Tag Archives: Credit

The California Challenge

How (not) to regulate disruptive business models
By Steven Hill – The latest trend from Silicon Valley is known as the “sharing economy,” sometimes referred to as the “gig economy,” “on-demand,” “peer-to-peer” or “collaborative-consumption” economy. Dozens of »disruptive« companies like Uber, Airbnb, Up-work, TaskRabbit, Lyft, Instacart and Postmates have proven to be attractive to consumers and those who would like to “monetize” their personal property (real estate, car) or find flexible, part-time work.

In some ways, these new platforms have the potential to provide new opportunities. But they also display a number of troubling aspects.

With this latest wave of Silicon Valley startup companies, the business model of US corporations is in the process of being redesigned.

The post-Second World War era was dominated by vertical, industrial powerhouses, such as auto companies, in which end-to-end production, design, research, marketing and sales were all performed under a single company roof. Many of these companies – such as GM, Volkswagen, Ford, IBM, Siemens, BMW and Daimler – created a huge number of jobs, numbering in the hundreds of thousands.

Today that company model is yielding yet again, to a new one typified by companies such as taxi service Uber, hospitality company Airbnb and labor brokerages Upwork and Task Rabbit. Their precursor was Amazon, which blazed the way for how to market and sell online. These corporations are little more than websites and an app, who utilize technology to oversee an army of freelancers, contractors and part-timers.

The quality of jobs created by many of the Silicon Valley disruptors is also troubling. The business-friendly “happy talk” of Silicon Valley tells us that these new companies are creating new opportunities by allegedly “liberating workers” to become “independent entrepreneurs” and “the CEOs of their own businesses.” In reality, these workers have ever-smaller part-time jobs (called “gigs” and “micro-gigs”), with low wages and no job guarantee or safety net benefits, while the companies profit handsomely.

In short, workers’ labor value is reduced to only those exact minutes they are producing a report, designing a logo or cleaning someone’s house. It’s as if a football star only got paid when kicking a goal or a chef were paid by the meal. In the name of hyper-efficiency, suddenly the “extraneous” parts of a worker’s day, such as rest and bathroom breaks, staff meetings, training, even time at the water cooler are being eliminated. more> https://goo.gl/hMV72j

Finance Is Not the Economy

By Dirk Bezemer and Michael Hudson – To explain the evolution and distribution of wealth and debt in today’s global economy, it is necessary to drop the traditional assumption that the banking system’s major role is to provide credit to finance tangible capital investment in new means of production.

Banks mainly finance the purchase and transfer of property and financial assets already in place.

This distinction between funding “real” versus “financial” capital and real estate implies a “functional differentiation of credit,” which was central to the work of Karl Marx, John Maynard Keynes, and Schumpeter. Since the 1980s, the economy has been in a long cycle in which increasing bank credit has inflated prices for real estate, stocks, and bonds, leading borrowers to hope that capital gains will continue. Speculation gains momentum — on credit, so that debts rise almost as rapidly as asset valuations.

When the financial bubble bursts, negative equity spreads as asset prices fall below the mortgages, bonds, and bank loans attached to the property. We are still in the unwinding of the biggest bust yet. This collapse is the inevitable final stage of the “Great Moderation.” more> https://goo.gl/GmDT72

What Trump Didn’t Learn From the Financial Crisis

By Noah Smith – There’s this old idea that what’s good for American companies is good for Americans. But that’s not necessarily true, and it’s certainly not true in the case of financial companies.

One well-known reason is moral hazard. Big banks, with their implicit guarantees of future bailouts, have an incentive to take more risk than is good for society.

Another reason is that sometimes banks and other finance companies use business models that hurt their customers.

Anyone who has studied behavioral finance knows that there are many ways in which the average borrower and the average investor predictably make bad decisions. Taking advantage of these lapses in rationality is the dark side of behavioral finance, and in general it’s perfectly legal.

The 2000s housing bubble provides a fairly clear example. Many mortgage lenders made loans to customers who couldn’t pay them back. The borrowers, not realizing that they couldn’t pay back the loans, suffered negative consequences such as foreclosure, repossession and bankruptcy.

The mortgage lenders sold the loans to banks, thus washing their hands of any of the risks they had created. more> https://goo.gl/WlWsLK

It’s not just Deutsche. European banking is utterly broken

By Jeremy Warner – Nine years after the initial eruption, it still rumbles on, with the epicentre now moved from the US to Europe. Only it’s not the same crisis; in large measure, it is completely different.

Today’s mayhem is not so much the result of reckless bankers and asleep at the wheel regulators, but rather of the public policy response to the last crisis itself – that is to say, regulatory over-reach and central bank money printing.

It all goes to show that there is no mess quite so bad that government intervention to correct it won’t make even worse.

There are essentially four factors at work here. First, it’s virtually impossible to make money out of banking in a zero interest rate environment, frustrating attempts to rebuild capital buffers after the bad debt write-downs of recent years.

In circumstances where central banks have bought right along the yield curve, flattening it down to virtually nothing, the margin from maturity transformation all but disappears. more> https://goo.gl/KqGo7Y

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Wells Fargo’s Scandal Is a Harbinger of Doom

BOOK REVIEW

Makers and Takers: The Rise of Finance and the Fall of American Business, Author: Rana Foroohar.

By Rana Foroohar – The irony is that the Wells case isn’t about anything as complicated as Tier 1 capital requirements. It’s about straight-up fraud — tellers were incentivized to make profits above all else.

But why did the trouble come in the consumer division, as opposed to any of the more complicated areas of the business? That’s where the story becomes more interesting, illuminating a more fundamental problem in the business model of banking.

Finance has moved away from its original model of supporting companies (and thus, economic growth), and now makes the majority of its money buying and selling existing assets, as well as issuing corporate and consumer debt.

Until the 1980s, banks mainly took deposits and lent them out to new businesses, which then grew jobs and supported the economy. In the 1970s, for example, the majority of financial flows coming out of the largest U.S. financial institutions went into new business investment. Today, only 15% of it does.

Until we craft a financial system that is once again focused on its true economic function — funding new business, rather than issuing debt, creating asset bubbles, and focusing on boosting profit share at whatever cost — I fear that we can expect more of the bad behavior we’ve seen at Wells. more> https://goo.gl/3cgijT

Peak Finance Looks Like It’s Over

By Noah Smith – It’s time to ask a scary question: How much of the financial industry will soon be obsolete?

There are many examples of technologies that have been replaced by something newer and better — film replaced by digital cameras, typewriters replaced by word processors. Finance isn’t quite like that — businesses will always need to finance their investments and their day-to-day expenses, property buyers will always need mortgages and everyone will always need places to save their money. As long as capitalism lives, there will be a financial industry.

What’s happening, however, is a winnowing. Finance may have outgrown the sustainable limits of its role in the U.S. economy, and might now have to endure a long and painful era of retrenchment.

For the past seven decades, but especially since 1980, finance has grown fat indeed. The share of gross domestic product going to the finance, insurance and real estate industries rose from less than 4 percent in the early 20th century to more than 8 percent by the start of the 21st.

Financial-industry profits also soared, briefly topping 40 percent of all U.S. business profits in the first years of the century. more> https://goo.gl/3KEtVh

A New Measure of China’s Vulnerability

By Mark Whitehouse – The 2008 financial crisis helped bring global leaders to the realization that they needed a better early-warning system.

To that end, the Bank for International Settlements — a sort of central bankers’ central bank — has been publishing more data on money flows around the world. These include an indicator called the credit-to-GDP gap, which focuses on the amount of credit being provided to households and businesses as a share of gross domestic product. The more the indicator rises above its longer-term trend in a given country, the more likely it is that borrowers are getting overextended — a situation that tends to lead to defaults, banking troubles and broader slumps.

Now, the indicators for the U.S. and Europe are in negative territory — a reflection of struggles to restore growth while still working through the excesses of the previous boom.

The credit gap in China, by contrast, is at its highest level since at least 1995 (the first year of the data series): As of March, it stood at more than 30 percentage points. more> https://goo.gl/hoXKI5

Wells Fargo Shows Banking’s Culture Crisis Is Worsening

By Rana Foroohar – You know there’s something off when a major American bank fires 5,300 employees for illegal tampering with 1.5 million bank accounts and applying for 565,000 credit cards that may not have been authorized by customers, and it’s not top news.

Clearly, the culture of finance hasn’t changed post 2008—it’s the likely hotspots for fraud that have. The fact that Wells employees were opening false credit card accounts to jack up sales figures likely reflects the fact that while Dodd Frank financial regulation has curbed some risky trading, banks are now looking at new profit centers in consumer banking.

The pressure on employees to perform (apparently by whatever means necessarily) will only increase, since bank profit margins are being compressed not only by regulation, but by the current low interest rate environment, which makes it tougher for them to make money on loans.

Double digit margins used to be commonplace in finance—now, many are lucky to make high single digits. In the long run, that’s not a bad thing—as I’ve been writing for some time, banks should be more like utilities; a strong and steady helpmate to business, rather than the main event. more> https://goo.gl/EzWdRj

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How Perfect Markets Concentrate Wealth and Strangle Growth and Prosperity

By Steve Roth – Perfect markets concentrate wealth. It’s their nature. But at some point, market-generated wealth concentration strangles those very markets (compared to markets with broader distributions of wealth).

But wealth concentration doesn’t just strangle the flows of spending, production, and income. It throttles the accumulation of wealth itself.

The dynamics are straightforward here: poorer people spend a larger percentage of their income than richer people. So if less money is transferred to richer people (or more to poorer people), there’s more spending — so producers produce more (incentives matter), there’s more surplus from production, more income, more wealth … rinse and repeat.

If a few richer people (who dominate our government, financial system, and economy) have the choice between making our collective pie bigger or just grabbing a bigger slice, grabbing the bigger slice is the hands-down winner.

That’s why decades of Innovative Financial Engineering has served, mostly, not to efficiently allocate resources to efficient producers, improve productivity, or increase production. Rather, these fiendishly clever entrepreneurial inventions control who gets the income from production. You can guess who wins that game. Top wealth-holders would be nuts to play it any other way (if you go with economists’ definition of rationality …).

But for the rest of us, it’s a loser’s game — at least compared to the world we could be living in. more> http://goo.gl/84WTBg

Why Trump voters are not “complete idiots”

By Chris Arnade – The US is bifurcated into two (actually a few more, but at the highest level only two). There are the “elites” and there is everyone else.

These two Americas are segregated, culturally, socially, geographically, and economically. They have gotten more segregated over the last 40 years.

The growing income inequality is one measure of this. Yet it is more than that. The elites have removed themselves physically. They cluster in certain towns (NYC, LA, Northern Virginia, Boston) and within those towns in certain neighborhoods. They dress differently. They eat differently. There is a culture of elitism.

The best single measure of elitism I see is education, the type and amount. A Harvard professor of sociology is more similar (despite different politics) to a Wall Street trader, than either is to a truck driver in Appleton, Wisconsin, or a waitress in Selma, or a construction worker in Detroit.

The elites by and large control things. They control the money. They control the rules on how you make it. They also control the social capital. They set/define what is acceptable, what is allowable, and what is frowned on.

In snazzy academic speak: The elites define what is valid cultural capital, and have defined it to further empower themselves. more> http://goo.gl/r6fXGf