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Guest Post: Over-Financialization - The Casino Metaphor

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Submitted by Graham Barnes via The Foundation for the Economics of Sustainability,

The casino metaphor has been widely used as a part-description of the phenomenon of over-financialisation. It’s a handy pejorative tag but can it give us any real insights? This article pursues the metaphor to extremes so that we can file & forget/get back to the football or possibly graduate to next level thinking.

What is the Financialised Economy (FE) and how big is it?

The FE can be loosely described as ‘making money out of money’ as opposed to making money out of something; or ‘profiting without producing’. Its primacy derives largely from two sources – the ability of the commercial banks to create credit out of thin air and then lend it and charge and retain interest; and their ability to direct the first use of capital created in this fashion to friends of the casino as opposed to investing it in real economy (RE) businesses. So the FE has the ability to create money and direct where it is used. Given those powers it is perhaps unsurprising that it chooses to feed itself before it feeds the RE. The FE’s key legitimate roles – in insurance and banking services – have morphed into a self-serving parasite. The tail is wagging the dog.

The FE’s power over the allocation of capital has been re-exposed, for those who were perhaps unaware of it, as we see the massive liquidity injected by the central banks via QE disappearing into the depths of bank balance sheets and inflated asset values leaving mid/small RE businesses gasping for liquidity.

By giving preferential access to any capital allocated to the RE to its big business buddies the FE enables those companies to take out better run smaller competitors via leveraged buy outs. By ‘investing’ in regulators and politicians via revolving doors and backhanders, it captures the legislative process and effectively writes its own rule book.

Five years after the 2008 crisis hit, as carefully catalogued by FinanceWatch, economies are more financialised than ever. If the politicians and regulators ever had any balls they have been amputated by the casino managers, under the anaesthesis of perceived self-interest. They have become the casino eunuchs. An apparent early consensus on the systemic problems of over financialisation has melted away into a misconceived search for ‘business as usual’.

Derivatives

Derivatives are one of the most popular games in the casino.

Over the counter derivatives, which are essentially bets on the performance of asset prices, stocks, indices or interest rates, have a nominal value (as of December 2012) of USD 632 trillion – 6% up from 2007 levels – and 9 times world GDP. If the world decided to stop living and buy back derivatives instead of food, energy, shelter and all the stuff we currently consume, it would take nine years to spend this amount.

OK – it’s a nominal value. Many observers believe (even hope) that its real value is a minute fraction of this, but the only way we will ever find out is if the derivative contracts unwind. That is, prompted presumably by some form of crisis, parties progressively withdraw from the contracts or fold. The regulators (and the FE itself of course) will do everything they can to prevent this from happening, including grinding the population into the dust via austerity, because while no-one knows who precisely holds the unwound risk, most will certainly belong to the FE’s top tier.

Many of these derivatives started life as sensible financial products. Businesses need to insure against an uncertain harvest, or hedge against uncertain currency movements. But only a small proportion of current holders now have an insurable risk. So whereas in the past you could say we insured against our own house burning down, now they bet on their neighbour’s house burning; whereas in the past we bet on our own life expectancy, they now bet on the deaths of others; whereas in the past we insured against currency losses we experienced in our own business transactions, now they bet on currency movements in general. What might be expected when there are incentives to burn your neighbour’s house down? Organisations have even purposely set up junk asset classes, had them AAA rated, sold them to outsiders and then bet on their failure.

Government & Politicians

Politics operates as a debating society in a rented corner of the casino. The rent is high but largely invisible to the populace. The debaters are themselves well off, at least in the U.S. they are.

Now the strange thing is that the government actually owns the casino, but they have forgotten this. For the last 40 years or so, they have asked the casino managers to issue all the chips. The government use the same chips to spend on public services, and require us all to pay taxes in those chips. Mostly they don’t have enough chips for all the services they provide, so they ask the casino managers for loans. The casino managers are happy with this, provided the government pay interest on the loan of chips. This hidden subsidy effectively funds the casino. It’s perverse because the government pays interest on money they could issue themselves debt-free.

It’s not entirely clear why the government thinks the casino managers are better at managing chips than they would be. Arguably the government is elected to carry out a programme and they should be the arbiters of the country’s strategic priorities, so there should be some strategic guidance over the way the chips are spent.

But the government is only here for five years, and the casino managers are here permanently. So perhaps they think it’s safer just to trust the casino managers to get on with it. When asked, the casino managers explain that they allocate chips according to ‘what the market needs’ and no-one quite understands why that doesn’t seem to include much real investment. In any case the government have forgotten that they could issue the chips themselves, and although prompted, have failed to show any interest in reclaiming that power. Occasionally they create a whole new batch of chips themselves (QE) – if they think the tables are quiet – but give them straight back to the casino managers. Maybe it’s too complicated for politicians. Many of them haven’t had proper jobs. There are a few civil servants who understand what’s happening, but most of them don’t want to rock the boat – they are here permanently too and have good pensions. They research for the debaters and have lunch with the casino managers. That keeps them quite busy enough, thank you.

The Real Economy

The Real Economy also operates from a corner of the casino. It’s hard to put an exact figure on it, but perhaps 3-5% of the overall floor space depending how you measure.

It’s a very important corner of the casino, but not for the reasons it should be. It should be important because it’s the place where food is grown, houses are built, energy for warmth and work is created and so on. But these precious things are taken for granted by the casino managers. They have always had enough chips to buy whatever they need – they issue them for God’s sake – and they think food, shelter and energy will always be available to them. Crucially though, they have also managed to financialise this remaining RE corner, and this ‘support’ is trotted out as a continuing justification for the FE’s central importance .

The RE corner has always included important social and cultural, non-GDP activities. The enormous real value of these activities is now being properly articulated and is spawning citizen-led initiatives (e.g. sharing economy approaches, basic unconditional income) but they are often presented as beggars who annoyingly keep petitioning for their ‘entitlements’ and generally clutter up this remote corner of the casino.

On the finance side, individuals and businesses are exploring ways of funding their future activity without going cap-in-hand to the casino managers. They are exploring peer-to-peer finance, crowdfunding, prepayment instruments and so on. What these initiatives have in common is the disintermediation of the casino. They provide ways for people to invest more directly and take more control over their savings and investments. Of course a new breed of intermediary is surfacing to broker and risk-insure these new models, and these new intermediaries can also be captured.

With transparency and short-circuit communication via social media though, there is definitely scope to do things differently. We must hope for progress because the casino managers have little interest in what’s going on outside.

The Planet – outside the casino

The planet outside is used by the casino in two ways – as a source of materials and as a dumping ground for waste.

The materials are not essential to the core FE which is all about making money out of money and needs nothing but ideas, a few arcane mathematical models to give spurious gravitas, and credulous or naive investors. But RE activity performs a valuable role for the casino managers – it provides them with an endless stream of innovative ways of using chips. The shale gas bonanza for example is apparently grounded in the real world need for energy, and is presented as such. Its significance to the FE is as another bubble based partly at least on land-lease ‘flipping’.

Without an RE-related rationale/narrative, the FE might disappear up its own waste pipe as it re-invested/sliced-and-diced/marketised its own products to itself. So materials from outside the casino are important for the managers’ big corporate proxies in the RE.

FE-favoured RE activities also create lots of waste, some of which is toxic, and may eventually prove terminal, as it builds up. This fact is of little interest to the casino managers. There is a minor interest in waste-related financialised vehicles – carbon markets for example are a relatively new casino game – and in the slight impact on some of the FE’s RE-friends like big energy companies. But mostly the casino managers are too busy with their games and their chips. Occasionally a manager will wake up to the dangers and defect to the real world where they, somewhat perversely, carry more credibility because of their casino experience. A small minority of managers stay within the casino and try to gently modify its behaviour. This is portrayed as a healthy sign of openness; the casino is secure in the knowledge that their ways cannot easily be re-engineered.

Combating the casino’s influence

Essentially there would appear to be three possible lines of response for those who believe there should be more to life than casino capitalism. Marginalise, convert or destroy……

These approaches map on to the three ‘broad strategies of emancipatory transformation’ suggested by sociologist Erik Olin Wright – interstitial, symbiotic and ruptural. I have a fourth suggestion/ variation of which more in a moment.

The challenge for interstitial initiatives is the sheer pervasiveness of the FE. There are few spaces left where the effects of the FE can be ignored. They may not be well understood, but whenever we pursue dreams, they pop up in front of us, usually as obstacles. Developments that are most heavily attacked by the FE establishment perhaps merit the most attention – community scale renewable energy, crypto currencies, co-ops, the sharing economy, and so on. The more these alternative directions are attacked as utopian or uneconomic the more we can be sure they offer promising interstitial opportunities.

Symbiotic opportunities may represent the triumph of hope over experience. Armed with the power of ideas, we back our ability to persuade policy makers and business leaders to change the game. The main challenges here are the arrogance of the powerful and the danger of being captured by supping with the devil. Vested interests generally feel secure enough that they don’t need to negotiate or even to spend brain power on listening and evaluating alternatives. If enough interest is manifested that symbiotic trial projects are begun, their champions can be captured by being made comfortable.

Ruptural alternatives come in a spectrum from those that would destroy business models to those that would destroy societies. They probably share the above analysis but differ in their degree of radicalism and disconnection from the main. The impact of FE-driven globalisation is beyond the scope of this article, save to note that its effects have unnecessarily radicalised whole populations making more measured responses more difficult to promote than they might have been.

The role of the internet and social media in progressing both interstitial and ruptural initiatives is significant. Most of the space to develop and assemble communities of interest and mission-partners is here, explaining why both are likely to experience increasingly determined attempts to capture.

The nature of one’s chosen response will be a matter of personal choice. We should not be judgemental of those who don’t have the will, energy or resourcefulness to play a more active role. We all suffer from our subservience to a dysfunctional system, some much more than others. The fourth response? Perhaps there’s some mileage in judo principles.

 


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Sat, 01/18/2014 - 20:10 | Link to Comment 0b1knob
0b1knob's picture

Speaking of casinos, somebody slipped some fake chips into a poker tournament.

http://www.myfoxny.com/story/24488636/ac-casino-hopes-for-quick-end-to-fake-chips-probe

Fake chips = bitcoin analogy?   

 

Sat, 01/18/2014 - 21:38 | Link to Comment CognacAndMencken
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Speaking of the "Financialization of America".... 

From the 1930's through the 1970's, profits from the financial sector grew at the same rate as profits from the non-financial sector. Then, from 1980 to 2005, profits in the financial sector grew at 800%, while profits in the non-financial sector grew at 250%.*

In 1978, the average salary in the banking sector was the same as the private sector - about $13,000 (1978 dollars).  By 2009, a top trader at CitiGroup got a bonus of $100M.  Top hedge fund managers made over $1B a year, with Paulson making over $3B.  The average salary of a Goldman employee is over $600,000.*  

Word-wide derivatives market did not exist in 1978.  By 2008...<pooff!>..it was a ~$33T market.* Ask yourself, does this represent ~$33T in more assets and more real wealth than what existed in 1978, or is this nothing more than the "financialization wizards" enabling Wall Street to extract more juice, more fees, more vig out of phantom value and phantom assets?  When Wall Street wants their compensation to grow quicker than real GDP growth, they've gotta start extracting vigs from deeper and deeper layers of the same assets they already have on the books.  This pyramiding of debt upon debt is just Wall Street's clever method to extract ever-increasing revenue (vis-a-vis compensation) when real assets and real wealth is disappearing, or growing too slowly.

Ask yourself, what happened in the 1980's and moving forward that enabled the financial sector to leapfrog ahead of the non-financial sector?  How did banking/finance go from being a boring, average-income job to becoming the new oligarchy of Western society?  Why did the smartest graduates turn toward banking and finance, rather than engineering, medicine or science?   

The divergence between the banking sector and everything else wasn't just about salaries and profits. By the end of the 80's, volatility had suddenly returned. Keep in mind, from the end of the Great Depression until the late 1980's, banking was relatively calm and risk-free. Then, suddenly, we had crisis after crisis.  By the late 1980's and early 90's, we had the savings and loan crisis which led to the failure of over 2000 banks.  In 1989, we had black Monday.  By 1991, CitiGroup had to be bailed out by Prince Al-Waleed bin Talal.  In 1994, Orange County had to be bailed out for nearly $2B.  In 1998, LTCM with $4B in capital and $130B in debt imploded.  Then the Nasdaq crash.  Then, from 2003 to 2007, the entire commodities complex went parabolic with oil going to $150, triggering a world-wide economic collapse. Then the housing crash. Then the market crash. Then the worst recession since the Great Depression and the entire banking system went insolvent.

So what happened to banking beginning in the 1980's that created all this?  The answer: Deregulation. Beginning in the 1980's, the deregulation juggernaut created by Reagan, Thatcher and Greenspan changed everything. 

13 Bankers, Johnson and Kwak.  Please read this book.  It's extremely easy to read and it gives a fantastic synopsis of the financialization of our economy beginning in the 1980's and the subsequent consequences.  

Sat, 01/18/2014 - 23:23 | Link to Comment ebworthen
ebworthen's picture

Heard a chap on the BBC World Service making just that point the other day.

He said in his day the big wigs never made more then 10X the lowest paid employee.

These days, the top dogs (cats?) make 100X or more above the lowest paid employee; he said it was a lack of individual prudence, ethics, and morality within the individuals in the institutions.

Well yes, I tend to agree, and when said individuals can use corporate money to bribe politicians and law enforcement to "look the other way" it all devolves into a sad case of societal juvenile narcissism, does it not?

Too many people in the world, and too many of the wrong stripe of moral character people for certain.

ROLL THE GUILLOTINES AND THE HEMPEN ROPE AND NOOSES FOR THE ELITES!!!

Whatever your sentiments this will happen sooner or later.

Nature wills it.

Sun, 01/19/2014 - 06:02 | Link to Comment falak pema
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Thatcher/Reagan, the catholic kings of the neocon/neo-hyperliberal deregulated age.

Reaganomics their new Evangelical mantra.

Neo feudalism is back with a vengeance. GWB/OBammy the Charles V and Philip I of NWO universal empire.

I like the chimes of history's rhymes. China being the Ottoman page to combat neo-Habsburgian rage. Now that is a Renaissance allegory.

Chose your age and you'll find this is a "history repeats" game. Except that TODAY the incremental entropy effect is now planet devastating; we be near the edge of the ecological cliff of manmade dystopia.

Clash of Civilzation saga post 1991 NWO declaration, in Pak/afghan/Iraq/Syria/Leb region,  is also similar to the Richarrd III/ Saint Louis saga of  III rd to VII th Crusades thread. Sterile colonial ventures in name of "God wills it".

And Pax Americana since 1945 dominance, in general and more and more so,  reminiscent of Pax Romana age. 

None of these historical threads ended the way they were supposed to...thats the bottom line to remember !

 

Sun, 01/19/2014 - 14:04 | Link to Comment LMAOLORI
Sat, 01/18/2014 - 20:11 | Link to Comment falak pema
falak pema's picture

Sustainability today is not about technology its about mindset. 

Corruption CHEATS every game played in the casino. 

You can change the rules but the new ones will be bent like the old ones. 

Its now not about PATHOS OR LOGOS, its about ETHOS. 

Once the hand has writ it moves on. And the damage to mindset is the toughest egg to repair.

Humpty Dumpty. 

Sat, 01/18/2014 - 20:11 | Link to Comment knukles
knukles's picture

Bravo!
Most excellent!

Sat, 01/18/2014 - 20:20 | Link to Comment TruthInSunshine
TruthInSunshine's picture

OT -I had a 1 hour 40 minute conference call today with a client who's an ex-pat in China and shit's gettin' real there; if any of you are Chinese or have friends/relatives in China, you most certainly probably know this.

When I write that things are getting real, I mean that there's a pervasive sense of anxiety & stress among many Chinese, and especially those deeply immersed in the Shanghai financial sector or tied into any major provincial manufacturing company.

There are rumors of many wealthy business people suddenly fleeing for whatever reason.

Sat, 01/18/2014 - 20:24 | Link to Comment prains
prains's picture

....so the smog is a cover for those fleeing LOL !

 

chinese octopus

Sat, 01/18/2014 - 20:56 | Link to Comment frankTHE COIN
frankTHE COIN's picture

Cool. Thanks for the Heads Up.

Sat, 01/18/2014 - 21:10 | Link to Comment new game
new game's picture

shits gettin real-oooowwww that smell.

wafting thru the smog!

in china debts are not forgiven easily.

blood gonna spill.

or i want your first daughter...

Sat, 01/18/2014 - 22:37 | Link to Comment satoshi101
satoshi101's picture

Shanghai is the NYC of CHINA.

Who gives a fuck about NYC? or wall street.

So let's get this right, ... the people in shanghai, or having that queezy feeling after 30 years of non-stop fucking bubble, ...

Correction? Fuck yes,

But to over a billion chinese people think they fucking care or know?

FUCK NO

Shanghai an NYC is joined by the HIP, in fact I will go farther long ago, SHANGHAI was an ameriKKKan outpost, to this day SHANGHAI has UK/USA buildings and sections from back in the day when the USA/UK controlled SHANGHAI.

Thus SHANGHAI is just a UK/USA outpost in CHINA.

Shanghai & NYC in a better more just world shoulda/woulda been NUKED long ago.

 

Sun, 01/19/2014 - 01:21 | Link to Comment mumbo_jumbo
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maybe that explains why the work is flooding back to the states.

Sun, 01/19/2014 - 09:10 | Link to Comment AdvancingTime
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The 6.6 trillion dollar spending spree used as stimulus to combat global economic slowdown is coming back to haunt China. This has greatly expanded credit and created huge overcapacity during the past five years. A massive debt crisis now looms in the offing as the try to repay loans for new factories that sit idle.

Fast growth tends to mask flaws and weakness within a system, and China has been growing like a weed for years. To make things worse many of the investment decisions were driven by politics. This has created massive overcapacity. Money has been poorly allocated and often shoveled into deep holes like ghost cities and bridges to nowhere. More on this subject in the post below,

http://brucewilds.blogspot.com/2013/11/china-land-of-overcapacity-and-de...

Sat, 01/18/2014 - 20:32 | Link to Comment buzzsaw99
buzzsaw99's picture

the last paragraph actually made sense which frightens me a little

Sat, 01/18/2014 - 20:49 | Link to Comment OC Sure
OC Sure's picture

"We all suffer from our subservience to a dysfunctional system"

Kinda sticks in your crawl knowing that once upon a time far greater men stood up and shed their blood for far lesser usurpations?

 

Sat, 01/18/2014 - 22:51 | Link to Comment satoshi101
satoshi101's picture

Hamilton advocated from day one of the birth of america, that every  man should have a vested interest in the criminal plunder of Federalism, aka US Government.

I would say that today, we have achieved nearly ORWELLIAN/HITLERIAN perfection in that every one is a criminal, and every criminal has a chicken in his pot.

***

For those who don't understand what I just said, "OVER 60% of the US public get money every month from the US Government".

 

Sat, 01/18/2014 - 23:22 | Link to Comment OC Sure
OC Sure's picture

I was never a fan of Hamilton and favored Jefferson instead purely on their monetary/banking differences. Hamilton was a faint, dismal shadow compared to Jefferson/Adams.

However, if we turn to Ben Franklin then he foretold exactly what you are identifying in his speech prior to the signing of the Constituion:

"there is no form of Government but what may be a blessing to the people if well administered, and [I]believe farther that this is likely to be well administered for a course of years, and can only end in Despotism, as other forms have done before it, when the people shall become so corrupted as to need despotic Government, being incapable of any other."

What you are witnessing all around you is that the people HAVE become so corrupted and thus here we are in despotism.

Sat, 01/18/2014 - 21:07 | Link to Comment new game
new game's picture

no more to ad. bravo II

Sat, 01/18/2014 - 22:42 | Link to Comment satoshi101
satoshi101's picture

The nature of one’s chosen response will be a matter of personal choice. We should not be judgemental of those who don’t have the will, energy or resourcefulness to play a more active role. We all suffer from our subservience to a dysfunctional system, some much more than others. The fourth response? Perhaps there’s some mileage in judo principles.

***

JUDO is 100% 'tricks' (  KANO )

So let's understand the code here.

1.) That the USA is fucked up? Yes, the world? NO

2.) That those that have the MEANS to escape SHALL escape,..

3.) That the system will eat those who remain

4.) That by trickery or fraud you might get some mileage if you remain, ... well that what post 1938 Jews said in Nazi Germany, guess what they were wrong.

 

Sat, 01/18/2014 - 22:44 | Link to Comment bobbydelgreco
bobbydelgreco's picture

this article tells us that the dumbest words on the planet are when the banks begin to loan which means sell your pm's zhers

Sat, 01/18/2014 - 22:46 | Link to Comment satoshi101
satoshi101's picture

Over 60% of the USA public Nazi Citizens get a US TReasury deposit monthly, that means the MAJORITY of ameriKKKans feed at the NAZI pig trough

The ability to put so many NAZI's on the payroll, was because the USA looted  the world,

That every ameriKKKan citizen has blood on his hands,

If you want to see a CASINO owner/partner, you must only look in the mirror.

***

In gentel not too subtle ways the author has said "RUN WITH YOUR LIFE", if your a clever PONZI man maybe you can stay and profit from the madness. The problem with Russian Roulette in a casino is that smart men fold early when they're ahead and leave the casino.

Now the only people remain are fools addicted to russian roulette, where is boris?

***

Run like hell from the USA, and deny forever to your new adopted country that you were ever a USA citizen. IMHO

Sat, 01/18/2014 - 23:29 | Link to Comment ebworthen
ebworthen's picture

My response has been to withdraw from the Matrix.

Not buying stocks, buying physical Gold and Silver I hold in my possession.

Not buying into Obamacare (fuck 'em, really, I don't care what pain they have intended, I'll leave the lost Republic physically or the planet existentially).

Not working!  LOL!  But really, I have busted my balls applying for any and all jobs for over 2 years, squat.

I told me Mum today that if I don't find something soon I'm going to have to develop mental illness and a belief in alien invaders so I can apply for S.S. Disability or I'll be out on the streets.

Poor Mum.

"Be like Dad, keep Mum."

Yes.

Sun, 01/19/2014 - 02:11 | Link to Comment TheABaum
TheABaum's picture

"It’s not entirely clear why the government thinks the casino managers are better at managing chips than they would be."

 

Sure it is.

 

Almost anybody would be better at managing chips than the government.

 

If you are in government, you know your job is to be open tomorrow, come hell or high water. This necessarily entails bureaucracy with it's fragmentation, specialization and replication. because bureaucracy is designed to protect and preserve an existing order,to the point of maintaining a mirage when the old order has been deformed, it necessarily entails slow and deliberative processes.

These things work well in maintaining civic order, but not responding to the incessant gales of creative destruction.

Sun, 01/19/2014 - 09:03 | Link to Comment AdvancingTime
AdvancingTime's picture

What I'm seeing develop is an "almost surreal" feeling of indifference towards reality. Companies have already ushered saving from interest paid on debt into the earning column and a major reason inflation remains low is they are sitting on a hoard of cash this has lowered the velocity of money. We must remember the artificially low FED controlled interest rates are a massive one-off or onetime tailwind that is mainly behind us. When they stop going lower or reverse the positive effect will ebb and become a major headwind. With massive government debt in many countries and the economy still weak this headwind has the potential to become devastating. The collision of MMT, social unrest over inequality, and other destabilizing factors have the potential to create the perfect storm. More about how we have grown complacent to ecomomic risk can be found in the post below,

http://brucewilds.blogspot.com/2014/01/have-we-been-lulled-into-complace...

Sun, 01/19/2014 - 11:23 | Link to Comment Eeyores Enigma
Eeyores Enigma's picture

Finance grew up on the backs of the real economy.

Finance liked making all that money without having to work so it grew big.

Finance then sucked the the life blood out of the real economy.

Finance believed it could fly on its own so it grew even more.

Finance serves up "Tech" as the answer.

Finance fails and it all comes crumbling down.

Finance shoots pure adrenaline into the system to keep it erect long enough to secure real assets before its too late.

And here we all are.

Do NOT follow this link or you will be banned from the site!