Bulls, Bears, and Tapeworms

In a brilliant post, Steve Waldman bitch-slapped the entire finance system and exposed it for what it is:

By a financial system, I don't mean the tottering cartel of banks and insurers loudly sucking newly printed cash into "collateral postings" and "deleveragings" and other meaningless nonactivities. That is no financial system at all. It is an ecology of intestines and tapeworms, tubes through which dollars flow and are skimmed en route to destinations about which the tripe-creatures have little interest or concern.

Boo-yah! There is more:

Right now, banks don't even bother to sell themselves to savers on the basis of their superior acumen in choosing real investments ... We have methodically erased information about real-world activities from the financial decision-making process. We've created an intrafinancial mandarin class, treated as experts, entrusted with wealth, but lacking knowledge of anything other than the arcane wheels and gears of finance, as if the finance exists apart from the workaday world of producing and consuming, serving and being served.

To my admittedly green ears, it sounds as though Waldman is advocating a system that routes capital based on fundamental analysis, and steers clear of securitizing, structuring, deriving, blowing lines off the bosoms of hookers, et cetera. While I could not agree more with this, I think there must have been some incentive for the so-called 'real economy' to reward the financiers hansomely for diving into these convoluted "nonactivities." Until we can correct these incentives, perhaps the finance system as we know it will dive right back into another self-generated bubble that manifests itself in penthouse apartments, yachts and awful art before bursting into another deep recession.

It seems that even the 'real economy' has its hand deep in the same cookie jar. There is real demand for these supposedly "value-added" layers of financial sorcery. Companies, financial and otherwise, want to distill the real world down to packets of market risk, credit risk, interest rate exposure, or whatever. If all these instruments worked as advertised, I supposed we would not be in the situation that we are in now; we may blame the crisis on the simple ineptitude of the financial engineers who conceived of these things, and argue that the premium commanded by these products are just overpriced.

But that is perhaps not the point. By convincing ourselves that such abstractions actually facilitate the means of production and distribution, we have buried our heads in mathematical models and forgotten to look out the window at the world. I am not sure how we should arrive at a brave new world of finance, in which the reasonably paid financial professionals are out in the field and smelling the earth a la Maximus the Gladiator before laying down their humbly leveraged capital, and companies manage their exposures with down-and-dirty activities rather than buying and selling contracts that promise (honest! for real!) to eliminate this risk or that. But I sure am rooting for it.