floats your boat, then you will love the book — it gets much more granular than the Atlantic piece does.

Anyway, this is the section that I thought was pulled right out of chapter 20. Casting Blame. Regular readers of TBP will recognize most o these elements:

From this confluence of campaign finance, personal connections, and ideology there flowed, in just the past decade, a river of deregulatory policies that is, in hindsight, astonishing:

• insistence on free movement of capital across borders;

• the repeal of Depression-era regulations separating commercial and investment banking;

• a congressional ban on the regulation of credit-default swaps;

• major increases in the amount of leverage allowed to investment banks;

• a light (dare I say invisible?) hand at the Securities and Exchange Commission in its regulatory enforcement;

• an international agreement to allow banks to measure their own riskiness;

• and an intentional failure to update regulations so as to keep up with the tremendous pace of financial innovation.

The mood that accompanied these measures in Washington seemed to swing between nonchalance and outright celebration: finance unleashed, it was thought, would continue to propel the economy to greater heights.

What he calls the Cult of Finance I would describe as the “Deification of Markets” . . .

>

Source:
The Quiet Coup
Simon Johnson
Atlantic, May 2009

http://www.theatlantic.com/doc/200905/imf-advice

Category: Credit, Derivatives, Legal, Markets, Politics, Regulation

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

40 Responses to “The Cult of Finance”

  1. DL says:

    “insistence on free movement of capital across borders”

    How would one propose to stop this? And might the “cure” be worse than the disease?

  2. Alex says:

    Ok, so if we have a cult of finance, and these are the symptoms of being programmed by same cult, who are we going to hire to deprogram T.Geith? Or is he the Jim Jones dejour?

    I would hope a more useful modification of “Insistence on free capital movements across borders” would be “Heading off any internationally coordinated financial supervisory response to capital flows that could pose systemic risk.” It is not even acceptable for supervisors to even KNOW what the hell is going on, much less do anything about it.

  3. franklin411 says:

    Great article on Geithner in Newsweek as well. I completely agree with the Treasury Secretary that his critics don’t know what they’re talking about:

    “Geithner scoffs at their proposed alternative, what he calls “preemptive nationalization of the big institutions,” saying his critics have no idea what they’re talking about. One big problem, Geithner says, is that the government doesn’t have the resources to do more now, not with political outrage so high.”

    The Education of Timothy Geithner
    By Michael Hirsh | NEWSWEEK
    Published Mar 28, 2009
    From the magazine issue dated Apr 6, 2009
    http://www.newsweek.com/id/191394

    ~~~

    BR: It ain’t pre-emptive if they are insolvent.

    The two alternatives: Admitting insolvency/reorg, or taking $300 billion in taxpayer monies

  4. Marcus Aurelius says:

    Ask not for who the KY flows . . .

    “The mood that accompanied these measures in Washington seemed to swing between nonchalance and outright celebration: finance unleashed, it was thought, would continue to propel the economy to greater heights.”
    _______

    Maybe if we just let the barbarians besieging the city come on in, they’ll turn out to be really good guys, who do right by us – keeping them on the other side of the wall seems to be pissing them off.

  5. DM RTA says:

    how does one cure optimism toward an always uncertain future? why would you? or better yet who would dare go against the crowd when everyone is on a roll? Do you really think we (the collective we) would have not fired the person who took the punchbowl away too quickly a while back…just when the late adopters got in just in time to get burned?
    Likewise, how do you cure pessimism toward an uncertain future? Not by bailouts…at least so far. Not by banning short selling.
    I see the “Deification of Markets” as a symptom you just have to see for what it is…a mess to be cleaned up later. Didn’t someone else say that?

  6. JustinTheSkeptic says:

    It all seems to illconceived given the intelligence of the people involved. But given the complexity of the system(s), it makes total sense. Which begs the question: “how can we trust them now?” We’re going lower boys and girls. Maybe not Monday, or next week, but we will break the lows that are in.

  7. JustinTheSkeptic says:

    We have found the enemy and he is us!

  8. paulyarbles says:

    From Newsweek via franklin411: ““Geithner scoffs at their proposed alternative, what he calls “preemptive nationalization of the big institutions,” saying his critics have no idea what they’re talking about.”

    Critics have no idea what they’re talking about?! Has Geithner seen who some of the critics are?

    Geithner (and Obama) should get off of their knees, wipe their mouths, and finally tell the bankers they are currently servicing to eff off. It will be in the Obama admin’s best interest in the long run.

  9. crabsofsteel says:

    In order to remedy the mistake of allowing too much leverage to enter the system via option-ARM mortgages, CDOs and CDS written without reserves, the Geithner solution is to repeat the mistake, monetize fictitious future cash flows, and give borrowers even more credit. It makes no sense and the evidence is already there that certain institutions are loading up on toxic securities in anticipation of TALF which they will likely be unable to sell. Just like what happened with TARP.

    It also spells doom for the dollar.

    Get Geithner out of there and bring back Volcker. Bad contracts need to be abrogated, not honored, in order to clean the mess out of the system.

  10. snapshot says:

    On pg. 8 of 11

    This says it all for me….

    “The challenges the United States faces are familiar to the people at the IMF. If you hid the name of the country and just showed them the numbers, there is no doubt who old IMF hands would say: nationalize troubled banks and break them up as necessary.”

  11. snapshot says:

    ….”no doubt WHAT old IMF hands would say.”

  12. crabsofsteel says:

    here’s what FairEconomist said over on Krugman’s blog and I think it’s relevant:

    “Our equivalent is the worship of derivatives, especially the credit default swaps. Just as maintaining the gold standard forced the depression-era national banks into destructive deflationary policies, paying off derivatives that never should have been allowed to exist is forcing the current national banks into wasteful giveaway and encouraging zombiefication.”

  13. snapshot says:

    Speaking of Krugman, I found this article @ Newsweek – http://www.newsweek.com/id/191393 -
    “Obama’s Nobel Headache” more interesting than the Geithner piece.

    “Paul Krugman has emerged as Obama’s toughest liberal critic. He’s deeply skeptical of the bank bailout and pessimistic about the economy.”

  14. call me ahab says:

    BR: It ain’t pre-emptive if they are insolvent.

    exactly- the amount of money they are throwing around is scary ridiculous- all on a “maybe” limp along fix a la Japan with possible disastrous long term consequences for the economy and the US dollar. The companies should be bankrupt and would be if not for the USG. And the USG keeps f*cking with people making intelligent investment decisions- as long as people believe the USG will never let the banks go down then people will keep chasing bank stocks (that should be ZERO). Let’s stop the madness please.

  15. Mike in Nola says:

    snapshot: To quote Nietzsche “The thinking man is not a party member because he soon thinks himself right through the party.”

  16. Mike in Nola says:

    Oops! – meant to say “good party member”

  17. Mike in Nola says:

    Finally got to finish the article in question. Very good. I think the second scenario is the more likely. If Obama falters, as is likely, he eventually has to sacrfice Geithner to save himself.

  18. snapshot says:

    http://economistsview.typepad.com/economistsview/2009/03/it-pays-to-understand-the-mindset.html

    Mike in Nola – I think you are right about Geithner.

    In the Newsweek article, Krugman has a bit of hope for Summers, but says..”he thinks Geithner has been captured by Wall Street.”

    Here is a piece on Summers from The Economist.

    Anybody here hold out any hope for him?

  19. call me ahab says:

    no

  20. enver says:

    I prefer to think of it as defecation on the markets.

  21. km4 says:

    Have read The Quiet Coup http://www.theatlantic.com/doc/print/200905/imf-advice because it’s that good.

    Simon Johnson is a hero to spell it out so clearly.

    The crash has laid bare many unpleasant truths about the United States. One of the most alarming, says a former chief economist of the International Monetary Fund, is that the finance industry has effectively captured our government—a state of affairs that more typically describes emerging markets, and is at the center of many emerging-market crises. If the IMF’s staff could speak freely about the U.S., it would tell us what it tells all countries in this situation: recovery will fail unless we break the financial oligarchy that is blocking essential reform. And if we are to prevent a true depression, we’re running out of time.

    Net Net: US Banking oligarchy f*cked up and still won big

    The USA in addition to having most advanced economy and military also has the most advanced oligarchy so if the Obama admin doesn’t swing the banking regulation pendulum back we’ll also be the world’s largest Banana Republic

  22. wkevinw says:

    Re: “deification of markets”….

    I know Adam Smith spent a fair amount of space discussing regulation of markets, so this idea of “deification” is mis-placed in my mind. I have called it “anarchy markets” instead of “free markets”. I saw a discussion of modern jazz as kind of like tennis without a net- same thing with the anarchy markets.

    I think free markets have “nets” as fundamental parts. They can’t function without the nets, e.g. regulated leverage maxima, and many of the other bullet points BR cites.

    It’s really not an argument. There was the perfect storm of stupidity on all sides, satisfying their own interests, who rationalized all of this.

    Doing the “right thing” didn’t work because it didn’t lead to getting rich quick, and in the end, it’s boring, (like much good investing).

  23. crabsofsteel says:

    The only dispute I have with Mr. Johnson in the Quiet Coup is that, as a solution, he proposes having assets marked down to their “true” value. For the $300B+ of RMBS, CMBS and CDOs held by the major banks, you can only know what true value is by knowing what residential and commercial delinquencies and loss severities will be for the next 27 years. I don’t, nor do you. Furthermore, no model will be reliable because there were never loans like this before. We have a valuation problem, now we also have an oligarchy problem. So I kind of feel like I’m back at square one. What I don’t get is that Geithner is ex-IMF and he should know all of this.

  24. Trainwreck says:

    The cult of finance I would think is more a religion. At least you can deprogram cultists, not much you can do with religious adherents other then to bomb them out of their primitive caves.

  25. 1 currency now says:

    Geithner says, according to Newsweek, that the government doesn’t have the resources to do [preemptive nationalization] with political outrage so high.

    The outrage is that you’re spending all our money propping up the big banks, asshole.

  26. Transor Z says:

    Wealth disparity in the US is greater than that in the EU and developed nations. Household income or consumption by % share in the US is Bottom 10% (2%) and Top 10% (30%). The world average is a spread of 2.5%/29.9%. The EU is 2.8%/25.2% and Japan is 4.8%/21.7%. Russia is slightly worse at 1.9%/30.4%. The US spread is consistent with that of the developing world. We are closest to Ghana at 2.2%/30.1%.
    https://www.cia.gov/library/publications/the-world-factbook/geos/us.html#Econ

    The US has the 42nd highest Gini index in the world, another index of degree of economic inequality which measures the distribution of family income in a country. The index is calculated from the Lorenz curve, in which cumulative family income is plotted against the number of families arranged from the poorest to the richest. The index is the ratio of (a) the area between a country’s Lorenz curve and the 45 degree helping line to (b) the entire triangular area under the 45 degree line. The more nearly equal a country’s income distribution, the closer its Lorenz curve to the 45 degree line and the lower its Gini index, e.g., a Scandinavian country with an index of 25. The more unequal a country’s income distribution, the farther its Lorenz curve from the 45 degree line and the higher its Gini index, e.g., a Sub-Saharan country with an index of 50. If income were distributed with perfect equality, the Lorenz curve would coincide with the 45 degree line and the index would be zero; if income were distributed with perfect inequality, the Lorenz curve would coincide with the horizontal axis and the right vertical axis and the index would be 100.

    No EU nations or developed nations rank lower than us. Iran, Kenya, Cameroon, and Ivory Coast are slightly better. Those lower than us are banana republics, sub-Saharan Africa, and a few Asian nations.
    https://www.cia.gov/library/publications/the-world-factbook/fields/2172.html

    Per capita GDP excuses the disparity somewhat vis a vis developing nations (the US poor are not Mumbai-poor), but clearly not vis a vis EU and developed Asian nations. US per capita GDP is 10th in the world at $48,000. The EU average is $34,000 with a few, like Switzerland ($40,900), Ireland ($47,800), and Norway ($57,500) averaging over $40,000 per capita.
    https://www.cia.gov/library/publications/the-world-factbook/rankorder/2004rank.html
    Source: CIA World Factbook (2008)

    According to a September 2003 Federal Reserve Board paper “A Rolling Tide: Changes in the Distribution of Wealth” by economist Arthur B. Kennickell, division of wealth in the US in 2001-02 was one third held by the top 1%, one third held by the next 9%, and a third held by the remaining 90% of the US population, with the bottom 50% of the US population holding only about 3% of wealth.
    http://www.federalreserve.gov/pubs/oss/oss2/papers/concentration.2001.10.pdf

    These kinds of figures make me wonder about real-life pitchforks and torches. Just ordered my copy of the book, Barry.

  27. cbosco76 says:

    The securitization plan may be an attempt to draw a line that will finally determine bank solvency. Maybe then we can get on with nationalization, bankruptcy, etc.

    Gosh, I hope these guys know what they’re doing.

  28. mschek says:

    What I don’t see anyone addressing is how this economy gets moving again without a large export market.
    This what the government knows; that our economy is totally services driven and we don’t have any other cards to play, except that the US has had substantially the same system longer than anyone else. There is no where, long range, to park serious money. Historically, then, we have a very strong hand. Bailing out these banks over time, criminally charging some unattractive management peons to take the fall is the future that will pan out.
    Of course, the US could run out of time.
    But the US style of government & capitalism has stood the test of time and everyone knows it around the world.

  29. cbosco76 says:

    Very amusing response to Jack DeSantis’ resignation letter by Rolling Stone writer Matt Taibbi:
    http://www.smirkingchimp.com/thread/20988

  30. aitrader says:

    I’ll read the book Barry and I’m sure your prose will delight, but I’m more interested in leading indicators. So many are currently focusing their energies on lagging historical analysis. This is a beautiful market to trade. The whipsaws are churning out opportunities and the market tells seem obvious, at least to me. I’ll read the history in between trading the hills and valleys. Those that focus on leading indicators and analysis ahead of the markets are going to garner the most attention IMO.

    If your blog here focuses more on leading insights instead of lagging history you’ll end up competing with the likes of CNBC, Bloombeg et al right here in your own little slice of cyberspace. Should be a lot more profitable to boot – both the website and trades.

  31. Bruce in Tn says:

    speaking of leading indicators…the headline today about Christmas 2009 makes it look like the retailers are going to put a lump of coal in the manufacturers’ stockings…

    http://finance.yahoo.com/news/Toy-luxury-stores-eye-apf-14775611.html

    “For shoppers, this hesitance will translate into fewer choices and, if demand increases at all, fewer bargains. For factories abroad, it’s feeding desperation at the time of year when manufacturers usually start ramping up to fill summer and Christmas orders.”

  32. danm says:

    For the $300B+ of RMBS, CMBS and CDOs held by the major banks, you can only know what true value is by knowing what residential and commercial delinquencies and loss severities will be for the next 27 years. I don’t, nor do you
    ————————-
    When an individual files for bankruptcy, when is the last time they accurately forecased that person’s next 27 years of revenue generation?

    It’s the same thing with companies, unless they are too big to fail of course.

    Our financial system is based on current solvency. The vultures are only too happy to get a hold of your assets when you can’t pay at a point in time, especially when there is equity. Only there is not much equity today (lol). Therein lies the rub.

    It’s also been like this for all other countries that have defaulted in the recent past but Americans are expecting the rules of the game to be different for them.

    Ironically, in the last few decades, which country do you think controled the terms of the IMF restructurings?

    To the point that, not long ago, if you asked the average American what they thought of their countries finances, they’d answer that America is loaded: “We make all the loans to the other countries.”

  33. Bruce in Tn says:

    orders for the Eurozone fell another 3.5% last week:

    http://www.rttnews.com/CorpInfo/EconomicCalendar.aspx

    3/27/09 page 4…

    This is the same sort of thing that got my attention about our US figures a couple of months ago…it heralds future weakness….I would like to see orders improving before jumping on the Bus full of Bulls…

  34. Greg0658 says:

    a fine thread

    “Christmas 2009 ….. For shoppers, this hesitance will translate into fewer choices and, if demand increases at all, fewer bargains.” .. aitrader – forward thinking maybe put Ebay and garage sales on your radar (unfatten’g and lighten’g us) .. I guess trade that (well .. one is tradeable globally)

    but longer term I’m not sure what the learned trade to be in is … I saw a stroy on displaced Michigan auto manufacturing workers going into Healthcare at alarming numbers .. “alarming” because imo its service biz .. reliant on Medicare and an Insurance Industry that are both strapped

    closing up – repeat a fine thread all – lots of outer reading

  35. Transor Z

    ….The US spread is consistent with that of the developing world. We are closest to Ghana at 2.2%/30.1%…..

    aitrader

    …If your blog here focuses more on leading insights instead of lagging history you’ll end up competing with the likes of CNBC….

    mr/mrs trader,
    The leading indicators are right under your very nose,
    don’t overlook the obvious.

  36. willid3 says:

    and that story isn’t the only one. it sounds liek we really have more of a political problem with financial leaders capturing the government.

    http://www.washingtonpost.com/wp-dyn/content/article/2009/03/25/AR2009032502226.html

  37. ….. Yet I still recall the shock I felt at a meeting in Russia’s dingy Ministry of Finance, where I finally realized how a handful of young oligarchs were bringing Russia’s economy to ruin in the pursuit of their own selfish interests, despite the supposed brilliance of Anatoly Chubais, Russia’s economic czar at the time.

    ……Over the past year, I’ve been getting Russia flashbacks as I witness the AIG debacle as well as the collapse of Bear Sterns and a host of other financial institutions. Much like the oligarchs did in Russia, a small group of traders and executives at onetime venerable institutions have brought the U.S. and global financial systems to their knees with their reckless risk-taking — with other people’s money — for their personal gain….

    A singular characteristic of an emerging market heading for deep trouble is a seemingly suicidal tendency to become overly indebted to foreign creditors. That tendency underlay the spectacular collapse of the Thai, Indonesian and Korean currencies in 1997. It also led Russia to default on its debt in 1998 and plunged Argentina into its economic depression in 2001. Yet we too seem to have little difficulty becoming increasingly indebted to the tune of a few hundred billion dollars a year. To make matters worse, we do so to countries like China, Russia and an assortment of Middle Eastern oil producers — none of which is particularly well disposed to us…..

    Thanks wkkid3,
    More FORWARD looking indicators

  38. Mike in Nola says:

    Bruce in Tn: China, Taiwan and Korea really haven’t seen the worst of it yet. Those expecting China to somehow save the day are mistaken.

  39. willid:

    w/this: “we really have more of a political problem with financial leaders capturing the government.”

    welcome to the 18th C.

    JEFFERSON’S OPINION ON THE

    CONSTITUTIONALITY OF THE BANK

    February 15, 1791

    (The Writings of Thomas Jefferson, ed. by H. E. Bergh, Vol. III, p. 145 ff.)

    The bill for establishing a national bank, in 1791, undertakes, among other things,–

    “I consider the foundation of the Constitution as laid on this ground–that all powers not delegated to the United States, by the Constitution, nor prohibited by it to the states, are reserved to the states, or to the people (12th amend.). To take a single step beyond the boundaries thus specially drawn around the powers of Congress, is to take possession of a boundless field of power, no longer susceptible of any definition.

    The incorporation of a bank, and the powers assumed by this bill, have not, in my opinion, been delegated to the United States by the Constitution.”