The New Wall Street and the High Cost of Manipulating Money

The New Wall Street and the High Cost of Manipulating Money, by George Gilder.

Washington … has rewarded financial manipulation over entrepreneurial investment and learning. Government by policy now favors the short-term arbitrage and rapid trading of the big banks and multinationals over the long-term commitments that create employment and growth. and depletes the incomes that sustain Main Street and the mShrinking the horizons of economic activity, the result of currency chaos is a predatory zero-sum economy that destroys the jobs iddle class.

For most of us, wildly changing prices and currency values are a menace. They confuse enterprise and learning and thwart the enduring commitments and investments that shape our lives and prospects. But the new Wall Street and its computer-driven trading benefit massively from volatility. Gyrating currency values and stock movements, whether up or down, mean opportunities for arbitrage, hedges, and fast trading. …

The new Wall Street wants volatility, with the downsides protected by government. Main Street and Silicon Valley want stable currencies for the benefit of work, savings, and long-term investment, with the upsides protected by the rule of law. …

Since 2008, the United States has seen a 30 percent rise in the financial share of gross domestic product (GDP), with as much as a 40 percent share of profits going to the financial sector …

The most prestigious vessels in the finance industry now shun any serious attempt to fund the real economy’s industries and learning curves. Apart from providing liquidity, the short-term trading activities that prevail in the financial world yield virtually no new knowledge and thus are exploitative of wealth rather than creative of it. …

Part of the problem is what should be called the “outsider trading scandal.” Hounded by government insider-trading witch hunts and “fair-disclosure laws,” investors must follow the government rule “Don’t invest in anything you know about.” … Nearly anyone who understands a company is barred from investing in it. …

The SEC astoundingly favors boards that know nothing about the companies they rule and have no stake in them. Lawyers and accountants proliferate. In an economy increasingly governed by information flows, the SEC thus suppresses learning and knowledge and stultifies investment. It pushes money into the hands of arrogantly ignorant outside traders. …

Guided by deep inside knowledge, venture capital is the most valuable money in the economy. Launching learning curves across a wide span of innovations, venturers have seeded companies that now produce some 21 percent of GDP, 65 percent of market capitalization, and a probably underestimated 17 percent of all jobs.

But venture capital represents a tiny proportion of less than two-tenths of one percent of total capital. Mostly barred from venture capital or private equity, the public at large is widely counseled to invest their money in “index funds.” These funds yield no more knowledge and learning than the state lotteries do. Purchasing a sampling of all the stocks in the market without any research on specific companies, indexers give the public some exposure to the gains of the insider-trading conglomerateurs. But they provide less than no benefit to the learning processes that create growth and wealth. Index funds are parasites on the research done by actual investors.

Momentum prevails until it stops. But as economist Charles Gave of GaveKal puts it, “In a true capitalist system, the rule is the higher the price, the lower the demand. With indexation, the higher the price, the higher the demand. This is insane”. …

Dwarfing all positive investment by “insider traders” and knowledge brokers are the financial power brokers in the major banks. Thriving through leverage and arbitrage, fast trading and risk shuffling, they have long had access to virtually unlimited funds at near zero interest rates and have for the most part been anointed by the government as too big to fail. In effect, the federal government through the Federal Reserve Bank and scores of other regulators has socialized the downside of these institutions, which has enabled them to do what they call “creative risk taking.” But what in fact they do is a cockeyed extension of ever more cantilevered loans and compound securities with only tiny slivers of actual equity at risk. Real entrepreneurial risk taking is totally unrelated to mere hypertrophy of leverage with implicit government guarantees. …

When something is free, as Donald Trump’s adviser, economist David Malpass, points out, only the well connected get much of it. Main Street is far back in the queue. Zero interest rates resulted in easy money for high-leveraged Wall Street speculators, cheap money for the government, and parched credit for entrepreneurial small businesses that generate nearly all new jobs and learning.

Severing the final link between money and gold in 1971 finally unleashed the financial system, who ultimately make the most profits from creating money out of nothing. Banks will end up owning all sizeable assets eventually, as surely as the casino will eventually own all the punter’s money.

 hat-tip Chris