Goldman Sachs

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Back to the Bank?

Following on from the revelation that our impoverished banks are thinking off penalizing their staff for the rather obvious and rational decision to re-locate, along with their big city wages, to a low cost place to live, we discover that most are now trying to force those recalcitrant workers back to the big city offices.

My head is still spinning from the absurdity of the threat to cut the wages of enterprising workers.  Just how stupid, mean-spirited, and unnecessary is this?  Those workers are being exactly the kind of person the banks want to employ.  Self-interested, rational, aggressive in pursuing their goals, and intense.  The problem, I suppose, is that all those qualities make them difficult to control.  Whatever next?

Banks love, of course, to crow about the so-called “teamwork” and “spirit” that allows them to help their clients “realize their goals”.  Renting this teamwork is expensive.  Woe betide the unsuspecting client who falls into the grip of a hungry investment banker.  That spirited teamwork can appear gold plated at times.  Those partners have expensive lifestyles to uphold.  The army of grunts they bring along with them to crunch the numbers , work through the night, and generally play factotum to their every whim, is well paid, smart, and ambitious.  It is also expensive.  Having such an army allows places like Goldman Sachs and Morgan Stanley to earn enormous amounts of profit from what are fairly straightforward activities like trading, and giving advice.  This is not to diminish what they do.  It is just to remind us that those things are an enormous cost to be borne by the non-financial economy.

I wonder sometimes just how much all that savviness has added to GDP.  Are we all better off for the efforts of the overnight banker-grunt churning out spreadsheet in double time rather than, say by lunchtime the next day?  Has all that M&A advice really added to the economy?  If you believe Jan Eeckhout, in his book I mentioned recently, the answer is a resounding no.  Industry consolidation leads to the development of market power, which, in turn, allows dominant firms to under-produce, over-price, and thus hammer both workers and consumers at the same time.  All in the name of a few extra points in the return on equity and a few more millions for the CEO’s next bonus.  The world must bend to the will of shareholders.  Mustn’t it?  However the banks justify their existence, the real world consequences of their activities appear to have aided in the stagnation and malaise we were suffering through before the pandemic hit.

But about those ROEs.

I note that the banks did pretty well in 2020.  I love when a bank CEO talks about the “challenges” the organization faced in his or her notes accompanying the earnings report.  Challenges is such an anodyne word.  It is extraordinarily elastic.  It can mean a mild hiccup, or it can mean an existential disaster.  A pandemic is certainly a challenge.  Tens of millions of people lost their jobs, hundreds of thousands died, a multitude of small business went under, and our political system nearly sank under the weight iof partisan disagreement as to whether the entire thing was real or not.  Challenge seems to understate some of this.  But it is the preferred word of the public relations people drafting serious CEO statements.

And I also not that the banks appear to have risen to these challenges heroically.

You see, their ROEs rose.  It was a good year.  Goldman Sachs ROE was 11.1% for the year 2020.  It was 21.1% in the fourth quarter. The bank’s diluted earnings per share was $24.74 in 2020 compared with $21.03 the year before.  Its book value rose 8.1% on the year.  If these are hard challenging times I shudder to wonder at the sea of profits that must roll in during a less stressful year.  Morgan Stanley’s numbers are similarly bountiful.  Clearly being a big-city investment bank during pandemic must be a walk down easy street.

The point is not the excessive weight these profits are on the rest of the economy, but the fact that they achieved these results with most of their staff being remote.  That vaunted teamwork that now apparently depends on everyone turning up at the office, living in expensive big-city apartments, and absolutely not living in low-cost more pleasant lifestyles, managed to survive remotely.

So why the urgency in bringing people back?  The profits didn’t go away.  The business model appears to have survived.  I imagine the CEO was paid a good bit.  That’s all that matters isn’t it?  The entire enterprise did well.  More than well compared to the destruction in the less rarified sectors of the economy where the challenges were real rather than the subject of PR word-smithing. The cash rolled in.  Just how much more do the banks need?

Let me repeat: so why do they now all need, urgently, to force their workers back to the office?  Why does the head of Morgan Stanley need to sound like a complete idiot by using overly tough language to threaten his own staff?

Is this simply a clash between generations, with the old guard uncomprehending of the younger set’s ability to work more flexibly? Is it that having survived the notorious hazing of those overnights stints and foregone family moments that the old guard is begrudging of the youngsters desire not to go through the same?  The pandemic and its enforced remote working proved that many of the ironclad rules of investment banking behavior are incorrect.  They are nothing but antiquated and unnecessary norms to justify the excessive pay that the bankers receive.  There must be better ways to sort the wheat from the chaff within each annual intake from the top business schools.  Perhaps not.

But if not, then we have to suspect the culture that needs such an old style management process.  If, having performed well during crisis, a firm needs to abandon all it might have learned from the flexibility enforced on it, why would we trust the progressiveness of its advice?  Is that firm truly a cutting edge source of thinking?  Or is it simply an obsessive deal maker, intent on cutting deals whether good or bad?  If it cannot walk away from its own old style methods in the face of newly acquired knowledge, how can it advise others to do just that?  It can’t.

The alternative is, of course, that the cultures of the banks are so rotten that they need their staff in close quarters for supervision.  Traders can go rogue.  They often do.  That’s risky.  It’s best to bottle them up where you can keep an eye on them.  Perhaps the Morgan Stanley CEO is right: his bank is so riddled through with poor morale, full of cultural contradictions, inequities, and other distortions that he needs to have those incorrigible workers on site where he can bash them into shape.  Clearly he can’t trust them if they remain offsite. That he doesn’t trust them is obvious.

The more intriguing question is: why should they trust him?

Why should his clients?

Why should we?

 

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That’s a Tax Plan?

Well, no, it isn’t. It’s a draft of a sketch of an outline of a synopsis of what a tax plan might look like were it designed exclusively to serve the interests of the drafter/sketcher/outliner.

With great fanfare and pomp the White House rolled out its “huge”tax plan. As predicted it is not a plan, it is a tax cut for the wealthy.  And, also as predicted, it is more ghost than real. The entire thing fits onto one side of a piece of paper. It is a typically bureaucratic bullet-point presentation of suggestions that Congress might, or might not, want to take into consideration as it works on its own tax plan.

The entire thing is a farce. It is yet further confirmation that Trump has no clue about governance, or about legislation, or about anything much to do with being president. Oh well, he’s what we’re stuck with.

But, what the piece of paper tells us is interesting. It gives us insight into the minds of the plutocrats that now control the country. Let’s be honest: neither Gary Cohn nor Steve Mnuchin, the two ex-Goldman Sachs financiers who make up Trump’s economic team, are so stupid as to believe that massive tax cuts will lead to extraordinary economic growth. They know better. It’s just that after four decades of selling tax cuts to voters the Republicans have discovered that most people are sufficiently blinded by the prospect of a sliver of gain for themselves that they will happily ignore the torrent of gold that floods into the coffers of the wealthy.

The moral bankruptcy of the sales pitch is breathtaking. It ignores the recent example of the state of Kansas under the leadership of Governor Brownback. Kansas became a test bed for the more virulent form of conservative tax theory that Trump’s erstwhile plan embodies. And the Kansas experiment has been an unmitigated disaster.

Not only did Kansas not benefit from a surge in employment when it slashed taxes — it has seen weaker employment growth than most other states — but its budget was thrown into chaos. The state’s credit rating has been cut. It has had to undergo crisis financial management that includes cuts to popular services like education. And it still is in fiscal turmoil. None of the promised benefits from the tax cuts turned up. On the contrary: Kansas has become a fiscal basket case and a premier example of why far right tax plans are to be avoided at all costs.

Yet here we are with Trump trying to turn the entire US into Kansas.

Why?

It isn’t because he is clueless. Nor is it because he is ill-informed. Cohn and Mnuchin are too smart for that. It is because he is a plutocrat. It’s as simple as that. Trump himself will get a tax cut of around $30 million a year from his own plan. On any other planet that would smell of corruption, but in planet-USA it is positioned as a pro-growth strategy to generate jobs for the plebes.

Now, I could support a thorough revision of the US tax code. It is so ridiculous and riddled through with special interest driven exceptions that it needs tossing out and totally re-inventing. At one point in his presentation Cohn mentioned that the intention was to produce a radically reduced and simplified tax code. Great, but the one page we were given didn’t get us there. Instead it featured a breathtaking giveaway to the wealthy and to business.

Republicans are always telling us that the US tax rate for corporations is the highest in the western world. That’s true, it is. But corporations don’t pay the nominal rate, they pay a much lower rate after taking all sorts of deductions that lobbyists have managed to insert into the tax code. That’s why the code is so complicated. Most large companies pay a very low actual rate of tax. Many pay nothing at all, even after making enormous profits. The same is true of wealthy taxpayers who can exploit all sorts of loopholes to minimize their tax rates.

Most people know this. Yet the Republicans keep up with the special pleading anyway.

Trump’s suggestions do include a few things for the average voter: the old seven tax brackets are condensed into three, although we have no idea at what income levels these brackets kick in; and the standard deduction would be doubled, meaning there would be virtually no tax below an income of $24,000. The plan is decidedly partisan in one way at the individual level: it would do away with a whole host of popular deductions that have particular impact in typically Democratic states like California and New York. Those states tend to have higher local taxes to pay for their higher quality education systems and public services. Eliminating the ability to use those local taxes as a Federal deduction would put huge pressure in those states to cut services like education. The Republicans apparently want to turn the entire country into Alabama or Mississippi. The want to initiate a race to the bottom in public service. Right now low quality service tastes benefit from an inflow of residents who have been educated in higher quality service states. Their workforces do not reflect their own service levels but those elsewhere. Once we have squeezed quality down everywhere, those inflows will cease.

Worse: since the higher quality service states are typically those where the economy is strongest, they have sent to Washington tax revenues far in excess of any subsidies they receive back. In effect the blue states pay into and the red states draw out from the Federal Budget. Trump’s tax plan will exaggerate the subsidy the blue states pump into the red states. At some point this will have to become an explosive political issue. Right now most taxpayers are blissfully unaware of it.

Fortunately, none of this matters much.

This meager beginning is just a start in what will be a long and drawn out battle. Most of what we saw yesterday will not make it into the final package that emerges from the arcane processes of Congress.

Oh, and we will now see just how committed the Republicans are to their fiscal conservatism. After years of bleating about the deficit during the Obama years will they simply “do a Cheney” and suddenly argue that deficits don’t matter? The Trump plan would blow hole of up to  $7 trillion in the budget over the next ten years. Either the Republicans have to let that happen or they need to find ways to cover the gap. Current Senate rules forces any tax legislation with a life beyond ten years to be “revenue neutral” — they must not add to the deficit —  this is why the Bush tax cuts were phased out after ten years, or they would have been had they not been re-upped. So do the Republicans go for another ten year deal? Or do they tackle the tax code once and for all?

The Trump plan gives us no insight. It isn’t worth the paper it is written on. So it’s a good job there wasn’t much paper involved.

One last thing, for all of you who thought a vote for Trump was a vote for fair trade: the Trump tax plan has abandoned his much ballyhooed tax on importers. He caved to pressure from the retailing industry.

What a negotiator!

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Goldman Sachs and Bank Pollution

By now most of you will be aware of the letter/op-ed article written by a disgruntled Goldman Sachs executive. He is resigning, and on the way out he is taking the time to lambast the firm’s culture. Rightly so. It is anti-client and, more importantly, anti-social.

As I have said repeatedly: I have no problem with business being anti-social provided that society maintains the means to correct that behavior and to keep it within bounds. This is why I am both pro-business and pro-regulation. I see no contradiction in being an advocate of a strong profit motive and an advocate of a strong regulatory regime at the same time. Capitalism is inherently an anti-social activity – by definition is is designed to accrue wealth to individuals who innovate or exploit opportunities. This means it flies in the face of democracy which is a system designed to provide equal opportunities with the hope that outcomes are less unequal, and that all of us share in the wealth being created because no individual is so isolated from society that he or she can truly be said to innovate independent of us all. All healthy societies are a complex mix of competitive and cooperative urges. The trick is to maintain a balance to extract the benefits from both and to live with the ensuing tension.

And it is exactly the unbalancing of the two that undergirds our current malaise.

By mistakenly imagining that the profit motive alone is necessary for wealth generation we have ignored its anti-social side effects, and have lost the strength that cooperation – usually as expressed through collective action – brings as a counterweight. In economics this shows up in an unhealthy bias – which I regard as ideologically driven rather than as scientifically derived – towards entrepreneurial activity or support of unfettered free markets. Neither are phenomena that thrive outside of a systemic setting that provides conditions allowing them to flourish.

So the proper discussion, in my mind, is about where to strike the balance between the conflicting demands of capitalism and democracy. Or, in business, between the opportunity for profit and the interests of other “stakeholders” particularly clients or customers on whose goodwill the business relies for sustainable profit streams.

Goldman Sachs has fallen prey to the virulence of pure profit. This is not threatening to the firm in the short term, indeed it creates the illusion of benefit since profits rise when any discussion of mitigation in support of stakeholders is taken off the table. It is the longer term impact that our disgruntled executive is pointing to.

Sooner or later clients realize that they are being exploited. They start to look for alternatives. And even in our highly concentrated banking industry where competition is way too concentrated there are alternatives. Eventually the short term relentless exploitation of clients transforms into an equally relentless undermining of the longer term credibility of the firm. This is an example of where a market can correct behavior. It is also why I advocate the break-up of our mega-banks in order to ensure more alternatives.

At one point in the distant past I tried to get my employer to use Goldman Sachs. It was clear to me that they were the best, their service was superior and their employees by far the brightest, attentive, and most innovative. I was overruled because of internal politics. That was over two decades ago. I doubt I would make the same decision again. The firm has become unmoored from the concept of client service. Its reputation is one of rapacious self-interest rather than of enlightened self-interest. The difference is enormous.

Getting back to my point that competition ought to offer a correction. This only stands if the culture at Goldman is unique and that alternative choices exist. It isn’t. They don’t. The cultural shift in the US economy has been towards an over emphasis on capitalism to the detriment of democracy. Our collective aspirations have been subordinated to such a degree that many claim that they don’t exist. Instead they imagine that the economic whole is simply the sum of its parts. They deny any result of interaction. They deny any concept of shared investment or shared outcome. They deny the existence of the “commons”.

When the idea of community is shoved so violently to the back seat, the stage is set for the antics and behavior that Goldman exhibited in the run up to the crisis. It also lays the groundwork for anti-social policy making, the disregard of environmental damage, and all sorts of other activities that would be limited in a less individualistic or atomistic culture.

The models and theories that embolden or give credibility to such behavior are both naive and artificial. They ignore the deep complexity of everything around us and the consequent interrelated nature of all activity. It is simply not possible for even the most brilliant entrepreneur to innovate in the absence of a multitude of prior existing and socially created knowledge. It is impossible for even the purest market to operate without a set of socially established rules to eliminate cheating and other sources of dysfunction. The existence of society and its accumulated knowledge, technology, infrastructure, institutions, social networks, and culture are what enables an economy to function. They are what enables a business firm to function. They are what allows an individual to earn a living. Privileging the individual, or the firm, to the extent that these resources are abused, denigrated, and eventually dissipated, will inevitably undermine the sustainability of the wealth that individual or firm hopes to extract.

In short: Goldman is on a self-destructive path. So is banking in general if it continues to ignore its clients and its proper situation within society at large.

This is why I support regulation. We need to place limits on what appears to be a highly toxic culture.

I don’t care whether Goldman destroys itself. I care whether it takes society down with it. And, as the crisis has shown, an unregulated banking system has the capability of damaging us all.

Banking pollutes in a very nasty way. We need to clean it up. As our disgruntled ex-executive is highlighting.

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From The Mouths of The Elite …

I am a big fan of the Financial Times. One or two of its contributors seem to get things right. But, periodically we come across a column or letter that exposes the thinking of the financial world a little too bluntly. Plus it’s always fun to follow the discussion when someone in that elite group responds to a column written by another of the group. It’s like sitting in a very expensive dinner and listening to dueling millionaires bemoan the price of expensive houses. Things are so bad they simply will have to give up the European tour this year. Oh my: that bad? They don’t get it. They have no idea how odd they sound. Especially given the recent history of their industry and its total ineptitude and reliance on the little people for its continued existence.

In that vein we have two examples.

Weighing in on the plight of Ireland we have a certain Peter Sutherland whose article appears on the comments page. He launches us, with all the required language of a very serious person, into a discussion of the need to renegotiate the EU-Ireland deal that provided bail out funds for that beleaguered economy. That sounds very reasonable to me, especially when I am told that the interest rate on the deal is 5.8% while the cost of funds underlying the loan is only 2.9%. That sounds like a very wide risk premium.

Or is it a premium for something else?

After being told that the need for austerity is self evident – Sutherland says “there is no denying the austerity required” – it emerges that he endorses a slightly lower premium in order to signal that we disavow moral hazard.

There’s that phrase again.

How often have we been hammered with the moral hazard argument? For all the talk about it, we would think that the important folks who worry would have eliminated its threat. The poor Irish are certainly now aware of their foolish reliance on moral hazard. They have to be punished both by harsh austerity with its loss of wealth, and now this premium on the bail out loan provided by other Europeans.

Naughty Ireland. Thinking it could fall back on the old moral hazard trick. How, well, despicable to take advantage of such an evil device.

This all sounds terrific. I, for one, want to root out the risks associated with moral hazard wherever I find it. Especially in finance, where as we now all know, moral hazard was the underpinning that helped turn Wall Street into a casino where the lads at those trading desks could play on regardless of losses, and make fortunes on the basis of knowing nothing, but how to game a tilted system.

With all Sutherland’s obvious distaste for the evils of moral hazard, and his earnest embrace of the hair shirt of austerity as a remedy for the crisis that it contributed to, you might be a little surprised to learn he is the Chairman of Goldman Sachs.

Yes. That Goldman Sachs. The one sitting right at the casino table benefitting from the very moral hazard he now seems to want to cry foul about. He is quick to impose extra costs on the Irish taxpayers. Remember how naughty they all were. He seems less quick to accept a premium on Goldman Sach’s cost of funds which are lower than they might be because investors expect Goldman to be bailed out were it ever in trouble. That market expectation is what we call moral hazard. Perhaps Sutherland should look into it.

Now, I realize that the events and revelations of the crisis revealed the extent of Goldman’s double, triple, and sometimes quadruple dealings, and its almost pathological willingness to profit from customer information, but for someone who is listed as its Chairman to be so baldfaced as to argue for an imposition his company is unwilling to accept, is stretching things a bit too far for me.

If moral hazard is rotten and austerity the just deserts for the Irish taxpayer, then they should be so for Goldman Sachs.

Then again the Irish taxpayers don’t have the same clout as Goldman Sachs. Nor are they as important – vital even – to the safe workings of the world’s financial system. So, come to think of it, Sutherland is right: we should double the premiums on taxpayers everywhere so we have a pile of cash to bail the banks out again when the bust the casino next time.

Yes. Right. No moral hazard there.

Meanwhile, over on the letters page we are treated to the sober insights of another very important financial person. This time it is Michael Mulhall, who is listed as being a Managing Principal, whatever that it is, at Capco here in New York.

His concern is the evils, not of moral hazard, but of collective bargaining by public workers, who as we all know are entirely responsible for the collapse of state budgets across the US. Were it not for these awful bargains the yawning deficits we are struggling with would never appeared. Great Recession notwithstanding. Mulhall is particularly irate about the possibility of a heinous extra New York state tax on incomes over $200,000, which is being relied upon to raise $10 billion to help fill the gaping state budget hole. Such a tax, he assures us, would drive rich New Yorkers to flee the state en masse. Presumably we should look for a Grapes of Wrath style exodus as they all pack up their limos and head to their country homes in a huff.

One of the more interesting habits the elite have when commenting on such matters is that they describe advocates of higher taxes as “well-meaning”. Never has there been a more derogatory word hurled in the current class war. Those of us who try to articulate ideas on behalf of the less well off are constantly being referred to as well-meaning. But, the implication is, we just don’t understand the vagaries and rigors of the wider world. At least not in the way that these important people understand them. Perhaps when we grow up we will. But, as of yet, our silly little heads seem filled with idealistic nonsense about fairness.

At the end of his little elitist homily Mulhall answers his own question.

The question: “What type of country will the US become should Wisconsin governor Scott Walker succeed in eliminating collective bargaining from municipal unions?”

His answer: “A fiscally more solvent, responsible, and affordable one.”

So there you have it. The elite speaks.

The conclusion appears to be that we need to hammer workers with austerity measures in order induce them to behave.

Behave more responsibly.

Once those workers are firmly underfoot the elite will be able to collect its rents, play at the casinos, and otherwise frolic safe in the knowledge that they can continue to afford their luxuries. Safe from having to flee New York. Safe from the risk that their investments might drop in value. And safe from having to concern themselves with the consequences of their own excesses. After all they will always have the workers to clean things up for them.

Above all, the financial system will be preserved for them to play within. And the preservation of that system of systems is the be all and the end all of sound policy. Sound policy, you see, must always focus on securing the safety and soundness of the things that worry the elite. No matter how unequal the national incomes have become. And no matter how indifferent the elite is to the plight of the rest of us.

You may not have known that. But now you do.

Addendum:

As I write this I am watching the devastation in Japan. Those poor people. Their troubles puts the rest we worry about into true perspective.

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Jobs; Trade; Banks … Ho Hum And Bun Fights

This is getting dull. Really dull. The economy refuses to shift gears. Wall Street twitters on about nothing in particular. Central Bankers are even more confused and surly than usual. Businesses are sitting on piles of cash and complaining that no one cares about them. Banks are in a snit over being asked to play nicely. Consumers have all but disappeared. Government policy makers wring their hands and smile at the same time. The dark clouds of currency wars have rolled into view. And we go nowhere fast.

Welcome to the crisis part 2.

Oh: the very slightly good news is that new claims for unemployment assistance fell again last week. Whoopee. The drop was by 11,000 all the way to 445,000, which, in normal times, would be viewed as hopelessly inadequate, or a mere blip not worth mentioning, but was the reason that Wall Street roared briefly to life this morning. We exist – I won’t dignify our current state by using the word “live” – in such diminished times that even the most modest step in the right direction can be viewed as a triumph of the first order. Our era has so perverted our language that we no longer can use the word “modest” without feeling slightly apologetic. Personally I blame corporate America for its incessant hyperbole that has undermined the value of words that used to mean something.Modest used to mean, well, modest. Now it means a mix of useless and wimpy. Thus when we run into a putrid performance we have and reach for a proper descriptor we are apt to bring pablum out of our bag. This ends up confusing everyone, and allows the incompetent folks who buy and sell stocks for a living to justify anything. Thus today’s new claims data, which can only be described as the greyest of greys, is greeted in the manner once reserved for the returning Caesars of Rome.

My advice: ignore the hoopla. The claims number represents one of a long series of indifferent and indistinguishable data points, none of which tells us much other than that our malaise continues. Allow me to repeat: we need that claims number to be under 400,000. Better yet, we need it to drop to the mid 300,000 range before we reach for the celebratory fireworks.

Meanwhile ignore Wall Street. Remember they are the folks who trashed the place in the first place. The one fact we have at present is that they know nothing worth our learning.

In other news we are reading a great deal about the brewing trade and currency wars about to blight the world.

The reason is simple: practically every government facing a domestic crisis has written into its escape plan that it will grow out of crisis by pumping up exports. Those of you with an eye for detail will notice that there is a slight problem with this. Someone has to import. Not everyone can export. Whoops. In the old days the game was extremely simple. Japan, Germany, and China exported. The US and the UK imported. That meant that German, Japanese, and Chinese workers lived below their means while Americans and Brits lived above theirs. A better way to look at this is that the Germans, Japanese and Chinese exported unemployment by deliberately under-consuming goods that they made. The surplus was sent abroad. Further: the spare cash that this generated for those economies was recycled back into the US and UK where it pumped up asset prices. This “surplus” of savings on world markets created by the deliberate under consumption in the exporting nations was a major factor in the real estate bubble. At least that’s one theory doing the rounds. Bernanke is a leader of that train of thought.

Now, in the depths of crisis, the importers need to rebalance their economies and reduce the import inflow. But that implies the exporters have to adjust as well. Therein lies the source of tension. The exporters do not want to change their game. Too many local jobs depend on trade. In the case of China, whole industries depend on it, which means millions of recently displaced agricultural workers do too. That’s a big social problem waiting to burst if exporters have to change course. China’s middle class is insufficient to buy all those goods. At least not yet. So they need to keep on exporting. To us.

Which is why they rig their currency and try to play beggar-thy-neighbor with the rest of the world, and particularly with the US. If China were to allow its currency to float by unfixing its relationship with the dollar, it would be revalued upwards. That would make Chinese goods more expensive in foreign markets like the US and would thus reduce their exports. The displaced goods would have to be sold internally within China or those factories would have to close down. Either way the adjustment could be difficult. It would cramp Chinese growth which has averaged 8% a year for a while now. A slowdown from that pace would – potentially – hit their agricultural and poor workers the most since it would remove their opportunity to earn higher wages. The result? Civil unrest. The entire structure of the Chinese elite would feel the strain. It has already been hit by waves of strikes as workers lobby for better conditions and wages. Add in the loss of export industry jobs and the country gets shaky quickly.

Hence the current stand off.

Of course this scenario is being played out across the globe as countries seek to devalue their currencies to dampen Chinese and other exports and boost their own. It is particularly acute in Europe where the German refusal to rebalance their economy is weighing heavily on places like Spain. Since Spain and Germany use the same currency the poor Spanish cannot devalue. They have only one option which is to throw themselves into massive austerity programs. The Germans meanwhile preach such austerity, apparently oblivious that their failure to boost domestic demand created the excess cash that blew Spanish real estate into its bubble – all those German second homes on the Mediterranean coast, not to mention the tourists and their wads of Euros – and is now exporting unemployment along with those BMW’s.

I won’t mention the dire straits the poor Irish are in. Suffice to say that they make the Icelanders look like amateurs when it comes to self destruction.

So, all of a sudden, attention worldwide is on how to rebalance the flow of trade so that excess cash doesn’t slop about creating bubbles, and the exporting nations don’t foist unemployment on everyone else. The recipe for a full blown trade war is nearly complete. Which is very worrisome, since one of the factors that made the Great Depression truly “great” was the trade war of the 1930’s.

And, finally, on a more comical note: the banks are at it again.

This time they are all in a huff over the new capital regulations introduced by the folks in Basel, which is where the organization that dictates these things is based.

The banks argue, rightly, that higher capital implies less credit available. This is correct because capital is held in proportion to assets. So if that proportion is forced higher, the banks have two choices: they can raise more capital and not deploy it as loans; or they can keep their current capital, and reduce the amount of loans from where they now are. Either way the level of lending will drop. The entirely neutral analysts at Goldman Sachs tell us that the drop could cut about 1% off of GDP over the next few years. Conveniently we are not told how much GDP was destroyed by the excess lending of the last few years – that would mess up the story. In any case, the bleating from the banks is now very loud. Fewer loans means lower profits. And we all know what that means: lower bonuses. So I think we can ignore the warnings of lower GDP and cut straight to the one thing we know they care about: that fifth New York apartment. Or: how awful that they might have to forgo the Hamptons home and the Aspen retreat. How mean spirited of us to force such choices on the poor dears. Now this is a true national policy issue.

Not really.

A cursory review of Hyman Minsky and his financial instability hypothesis tells us that less lending is a very good thing. It reduces long run volatility because more of the economy’s wealth relies on equity funding and not debt. That makes it less susceptible to the swings of interest rates and thus more stable. This is good. Very good. The cost for getting this stability is that we will generate less wealth on paper. GDP will, indeed, grow less quickly. But, as we recently learned, wealth that relies on debt is often an illusion – just as illusory as Lehman’s asset values were.

Frankly we could do with less illusion and more reality. Hence we should gird ourselves to ignore the weeping and wailing of Wall Street, even if they have a technically correct point. After all our economy is not theirs to play with. It’s ours.

Not only that, but we want it back.

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