Without a Paddle
You have nothing to lose but your chains…..
A Brief Recap on Ideology:
Ideology is not perceived in the generality of thought.
The extent and nature of ideology only becomes apparent in times of emergency.
The greater and more immediate the emergency, the clearer the expression of ideology.
To the extent that the emergency is perceived to be greater or more immediate by different sections of the population, they will respond more or less ideologically.
Capitalist ideology was designed to overthrow feudalism and is specifically developed for this task.
Capitalist ideology has to portray all enemies as Feudalistic.
Apart from periodic emergencies, there is one other instance when ideology becomes overt and apparent: When it starts to break down
Now we have got that out of the way we can have a look at something Dave Harrison at Trade With Dave took aim at:
Nobel prize winner Robert J Shiller asks:
NEW HAVEN – Are too many of our most talented people choosing careers in finance – and, more specifically, in trading, speculating, and other allegedly “unproductive” activities?
Shiller observes that
‘ the increase in financial activity has taken place in the more speculative fields, at the expense of traditional finance…..credit intermediation (lending, including traditional banking)’
So Shiller is clearly worried that good old, traditional usury is being replaced by something not half as morally uplifting. This is not to say that the new areas are to be banned, far from it:
‘We surely need some people in trading and speculation. But how do we know whether we have too many?’
(At this point Dave Harrison asks the question: Isn’t the market supposed to decide? Which points us to the nub of the problem. But we will get to that a little down the road…)
Shiller characterises a (significant?) amount of this new activity as ‘rent seeking’:
‘a significant amount of speculation and deal-making is pure rent-seeking. In other words, it is wasteful activity that achieves nothing more than enabling the collection of rents on items that might otherwise be free’
And what is wrong with ‘rent seeking’?:
…The classic example of rent-seeking is that of a feudal lord (my emphasis), who installs a chain across a river that flows through his land and then hires a collector to charge passing boats a fee (or rent of the section of the river for a few minutes) to lower the chain. There is nothing productive about the chain or the collector.
Shiller goes on:
‘…The lord has made no improvements to the river and is helping nobody in any way, directly or indirectly, except himself.
…All he is doing is finding a way to make money from something that used to be free. If enough lords along the river follow suit, its use may be severely curtailed.’
Well, well the ‘feudal lord’ has popped up again. Enter Vincent Price all decked in ermine, with a falcon on his wrist, perched on his horse, sneering down at the Saxon peasants.
And dastardly Sir Vincent has hired a lackey to raise and lower the chain. Strangely, only a little later Shiller complains that Sir Vincent has done nothing to benefit anyone else. Surely by hiring, our feudal lord has provided a ‘valuable employment opportunity for an entry level position in the waterway management business’- Or is job creation like this only to be applauded when it is a capitalist doing the hiring?
Shiller also argues that Sir Vincent has done nothing to improve the waterway, which begs the question as to what kind of ‘improvements’ he would suggest- a medieval roast boar fast food franchise so that waiting travellers could have a snack?. Tarmac on the banks of the river perhaps?
And how would this tie in to the modern exhortation for each of us to lower the carbon footprint? Isn’t a simple chain the most ‘environmentally conscious’ way of Sir Vincent carrying out his ‘custodianship’ of the river?
Finally Shiller suggests that rent seeking activities extract a price on something that might otherwise be ‘free’. I suppose that if you imagine a eight foot fishing boat going down the river under oar power you could argue that its passage is ‘free’. But that is hardly likely under capitalist progress is it? We would be much more likely to see a fifty foot coal barge spewing out pollution and dirt, killing the fish and small animals that live in the river as it progresses. But of course that is not the boat owners problem is it? The future wellbeing of the river is zero-cost or ‘free’ to him.
I make these observations to point out how far capitalist ideology has already decayed. I don’t doubt this ‘classic’ capitalist parable of river and the chain is repeated over and over to post-graduate classes across the western world, but I don’t doubt also that contemporary students are every bit as sceptical of the parable, its logic and its values as I am.
If the parable itself is a little threadbare, Shiller does not fare any better in its application. Shiller makes his case against the purveyors of derivatives thus:
Those in “other finance” …… contribute no more to society than a lord who installs a chain across a river.
Ever since the Gramm-Leach-Bliley Act of 1999 repealed Glass-Steagall, bankers have acted increasingly like feudal lords. The Dodd-Frank Act of 2010 introduced a measure somewhat similar to the Glass-Steagall prohibition by imposing the Volcker Rule, which bars proprietary trading by commercial banks, but much more could be done.
The phrase ‘somewhat similiar’ begs the question; What is different between Glass Steagall and Dodd Frank? Shiller asserts that :
‘To many observers, Glass-Steagall made no sense.,,
(as opposed to Dodd-Frank I suppose?)
and claims that many reasonable types ask the question:
‘…. Why shouldn’t banks be allowed to engage in any business they want, at least as long as we have regulators to ensure that the banks’ activities do not jeopardize the entire financial infrastructure?’
So to return to Dave Harrison’s original point albeit in slightly modified form:
Why shouldn’t banks do as they please and let the markets judge?
Or why do we need the specific forms of regulation that we have ended up with?
Shillers ideological response to the emergency is inevitably to paint the new enemy in feudal colours. ‘Feudal lords of finance’. But in reality this problem is entirely novel. The problem is the democratisation of money.
The market decides on the value of any given commodity by means of price. In a market system, price is an expression of value. In order for price to have meaning it has to be executed through a sale. In other words, the price is the monetary value at which a sale takes place. If I ask for 1 million dollars for my bicycle this is not the price of my bicycle The price of my bicycle is the amount at which it sells. If somebody actually buys my bicycle for the more modest and reasonable price of $100 they then have the opportunity to test the validity eg. the value of this price. $100 is the price at which the sale is executed and the exchange valued. But it is also the price at which the valuation is tested. Mark to market.
However the process of buying, selling and testing does not hold true when money itself is the subject of the transaction. As you are aware, money has no intrinsic value. As I explained earlier this is as true for gold as it is for paper fiat money. You cannot take gold or paper currency into the bank of England and swap it for a part of the Yorkshire dales etc. It has no claim on the wealth of England. The same would be true of the Dollar the Euro, the Yen in their respective territories.
Now supposing as a resident of England you wanted to obtain some dollars for the purpose of going on holiday in Disneyland. You go down to the bank and ‘buy’ dollars at 2 dollars to 1 pound (This was some time ago!). You believe that this is the ‘price’ and therefore the ‘value’ of dollars.
But as we said above, money has no value. Therefore its value cannot be discovered by price. If it cannot have a price, you cannot buy it! The simple proof of this is that you cannot ‘buy’ 2 dollars from an exchange beaureau and then decide to take them to the Federal Reserve to exchange for a piece of the Grand Canyon, as they have no value! The ‘value’ of the dollar cannot be tested, because it has none. The valuation you gave it cannot be tested. So there is no mark to market. There is only an agreed rate of exchange.
The market cannot test the valuation, so the market cannot decide on the value.
Derivatives are privately issued democratised money every bit as sovereign and foreign as the Dollar is in relation to the Pound. Like all instances of money they have no claim on value in themselves. Which means their assigned value in nominal and cannot be tested. Which means they cannot be priced. Which means the market cannot decide how valuable they are. They can only be exchanged.
Allowing of the issuing of more than one kind of currency within a national territory is a novel development. Just as novel as the Twin Towers attack was. And although the repeal of Glass-Steagall paved the way for the introduction of derivatives, Glass-Steagall itself was not legislated to prevent the creation of derivatives. This is the important difference between Glass Steagall and Dodd-Frank. Glass-Steagall was drafted with no knowledge of the existance of demcratised money but Dodd-Frank was. For this reason Shiller observes
… the main advantages of the original Glass-Steagall Act may have been more sociological than technical, changing the business culture and environment in subtle ways. By keeping the deal-making business separate, banks may have focused more on their traditional core business.
He specifically says that Glass-Steagal did not have a ‘technical‘ purpose in controlling financial instruments like derivatives and this is for the very good reason they had not been invented!
Further, Shiller tacitly admits that the market mechanism is unable to value derivatives although he is unable to say why:
Speculative activities have plusses and minuses, much that is good and some that is bad, and these are very difficult to quantify.
It is precisely for this reason that he tries to suggest a secondary related metric as an indirect means of estimating the value of derivatives eg. the number of people involved in producing them and then using this as the benchmark for an exchange rate between democratised money and state money:
economic research has not yet permitted us to estimate the value to society of so many of our best and brightest making their careers in the currently popular kinds of “other finance.”
We need to be very careful about regulations that impinge on such activities, but we should not shy away from making regulations once we have clarity.
In other words as soon as we can figure out what the f*ck this democratised ‘derivatives’ stuff should be worth, we can fix the exchange rate because the market will never be able to fix a price.
The final part will be
The Great Mooncake Mystery