Friday, July 14, 2006
(8:21 PM) | Anonymous:
Hedge Yourself
Robin Blackburn, "Finance and the Fourth Dimension," is a weird essay.On one hand, Blackburn gives a quick overview of contemporary finance, including explanations of the tools of the trade and plenty of examples of the power of those tools. Long Term Capital Management reference? Check. References to the ethereality of options and futures trading? Check. Stories about contemporary risk arbitrage so scary that they make '80s raiders sound warm and gentle by comparison? Check. You finish the piece already smarter than most of the staff at CNBC! So very New Left!
On the other hand, the sexy finance discussion is just window dressing - as the breathless, almost panicked tone with which Blackburn discusses current techniques attests. The real point here is to mourn the decline of corporate pension schemes, whether to outright theft, the ravages of bankruptcy, or the incompetence of pension fund managers. A sad tale, obviously, but not a new one. Indeed, in manufacturing, it's hard to understand how some companies have survived for so long. I don't know of any serious challenge to the proposition that General Motors was and is facing an existential crisis, and that trimming its benefits obligations is the only plausible solution (besides uprooting itself to some EPZ in the Philippines). Blackburn concludes with a sigh about the unfair effects of financialization on pensioners, the public sector, and consumers. I was actually surprised at the lack of reference to Marx's vampire metaphor. So very Old Left.
Two of Blackburn's points are particularly notable: fear of finance, especially of the elegant mathematical sorcery of derivatives, arbitrage, etc., is pushing the Left toward "neo-Luddism". We have to live and fight in this world, and there's no excuse for willful ignorance. Those of us who appreciate indoor plumbing, penicillin, and the internets need also to know something about what Fed chairmen do, at the very least so that we can advocate policies that are both just and plausible. (For example: antiglobalization Seattle-style protests are great fun and even better theatre. They're also strategic nonsense. An empowered milquetoast like John Edwards inside a G8 meeting is worth more than an army of angry "anarchists" outside.)
Second, he is correct that the agents of modern finance don't tend to play by their own - or anybody else's - rules. Fair, neutral strategies like vanilla swaps (replacing a variable rate instrument with a fixed rate one) and straightforward long/short positions seem to be the exception rather than the rule for the institutions. Banks and hedge funds get so obsessed with the short term and use such deliberately obfuscating techniques that they suck the profits and productivity from economies without any fear of retribution from governments or even markets.
The warning that financialization is exacerbating fundamental global economic woes makes enough sense. But it doesn't really add much to the agenda. We know that Enron wasn't a fluke, that LTCM could happen again, and that someday soon the American Samson will get a haircut. Macroeconomic resignation is warranted. A bolder SEC could do some real good, and a Gov. Spitzer will do some real good. But the only serious threat to financial engineering is a global flight of liquidity, and that wouldn't be good for anybody.
But if fear of finance is not an option, how about some suggestions for using finance as a weapon on the individual level? Maybe aged employees can only hope for the best; but there's no reason younger workers can't and shouldn't be protecting themselves from financial risk, even if that means shorting the company stock, consuming strategically, or consuming less (!). Wealthy investors don't put their retirement money into mutual funds; so there's no reason line workers should have to put their pension money into the hands of fund managers rather than ETFs. I don't have any big ideas either, but I do know that smarter, savvier employees and investors leave the banks and funds fewer suckers to exploit.
Religious voters get a lot of attention; didn't Christianity historically have something to say about usury?
