Friday, April 30, 2010

The Importance of Making vs Selling Stuff - sidebar on Goldman Sachs

Much discussion is being focused in Congress, recent books, articles, and in the media, on the financial crisis and the contributing factors to that crisis.  Omitting until the end the role of Goldman Sachs, one important factor about the crisis must not be overlooked said James Kwak of The Baseline Scenario:
Remember that financial services are an intermediate product -- that is, we don't eat them, or live in them, or put them on in the morning.  They are supposed to enable a more efficient allocation of capital, so that the non-financial economy is more productive. But what we saw since the 1980s was the unmooring of the financial sector from the rest of the economy.  
Financial services are supposed to serve our economy; not be the economy.  Yet the trend is otherwise... over 40% of the profits of the entire US corporate sector went to the financial industry.  As a reference, in 1970 it was 4%!

Paul Krugman wrote:
A growing body of analysis suggests that an oversized financial industry is hurting the broader economy.  Shrinking the oversized industry won't make Wall Street happy, but what's bad for Wall Street would be good for America.
Martin Wolf, of the Financial Times, wrote:
...the financial sector seems to be a machine to transfer income and wealth from outsiders to insiders, while increasing the fragility of the economy as a whole."
Even the ethic has changed.  Doing things with ones hands - the pride in the skill and craft of so doing - used to be our ethic; now it's who can earn the most money.

The real issue is that America has changed from a hands-on country to one that sells the products of others. As more and more production and service jobs go off-shore, only financial services are staying behind.  And as Andrew Sorkin said on the Charlie Rose show last week: many of these instruments on Wall Street, it's really just a casino, there is no underlying assets, they don't actually own these devices; people aren't getting mortgages because of this... What is the social utility of that?
All of this can be seen in the difference between the growth of the robotics industries in America and everywhere else.  America used to develop, design and manufacture their robots.  Then they only developed and designed them - the products were built off-shore.  Now much of the non-defense design is being done elsewhere and manufactured off shore without America having a piece of the pie.  Most of the iRobot products sold to the DoD are manufactured offshore!

Sidebar about Goldman Sachs

From a blog entry in The Huffington Post by Senator Carl Levin:
Most investors make the assumption that people selling them securities want those securities to succeed. That's how our markets ought to work, but they don't always. The Senators who in the 1930s investigated the causes of the Great Depression stated the principle clearly:
[Investors] must believe that their investment banker would not offer them the bonds unless the banker believed them to be safe. This throws a heavy responsibility upon the banker. He may and does make mistakes. There is no way that he can avoid making mistakes because he is human and because in this world, things are only relatively secure. There is no such thing as absolute security. But while the banker may make mistakes, he must never make the mistake of offering investments to his clients which he does not believe to be good.
Goldman documents make clear that in 2007 it was betting heavily against the housing market while it was selling investments in that market to its clients. It sold those clients high-risk mortgage-backed securities and CDOs that it wanted to get off its books in transactions that created a conflict of interest between Goldman's bottom line and its clients' interests.
These findings are deeply troubling. They show a Wall Street culture that, while it may once have focused on serving clients and promoting commerce, is now all too often simply self-serving. The ultimate harm here is not just to clients poorly served by their investment bank. It's to all of us. The toxic mortgages and related instruments that these firms injected into our financial system have done incalculable harm to people who had never heard of a mortgage-backed security or a CDO, and who have no defenses against the harm such exotic Wall Street creations can cause.
Levin went on to say that: 
Running through our findings and these hearings is a thread that connects the reckless actions of mortgage brokers at WaMu with market-driven credit rating agencies and the Wall Street executives designing the next synthetic. That thread is unbridled greed, and the absence of a cop on the beat to control it.
I couldn't agree more.  I'm pained to see this happening during my lifetime.