Speculation in the Late Empire

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We hear news that those diligent ‘unbundlers of risk’, those incomparable lubricants of our ‘flexible economy’, the men and women toiling in the reinforced concrete and plexi-glass canyons of High Finance have enjoyed rather a sumptuous Yule!

Indeed, as press reports on either side of the Pond have breathlessly revealed, Wall St’s $21.5 bln in bonuses, added to the $13 bio ‘trousered’ in London’s Square Mile, takes the rocket scientists, vulture capitalists, and assorted structured-product salesmen up to $35 bln in extra moolah in just these two main temples of Mammon.

For allowing my jaw to fall unrestrainedly open at the mention of such sums, I was taken to task as an ante-diluvian moralist and an unmitigated smokestack worshipper by a friend of mine who just happens to work in the bond market (summa cum bonus an non!).

In my defence, I pointed out that one could not quibble that speculation should not be seen an evil, per se; nor could one pretend that the old-style banker who shepherded a man’s savings toward productive investment — using specialist knowledge and economies of scale of which the individual could not dispose — was inherently a malign influence.

I even put aside forebodings about that $350 trillion sword of Damocles which is the derivatives market to allow that such instruments are a baleful presence by dint of their extraordinary scale and not because of their intrinsic properties.

Indeed, I went so far as to admit that, in their primary function of exchanging economic risk between actors with complementary needs — e.g., between farmers and millers — they are an unqualified plus, as they are when they perform the role of genuine insurance contracts drawn up between informed and consenting adults.

But when financiers and traders get paid well enough to make Croesus kvetch for taking wholly asymmetric risks with phantom capital — risks underwritten by government institutions like the Fed and the FDIC; risks constrained by limited-liability partnership, or corporate status — this is not exactly a fair card game.

When arbitrageurs and junk-bond jugglers receive kings’ ransoms for indulging in manic, fiat money-fuelled churning — a hyperactivity which reached $1 quadrillion at the DTCC alone in 2004!! — thus financing illiberal and corrupt governments at home and abroad, and so distorting prices that economic calculation is rendered well-nigh impossible for producers and consumers alike, this is a different ball game altogether.

When the buy-out merchants and private equity partnerships can borrow what are effectively limitless sums of cheap, tax-advantaged debt with which to buy out corporate shareholders (not all of them willing sellers, remember); when they can then proceed to ruin the target business’ balance sheet in a flash, by ordering payment of special dividends and by weighing it down with junk debt, in order to return their funds at the earliest juncture; when their pecuniary motives are mollified by so little pretence of undertaking any genuine entrepreneurial restructuring with which to enhance economic efficiency; when they can rake in an even greater haul of loot by selling the firm smartly back to the next debt-swollen suckers in line (probably into the little man’s sagging pension funds via the inevitable, well-hyped IPO); when they can scatter fees and commissions (and often political ‘contributions’) liberally along the way — then we’re clearly well past the point of reason or endorsement.

Just to see the scale of things here, let us consult the US Dept of Commerce’s quarterly reports on business profits and see how long it would have taken Main St. and Commercial Rd. to make the same $35 billion as did Wall St. and Canary Wharf’s favourite sons and daughters.

$35 billion — even in today’s high-priced world — is no trivial sum.

In fact, it is roughly equal to 15 months’ worth of combined profits at ALL of the US wholesale trade business. It represents close to a whole year of the American mining industry’s after-tax income. It matches 8 months’ earnings made by both the computers & electronics industry and by the nation’s retailers.

It would take almost six months for the entire US chemical industry to ring up the same number of dollars and — perhaps most tellingly of all — even at $60 and north for a barrel of crude and after a three-year doubling per tonne of anthracite, it is comparable to 35% of the annual take of every one of those supposedly villainous price-gougers who comprise Big Oil & Coal.

For any members of the Fourth International out there who still cling to the discredited dogma of the labour theory of value and who are sick of all this talk of profits, they may wish to hear instead that the arch-exploiters’ and rentiers’ $35 billion bonuses would also meet five weeks of payrolls for all of the Stakhanovite production workers left tenuously clinging to the rump of America’s dwindling manufacturing industry.

Now, it is true that, according to Bloomberg News, Exxon’s outgoing boss Lee Raymond was paid $38 million last year — mostly through stock awards — and that this seems to have been pretty much what Henry Paulson of Goldman, Sachs garnered in emoluments, too.

You may well think that Mr. Raymond may actually be worth that sum, or that he may not; likewise Mr. Paulson — but I think I know who created most real value and who had the much harder job to do.

So, who wants to spend weary years of bone-sapping practice learning to be a concert pianist? Who dreams of a Nobel Prize for Medicine for ridding Mankind of one of the many scourges which plague the human condition?

What sane would-be innovator-businessman would aspire to be the next Bill Gates, or Steve Jobs?

Who would think about a job drilling for gas in the wind-swept wastes of Kazakhstan, or digging for minerals in the fly-blown wilderness of Kalgoorlie?

With today’s outrageously skewed reward system — and the twisted monetary backdrop which makes it all possible — why would anyone waste their considerable analytical brainpower to deliver such less controversial benefits to humanity?

As it does to everything else, inflation greatly misdirects human resources, too, and it impoverishes us all thereby.

Why train to be a farmer or a pharmacologist, when you can join Merrill Lynch and become a millionaire in your mid-20s, using someone else’s ‘capital’ and benefiting from being an insider in the great Ponzi scheme in which we live.

Though one should never be a fetishist for such tangible endeavours as manufacturing, ultimately, one must also recognise that all material human needs are met by industry; by the application and transformation of capital goods, resources, labour, etc., into products.

In contrast, no City-slicker exotic options trader (or Zurich gnome!) is going to put food on your table or a flame in your furnace, no matter how quickfire his mind and steely his nerves.

Indeed, if more honest money and thus a less fevered and hypertrophic financial sector meant there were a few less of us and a few more mechanical engineers, private-sector scientists, and process managers — all guided by real-world entrepreneurs and not led by paper money pirates — the MTV-muddleheads’ dreams of “Ending Poverty Now” would be a great deal nearer being translated from a forlorn slogan on their modish, rubberised bangles and into a measurable alleviation of our lot in life.

But, as things stand, it is far, far more lucrative to don a silk shirt, polish up the shoe buckles, and to spend one’s day buying and selling electronic blips on a multi-coloured screen, using a bottomless supply of faux monetary tokens, at what must be the ultimate embodiment of one of Mssrs Gave and Kaletsky’s u2018platform’ companies.

Sadly, such pursuits hold out a much more tantalising prospect of gain; it is far easier to play the tables in a fiat market than it is to make them in a free one.

And that is why the bonuses on Wall St. and in the city are a matter for shame, even if they should not be cause for envy.

Sean Corrigan [send him mail] writes from Switzerland.

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