This is your Sunday required reading, two days early (or three days late). Michael Lewis gets to the bottom of it all. Here is one of many passages I particularly appreciated:
From that moment, though, the Wall Street firm became a black box. The shareholders who financed the risks had no real understanding of what the risk takers were doing, and as the risk-taking grew ever more complex, their understanding diminished. The moment Salomon Brothers demonstrated the potential gains to be had by the investment bank as public corporation, the psychological foundations of Wall Street shifted from trust to blind faith.
No investment bank owned by its employees would have levered itself 35 to 1 or bought and held $50 billion in mezzanine C.D.O.’s. I doubt any partnership would have sought to game the rating agencies or leap into bed with loan sharks or even allow mezzanine C.D.O.’s to be sold to its customers. The hoped-for short-term gain would not have justified the long-term hit.
No partnership, for that matter, would have hired me or anyone remotely like me. Was there ever any correlation between the ability to get in and out of Princeton and a talent for taking financial risk?
Read the whole thing.
Back to real work
A while back I commented on this board that the only endeavors that create real new wealth in a society are manufacturing, mining, and agriculture.
The retort I got from another poster was that this was quaint wisdom, and that it's the financial industry that creates wealth, oh yes, and plenty of it.
I wonder if he/she still believes in the financial industry ponzi scheme.
I think the jig is up.
Creating real new wealth
I would agree with your assessment - except I would add developing new technology also creates wealth. When this country's economy shifted from creating to consuming, we were headed down a dead-end. A country operating with a trade deficit is exactly like a household living beyond it's means. And this is where we end.
New technology development is part of manufacturing
New technology, when applied, nearly always results in a new physical product (OK, some people count derivatives and credit default swaps as "new technology"). Patents are filed and new products are manufactured based on the intellectual property contained therein. New technology is brought to fruition when a product is manufactured.
That's why the green technology push is so important. Solar, wind, etc. is about developing new technologies and new products (to be manufactured in the US -- we can hope) for constructing green buildings, driving greener cars, etc.
There are good people already at work trying to make it happen. They aren't the blood-sucking parasites on Wall Street -- they are the scientists and engineers in the labs and in the pilot plants, working furiously to invent new materials and technologies to reduce our dependence on fossil fuels.
These are the people who create the new wealth in our society. They aren't paid big bonuses like Wall Street parasites or CEOs, but they should be.
scientists and engineers need funding
The businesses that fund the scientists and engineers and find ways to market their inventions are an integral link in the chain as well.
Correct
They do need funding, and it's gonna be a real challenge to find it during this credit crunch. Venture capital is very tight.
Venture capital is tight, angel is not
Angel investors know they've got a buyer's market right now, and are ratcheting up their activity if anything. Their funding doesn't depend upon endowment funds, retirement funds, etc., which are shrinking...of course, their own portfolios have seen a hit, but they are actively investing every day.
Buy low, sell high...still works.
quibble
"No investment bank owned by its employees would have levered itself 35 to 1 or bought and held $50 billion in mezzanine C.D.O.’s. "
Umm, anyone know what % of these companies is owned by current or former employees? Greenberg at AIG ... Weill at Citigroup ... etc.
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