Bill Mitchell, “What is Wall Street For?,” October 5, 2011.The point is that useful types of speculative activity are helpful in real wealth creation because they can reduce uncertainty for certain businesses (a point which nicely complements the theme of my post here). A great deal of other speculative activities that draw money away from purchasing of producible commodities to buying and selling of financial assets and instruments on secondary markets are just casino-style gambling that redistributes money between gamblers, often the super rich and rich. The creation of debt-financed asset bubbles that collapse and cause debt deflationary depressions, downturns or stagnation is a disease plaguing modern capitalism. Japan fell victim to the latter in the 1990s, and now the US and Europe have as well. The 2010s may well be the West’s lost decade, unless radical action is taken.
I am also reminded of what Mark Hayes has recently said about the financial sector:
“First of all, Post Keynesians follow Kalecki, Galbraith and Eichner in recognising the well-established empirical evidence about the financing of investment. This is that the vast majority of physical capital formation or accumulation is financed from the internal cash flow of large corporations supplemented to some extent by bank credit lines. The social purpose of the stock market is not to finance new physical investment but to permit transfers of existing assets, including corporate control. Its speculative tendencies are not in fact offset by the benefits for enterprise which Keynes allowed. Industry could function quite well without the equity market, given alternative institutions focused on enterprise rather than speculation. ....
Post Keynesians would, in the words of Winston Churchill, see finance less proud and industry more content. Keynes thought casino banking should be kept expensive and inaccessible. A significant transactions tax going well beyond the current stamp duty should be imposed – a tax on speculation.” Mark Hayes, “The Post Keynesian (Policy) Difference,” 2010.
(BTW, I posted a response to you in the other thread).
ReplyDeleteLK, do you (or Post Keynesians, for that matter), think that Wall Street has ever lobbied for higher regulations? Regulations that have either government subsidize riskiness (moral hazard), or financial regulations that raises costs for businesses in a particular sector, but these fall harder on smaller competitors that can't handle them as well as larger businesses (thereby giving the larger businesses a "protection" from rivals)?
"LK, do you (or Post Keynesians, for that matter), think that Wall Street has ever lobbied for higher regulations? "
ReplyDeleteNo.
The idea that big business loves regulation is a silly myth perpetuated by big business so they don't have to be regulated.
ReplyDeleteKeynes proposed banning loans to speculators, btw, which he saw as a root cause of inflation. I'm not exactly sure how you'd go about that, though.
Its certainly obvious that they would lobby for regulations that clearly benefit them (subsidies, tariff, etc), why wouldn't they lobby for legislation that harms their competitors more than them?
ReplyDeleteIts certainly obvious that they would lobby for regulations that clearly benefit them
ReplyDeleteI think you're confused about what "regulation" means.
"I think you're confused about what "regulation" means. "
ReplyDeleteI think you haven't read my post above.
"or financial regulations that raises costs for businesses in a particular sector, but these fall harder on smaller competitors that can't handle them as well as larger businesses (thereby giving the larger businesses a "protection" from rivals)? "
LK,
ReplyDeleteI agree completely. There are types of capital that are socially valuable and productive, and there are types that are wasteful and parasitic. The fact that both right-wingers and most Marxists lump them all together obscures the real issue.
Incidentally, I wonder if the implications of this point toward a revival of the Classical concept of "productive" and "unproductive" labor. Do you think the idea has relevance in 21st century capitalism?
Wouldn't a speculator take a long position in a commodity because non-speculators also intend to buy the same commodity?
ReplyDeleteIs it not demand for housing that raised housing prices first and foremost, and then speculation on future demand for housing that raises prices afterwards and successively?
And is it not the fall in demand for housing by housing buyers that causes speculators to start selling housing?
Prices change from day to day, time to time, and place to place in capitalism. Even if speculators did not exist, who really believes prices would remain flat and never change? Unless this were Nazi Germany, where every price was painstakingly controlled, modern capitalism is about prices that do and must change. Speculators only respond to that reality. They aren't responsible for it.
Speculators only respond to that reality. They aren't responsible for it.
ReplyDeleteSo you're saying that speculators don't affect market prices in any way. Got it.
Or rather that a price already going up got only pushed up a little faster by speculators.
ReplyDeleteBecause the speculators wouldn't have longed it, if it weren't going up.
I was briefly a technical analysis based derivatives trader (very time consuming, so I stopped), and I really just responded to price trends. I never went the opposite of them, because it means losing money to go against the market.
"I was briefly a technical analysis based derivatives trader (very time consuming, so I stopped), and I really just responded to price trends."
ReplyDeleteYou are saying that as a "technical analysis based derivatives trader" your activities were essentially pro-cyclical?
This would appear to be a perfect example of the band wagon effect.
Or rather that a price already going up got only pushed up a little faster by speculators.
ReplyDeleteWhat LK said. Nothing like a little positive feedback to stabilize a system, right?
Right, so I don't doubt the bandwagon effect, but isn't all the more reason?
ReplyDeleteWhen coffee and chocolate bean demand started rising, due to new Asian middle classes discovering their love of chocolate, and certain plantations in Ghana and Bolivia started running out of their current supplies, the prices offered by those suppliers started rising. The speculators only responded pro-cyclically to this situation.
Had they been counter-cyclical and started holding short positions on those beans, until they drove down prices and caused coffee beans to run out quickly, then we might say we have a problem. Except doing that would have caused them to lose money, since they were betting on the downward fall of the price of a commodity in shortage.
Isn't it a good thing that when you have a shortage of chocolate, somebody drives up the prices of chocolates much quicker so that you can cut down your consumption of chocolate? And so that chocolate producers in advance can cut down production of chocolate? Until the higher prices encourage cocoa bean production to go up again.
The bandwagon effect is a positive, beneficial thing.
The difference between productive and counter-productive speculation? - the whole point of the post.
ReplyDeleteIf your job had been to buy up mortgage-backed securities and pack them into a off-balance sheet vehicle (SIV) (as done by every other bank) for your investment bank, what would this have done?
There is a great interview to Randall Wray about speculation in the commodity market. Forget about China.
ReplyDeletehttp://www.benzinga.com/content/1954634/stresses-seen-at-the-outer-surface-of-the-ballooning-commodities-complex
Pablo.
Special Purpose Vehicles? They serve a useful purpose.
ReplyDeleteSuppose you have mortgage backed securities with BBA rating. You put them in SPV. The SPV issues bonds. Series A bonds (50% of them) will have 5% p.a. coupon rate and AAA rating i.e. they will be definitely paid because they have prime preference and they represent the minimum balance that can be recovered. Series B bonds (50% of them) will have a 35% p.a. coupon rate and BBC rating; they are less likely to be paid as they are going to be residual payments.
What is wrong here? Special Purpose Vehicles are a useful way of allocating risk between risk-averse and risk-loving investors, and promising payments based on those risk preferences.
Nobody hides the risk. The sum aggregate risk remains the same. The risk itself is divided unevenly.
This is a perfectly legitimate conduct of financial activities, but the paranoia about SPVs, CDOs, and CDSs is akin to what people have for fractional reserve banking.