7.1.14

THE CASE FOR FINANCIAL LITERACY.

Last night, I was working on the railroad with the WGN sports-talk show on as background entertainment.  (Hockey nights are often good nights to work on the railroad, go figure.)  A brief segment dealt with an Auburn fan who, at the beginning of the season, purchased in Las Vegas the Auburn to win national championship ticket at 500 to 1 odds with a $100 stake.  At the time of the purchase, Auburn, coming off a losing season, was the longest of long shots.  At the time of the conversation, Auburn held a halftime lead.  Conversation turned to the wisdom, or lack thereof, of hedging the bet, say, by putting $100 on an even-money bet that Florida State wins.  The gentleman in question was on record as not doing so.

What I learned from that brief exchange was that sports-betting performs some of the functions of finance markets and insurance markets.  There's the transfer of risk.  Is there any difference between buying Auburn at 500 to 1 (or Northern Illinois at impossible to 1) and spending $100 on a $50,000 fire insurance policy?  There's the division of risk.  An investment of $100 in Florida State, even, yields a payoff of $49,800 in the event of an Auburn win, or a loss of nothing when the game turns out the way it did.  (And is football going the way of professional basketball, you only have to watch the fourth quarter?)  All that's missing is liquidity.  Or perhaps there is a secondary market in which the holder of Auburn at 500 to 1 can exchange that ticket at something more than $100 and less than $50,000, perhaps for Auburn and the points at $100 plus some cash to a punter with a greater taste for risk?

It's not too much of a stretch, then, to conceive of derivative securities in sports betting, and thus, to make the understanding of ordinary financial markets more relevant to people who might otherwise be looking out the window.

Our task, however, includes the overcoming of a lot of ignorance.
Speculators at megabanks or investment firms such as Goldman Sachs are not, in a strict sense, capitalists. They do not make money from the means of production. Rather, they ignore or rewrite the law—ostensibly put in place to protect the vulnerable from the powerful—to steal from everyone, including their shareholders. They are parasites. They feed off the carcass of industrial capitalism. They produce nothing. They make nothing. They just manipulate money. Speculation in the 17th century was a crime. Speculators were hanged.

We can wrest back control of our economy, and finally our political system, from corporate speculators only by building local movements that decentralize economic power through the creation of hundreds of publicly owned state, county and city banks.
Yes, let's return to those seventeenth-century days when life was solitary, poor, nasty, brutish, and short, or delude ourselves that somehow the sharing and transferring of risk, and the provision of liquidity, is less evil if committed by more people on a smaller scale.  But first, let's find the worst examples of something other than bourgeois rectitude among the traders and mock them.
True, ["Wolf of Wall Street" director Martin] Scorsese missed an opportunity to tell a great morality tale about the price of excess, but the kind of people whose life goal is to enrich themselves at any cost so they can pal around with chimps or fling midgets about for an afternoon's entertainment are unlikely to have been swayed by such a film anyway.

On the other hand, Scorcese might have done us all a favor by showing us how greed unchecked really plays out. If the public become less tolerant of the reckless behavior of the stealthier wolves of wall street as a result, then the movie will, at least, be worth the admission fee.
Or treat the ability to create liquidity out of what looks like nothing as undesirable.
Financialisation represents a historic and deep-seated transformation of mature capitalism. Big businesses have become "financialised" as they have ample profits to finance investment, rely less on banks for loans and play financial games with available funds. Big banks, in turn, have become more distant from big businesses, turning to profits from trading in open financial markets and from lending to households. Households have become "financialised" too, as public provision in housing, education, health, pensions and other vital areas has been partly replaced by private provision, access to which is mediated by the financial system. Not surprisingly, households have accumulated a tremendous volume of financial assets and liabilities over the past four decades.

The penetration of finance into the everyday life of households has not only created a range of dependencies on financial services, but also changed the outlook, mentality and even morality of daily life. Financial calculation evaluates everything in pennies and pounds, transforming the most basic goods – above all, housing – into "investments". Its logic has affected even the young, who have traditionally been idealistic and scornful of pecuniary calculation. Fertile ground has been created for neoliberal ideology to preach the putative merits of the market.

Financialisation has also created new forms of profit associated with financial markets and transactions. Financial profit can be made out of any income, or any sum of money that comes into contact with the financial sphere. Households, for example, generate profits for finance as debtors (mostly by paying interest on mortgages) but also as creditors (mostly by paying fees and charges on pension funds and insurance). Finance is not particular about how and where it makes its profits, and certainly does not limit itself to the sphere of production. It ranges far and wide, transforming every aspect of social life into a profit-making opportunity.

The traditional image of the person earning financial profits is the "rentier", the individual who invests funds in secure financial assets. In the contemporary financialised universe, however, those who earn vast returns are very different. They are often located within a financial institution, presumably work to provide financial services, and receive vast sums in the form of wages, or more often bonuses. Modern financial elites are prominent at the top of the income distribution, set trends in conspicuous consumption, shape the expensive end of the housing market, and transform the core of urban centres according to their own tastes.
Perhaps we must emphasize the fundamentals.  It is at best a polite fiction to speak of a house as anything other than a capital investment, and as a capital investment, it is in competition with other capital investments.  Because capital markets exist to transfer risks, those investments can be more risky or less risky than houses (in the same way that Auburn at 500 to 1 in August 2013 is different from Florida State even after December 10).  More fundamental, though, is the concept of voluntary exchange and gains from trade.  Where there are latent gains from trade, there are arbitrage opportunities, and it ought come as no surprise that people who are alert to such arbitrage opportunities can get rich.  Thus, to limit the earning power of financial elites, equip more people with the skills to understand how to recognize arbitrage opportunities, or to hedge Auburn at 500 to 1.

People better-equipped to understand how financial markets work and how financial assets are valued are likely to be better protected against bubble economies, particularly fraudulently inflated bubble economies.
Five years have passed since the onset of what is sometimes called the Great Recession. While the economy has slowly improved, there are still millions of Americans leading lives of quiet desperation: without jobs, without resources, without hope.

Who was to blame? Was it simply a result of negligence, of the kind of inordinate risk-taking commonly called a “bubble,” of an imprudent but innocent failure to maintain adequate reserves for a rainy day? Or was it the result, at least in part, of fraudulent practices, of dubious mortgages portrayed as sound risks and packaged into ever more esoteric financial instruments, the fundamental weaknesses of which were intentionally obscured?
It's tougher to intentionally obscure something to a person who knows how to ask the right questions.

No comments: