Friday, September 21, 2012

James K. Galbraith on Inequality and Instability

James K. Galbraith gives an interesting talk here on his new book Inequality and Instability: A Study of the World Economy Just Before the Great Crisis, given in August 2012.


  1. I have been looking at this talk (15 mins into it) as well as some reviews and interviews related to it.

    When people (and James Galbraith) talk about the rise of the financial sector, what part of it do they exactly mean?

    Are they referring to the retail banking sector, which lends to households and individual consumers?

    Or the wholesale banking sector, which lends to private corporations or conducts syndicated financing for infrastructure projects?

    Is it underwriting of IPOs?

    Or are they referring to insurance activities?

    Or are they referring to market-making, where certain large-volume traders help drive up trading activity and earn from arbitrage?

    Is it simply M&A deal-making, with financial institutions acting as intermediaries between companies that want to buy one another?

    It could even well be restructuring activities, where financial institutions assist heavily indebted firms negotiate with debtors?

    Or structured finance, which is securitization of debt commitments?

    Maybe they mean asset management, where wealthy private clients and business clients are advised on treasuring their funds?

    "Rise in finance" seems to be an assertion of dubious quality, given that various segments of finance keep fluctuating. Investment banking revenues are down by 33% over the past three years, while asset management is up by 10%, according to Deutsche Bank. Market-making activities are down while global transaction banking is up.

    More than that, I am a little baffled by what is supposed to be the main point of Inequality and Instability - that rise in finance is related to rise in inequality.

    If there is an increase in IPOs, or fees earned from restructuring deals, or syndication for bridge-building, then these activities are attacking wages of working people?

    How exactly is - say - JPMorgan increasing wage inequality from its advisory fees in consulting the merger of British Aerospace and European Aeronautics Defense and Space company, for example?

    1. He referring to the rise of comparatively deregulated financial activities, involving debt financing of NINJA loans, liar's loans, and other reckless debt given to speculators on asset prices, as well as CDOs, mortgage backed securities, CDSs an so on.

      The things you're thinking of (IPOs, asset management, etc.) are not what Galbraith is thinking of.

      Nobody denies that banks and financial organisations do in fact do a lot of useful activities.

    2. In fact, the rise of M&A and "restructuring" is a big part of it. But let me explain.

      A "classic" Warren Buffett style M&A contains no financial intermediary -- he talks to the firm's principal, then he makes an offer.

      In contrast, most M&As today are *financial engineering* -- lots of money siphoned off to financiers.

      IPOs don't need to be underwritten. Why are they underwritten? To siphon off money to financiers.

      Basically, "financialization" is referring to the percentage of the economy being taken (stolen?) by middlemen. It's been increasing. The "tax" paid by every industry and consumer to financial middlemen has been going up and up.

      Now, that would be fine if the middlemen were providing better services. The trouble is, the value added by these middlemen has been going down and down as "deregulation" arrived. The middlemen are now selling deals which are actually bad for their customers, and doing so routinely and openly. Look up the internal memos leaked from the megabanks -- they treat customers as "marks", and happily cheated even municipal governments. At this point, finance is a "criminogenic environment" as Bill Black calls it, and so the financiers are basically crooks running mafia-style rackets.

      Which is why it's really bad that they're taking a larger and larger percentage of the economy.

  2. "When people (and James Galbraith) talk about the rise of the financial sector, what part of it do they exactly mean?"

  3. Magpie, but that does not show merely a rise in financial industry in the post-1980s world but also in the 1950s and 1960s wonder years.

    Professor Galbraith explicitly says he refers to recent trends of the past 30 years. But that chart shows a long-term growth in finance, which only fell during WW2 when foreign capital flows were blocked to avoid funding the enemy.

    Besides, "finance" is just a very broad term that can just lumps together unrelated activities of S&L organizations and of stock market brokers and of debt securitization into one group.

    Now, this discussion seems to refer to debt securitization.

    But is debt securitization really that big a part of either general finance, let alone that of the entire economy?

    1. Debt securitization is a very very very large part of the entire economy. Count the percentage of home mortgages which *aren't* securitized. It's quite small.

  4. Neroden

    But financial disintermediation is one of the biggest trends in recent times. Use of middlemen is contracting, not growing.

    Deutsche Bank recently published a report stating that global investment banking revenues are **two-thirds** of what they used to be in 2009.

    Using IBs for IPOs and other forms of deal-making is increasingly less popular.

    Credit Suisse used to earn an annual $6.7 billion in net profits in 2009. Today it earns $1.9 billion.

    Goldman Sachs had annual gross revenues of $45 billion in 2009. Today it earns $28 billion.

    Morgan Stanley used to have revenues of $9 billion in 2011. In 2012? $6 billion.

    Deutsche Bank and Citibank are also slowly exiting from investment banking and returning to basic retail banking.

    I remember all of this information by heart, because I am actually looking for an IB job right now, and I research their financial before deciding to apply to them.

    And I have noticed that investment banking is in its fastest retreat ever known over the past decade, especially past half-decade. Deal-making was big in the 1990s. Not in the 2010s.