August 30, 2010
“War is the growth hormone of the cancer that is big government.” ~ Alex Jones
“A government always finds itself obliged to resort to inflationary measures when it cannot negotiate loans and dare not levy taxes, because it has reason to fear that it will forfeit approval of the policy it is following if it reveals too soon the financial and general economic consequences of that policy. Thus inflation becomes the most important psychological resource of any economic policy whose consequences have to be concealed; and so in this sense it can be called an instrument of unpopular, that is, of antidemocratic policy, since by misleading public opinion it makes possible the continued existence of a system of government that would have no hope of the consent of the people if the circumstances were clearly laid before them. That is the political function of inflation. When governments do not think it necessary to accommodate their expenditure and arrogate to themselves the right of making up the deficit by issuing notes, their ideology is merely a disguised absolutism.” ~ Ludwig von Mises
How Wall Street Died
- A d v e r t i s e m e n t
Let me take you back to the fall of 1999. I was a senior in college without a clue what I wanted to do with my life. Wall Street was in a boom and seemed exciting. I had always loved the financial markets since I had first discovered them years earlier; however, I wasn’t convinced this was the profession I wanted. I had majored in Economics at school for practical purposes but I found almost all of the courses to be extraordinarily uninspiring with the exception of a few like Corporate Finance and the Economic History of China. It was the general micro and macro economics courses that I found the most painful to sit through. I wasn’t alone in this assessment. Many of my close friends were Economics majors as well and we all felt the same way (I later found out this was because we were being indoctrinated in voodoo Keynesian economics). So even with the Economics degree I wasn’t sure that I wanted to pursue a career in finance given the fact that I found myself more interested in subjects such as English, History and Philosophy. Nevertheless, the firms were hiring, I had the degree and it would allow me to move back to New York City without living at home.
What I discovered as I interviewed for jobs disturbed me right away. Every single firm with the exception of one was completely obsessed with math. Entire interviews revolved around “how quantitative are you” and the like. Although I hadn’t had much experience with investing I had enough to know this line of thinking seemed preposterous. It seemed to me only basic math skills are necessary to be a successful equity investor. Besides that, it seemed that the key is understanding that the world is always changing rapidly under the surface and therefore what is a good business today might be bankrupt tomorrow and what is a start up today could be the next Microsoft. This seems obvious but the skill set to figuring all this out is more geared to an appreciation of human psychology, historical cycles and cultural shifts (both fads and structural changes) than math. What I realized later is the reason they were so focused on mathematicians and Phd’s is that Wall Street was moving away from what it was always meant to be – a conduit between the holders of capital and those that wish to deploy that capital in productive economic activity. Rather than trying to hire a well rounded workforce of intelligent college graduates the firms were hiring a cadre of quantitative robots that would play an instrumental roll in blowing up the world’s financial system.
When you get too many people of a particular mindset (in this case highly quantitative and academic) to aggregate in a field that is very much a people business and one where “street smart” common sense is of extreme importance you are asking for serious trouble. When you couple that with a Federal Reserve that keeps interest rates too low what you get is a bunch of quants inventing products that provide a yield sufficient for pensions and others struggling to earn a return. Products that are completely mispriced for the risk inherent in them. I am not placing all of the blame on the Wall Street firms (although they deserve a lot and the fact people haven’t been punished severely is a huge reason why there is no confidence on main street), rather I believe the Federal Reserve deserves 95% of it. If it wasn’t for them manipulating the price of money to absurdly low levels you wouldn’t have had the rush into toxic products in a search for yield. While the newly enthroned Wall Street quant army would surely have done their damage nonetheless it wouldn’t have resulted in the complete destruction of the financial and monetary system that we face today. In a nutshell, this is how I think Wall Street died and until it gets its act together will remain a corpse.
The Elites Have Lost Their Right to Rule
One of my favorite quotes is from Joseph Schumpeter who said “everyone has elites the important thing is to change them from time to time.” Of course, this is what happens in a well functioning democracy. The problem today and the reason why the United States is on the verge of some sort of revolution (I believe it will manifest as a revolution of ideas and not an armed one) is that the election of Obama has proven to everyone watching with an unbiased eye that no matter who the President is they continue to prop up an elite at the top that has been running things into the ground for years. The appointment of Larry Summers and Tiny Turbo-Tax Timmy Geithner provided the most obvious sign that something was seriously not kosher. Then there was the reappointment of Ben Bernanke. While the Republicans like to simplify him as merely a socialist he represents something far worse.