the finance industry / wall street

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ha, when i saw "goldman nuns" in the url i thought itnwas a reference to "some get shot locked down and turn nuns/cowardly hearts and straight up shook ones." like greg smith had "turned nun" #morningthoughts

i don't believe in zimmerman (Hurting 2), Wednesday, 21 March 2012 12:16 (2 years ago) Permalink

3 weeks pass...

stop us before we kill again: http://www.cnbc.com/id/47018347

s.clover, Thursday, 12 April 2012 16:55 (2 years ago) Permalink

Ok this isn't exactly about "the finance industry" but I have been puzzling over the ideas of David Graeber, and I don't understand this:

http://inthearena.blogs.cnn.com/2011/07/05/david-graeber-studied-5000-years-of-debt-real-dirty-secret-is-that-if-the-deficit-ever-completely-went-away-it-would-cause-a-major-catastrophe/
The current financial system – based on central banks – really goes back to 1694 when a group of London merchants made a loan to the King of England to fight some war in France, and he gave them the right to call themselves "the Bank of England" and loan the money he owed to them to other people in the form of bank notes. That's what British money actually is - an IOU from the king, an uncashed check.

What I am missing in this formulation is how did the Bank of England "loan" "debt"? Are they lending the privilege of being owed money? Normally I thought debt was sold, not lent.

i don't believe in zimmerman (Hurting 2), Monday, 23 April 2012 22:25 (2 years ago) Permalink

Let's use fantasy numbers, just to make the idea emerge more clearly.

We'll say the Bankers loan the King a million gold coins, each worth "ten" and he agrees to pay them back "twenty" for every "ten" he recieved. In one scenario, the Bankers just sit around waiting for their million "twenties" to dribble back in from the Exchequer, until they're all paid. Fine. They will make 100% profit. But they have to wait for it until the King coughs it up.

The smart Bankers realize that the King's promise to pay back is worth something. People trust it, sort of. They decide to monetize this promise to repay by dividing it up into twenty million notes, each worth "one". This is what the King promised, after all. Now they turn around and make loans, but instead of lending gold coins (the King has most of them atm), they lend these notes. They are as good as gold, because hey the King would never default, amirite?

The clever bit is that they lend all these "good as gold" notes at interest and announce they will take either gold coins or these notes back as payment for the principal and the interest. History ensues, to much hilarity.

Aimless, Tuesday, 24 April 2012 00:13 (2 years ago) Permalink

shareholders are suing jamie dimon over his compensation package

BIG HOOS aka the steendriver, Tuesday, 24 April 2012 00:17 (2 years ago) Permalink

Isn't that Citigroup/Pandit?

boxall, Tuesday, 24 April 2012 00:20 (2 years ago) Permalink

in any event I liked this exchange from an interview with a hedge fund director:

Q. What do you think in general about the influence of people with your means on the political process? You said shame on the politicians for listening to the CEOs. Do you think the ultrawealthy have an inordinate or inappropriate amount of influence on the political process?

A. I think they actually have an insufficient influence. Those who have enjoyed the benefits of our system more than ever now owe a duty to protect the system that has created the greatest nation on this planet.

boxall, Tuesday, 24 April 2012 00:28 (2 years ago) Permalink

Obviously, "has created the greatest nation on this planet" should be read as "has made me filthy rich."

Aimless, Tuesday, 24 April 2012 00:33 (2 years ago) Permalink

So, basically, the king wanted 1.2 mil. He gets some dudes together and names them the B of E, and they loan him 1.2 mil. Now, they own 1.2 mil in debt, payable from the king to them. They issue notes representing some portion of this debt. Now they can do whatever they want with these notes -- buy things, build little paper hats and boats, anything. You may have noticed that I said "buy things." That debt from the king, since it's backed by the power of the royal estate, is a pretty good fungible currency -- good as gold, so to speak. And one thing you can do with currency, especially if you're a financier, is instead of buying things yourself, lend it to other people so they can buy things and eventually pay you back with interest. So that's the B of E. And it's a good story to think about when considering fiat money.

s.clover, Tuesday, 24 April 2012 00:40 (2 years ago) Permalink

took me a long time to type that, on and off. aimless beat me to most of the punch.

s.clover, Tuesday, 24 April 2012 00:40 (2 years ago) Permalink

Isn't that Citigroup/Pandit?

― boxall, Tuesday, April 24, 2012 12:20 AM (12 minutes ago) Bookmark Flag Post Permalink

yes

BIG HOOS aka the steendriver, Tuesday, 24 April 2012 00:47 (2 years ago) Permalink

xposts: Ok, I think that makes sense with what I thought to begin with. There was just something confusing to me about the idea of loaning out what is essentially debt. Except in a weird way it seems like the currency ceases to have its debt connotations as it circulates, because people stop expecting "repayment" from the king.

So then what motivates the Bank of England to lend money to the king without interest?

i don't believe in zimmerman (Hurting 2), Tuesday, 24 April 2012 01:03 (2 years ago) Permalink

Also, is there kind of an implicit assumption in all this war-borrowing by kings that "Well, of course when we win the war we'll have spoils to repay you"?

i don't believe in zimmerman (Hurting 2), Tuesday, 24 April 2012 01:05 (2 years ago) Permalink

They actually loaned it at 8% interest. But they also got a bunch of privileges on top of that.

s.clover, Tuesday, 24 April 2012 01:09 (2 years ago) Permalink

But if they loaned it at 8% interest then why are the bearer notes interest-free?

i don't believe in zimmerman (Hurting 2), Tuesday, 24 April 2012 01:18 (2 years ago) Permalink

Because they kept the vig! Why wouldn't they?

s.clover, Tuesday, 24 April 2012 01:19 (2 years ago) Permalink

I guess it just sounds like initially it would be hard to convince people to not only take these notes but actually pay interest to the bank of england on them. But I suppose the promise of the king was worth a lot, hence "fiat currency"

i don't believe in zimmerman (Hurting 2), Tuesday, 24 April 2012 01:40 (2 years ago) Permalink

To be clear, as I understand it, they didn't pay interest on the notes, they payed interest on loans, which happened to be given in the form of notes (as opposed to, e.g., gold).

s.clover, Tuesday, 24 April 2012 02:54 (2 years ago) Permalink

important to remember that all this government debt is an asset

stay in school if you want to kiw (Gukbe), Tuesday, 24 April 2012 04:53 (2 years ago) Permalink

That all makes sense. But I think here's what's strange about it: BOE loans the King money. BOE issues "promise to pay" notes to BOE, which BOE in turn can lend out to third parties. But the result is that the King never actually has to repay the principal of his loan.

i don't believe in zimmerman (Hurting 2), Tuesday, 24 April 2012 14:51 (2 years ago) Permalink

Sorry, that should say "KING issues 'promise to pay' notes to BOE"

i don't believe in zimmerman (Hurting 2), Tuesday, 24 April 2012 14:54 (2 years ago) Permalink

You can learn more about the Bank of England and fiat currency by visiting your local library and looking under Stephenson, Neal.

i love the large auns pictures! (Phil D.), Tuesday, 24 April 2012 14:54 (2 years ago) Permalink

in terms of trust, prob also remembering England was much smaller then (about 5 million, London half a mil) & traders, merchants, financiers would be way more likely to know each other personally + more able to assess trustworthiness and solidity of these plans - who else is in? Are they stupid? Who do they know?

And people were suspicious of notes I think - they're mocked into the 1730s at least.

woof, Tuesday, 24 April 2012 15:20 (2 years ago) Permalink

(see Pope's Moral Essays, Epistle III)

woof, Tuesday, 24 April 2012 15:23 (2 years ago) Permalink

Well yes, and my understanding is that banknotes under non-central-banking regimes were even more suspect. But I'm just trying to get my mind around the initial transaction and how these notes were created I guess. Like BOE lends money to the King, the King issues promises to pay that he will literally never fulfill, and then BOE lends out those promises. A strange arrangement.

i don't believe in zimmerman (Hurting 2), Tuesday, 24 April 2012 15:24 (2 years ago) Permalink

As far as I know the loans were repaid eventually. The notes issued by the B of E were backed either by a claim on the royal debt, or by gold. On the other hand, even while individual loans were typically repayed, often this was accomplished by rolling over the debt into new loans. Think of modern treasury bonds, for example. They all pay off when they come due -- but there's always a large amount outstanding, and part of the issue of new debt goes towards paying off debt coming due. There's nothing especially tied to royal or governmental fiat about this either -- the same thing is true for bonds issued by most companies, or loans made to them.

s.clover, Tuesday, 24 April 2012 15:28 (2 years ago) Permalink

xp

But they're given sources of government revenue, so there is money coming from the crown.

woof, Tuesday, 24 April 2012 15:28 (2 years ago) Permalink

no hold on I've confused myself.

woof, Tuesday, 24 April 2012 15:30 (2 years ago) Permalink

The legit sources I've seen on a quick google (this is an interesting topic!) don't go into details of exactly what happened to each individual loan, but they do tend to confirm that these were like real loans that not only had interest payments but a genuine claim on principal. The only source for the "never intended to be repaid" characterization is like ron paulish fringe sites.

s.clover, Tuesday, 24 April 2012 15:30 (2 years ago) Permalink

if I'm reading this right, there's a grant of tunnage and poundage revenue built into the act that's designed to repay those who advance a lump sum.

woof, Tuesday, 24 April 2012 15:33 (2 years ago) Permalink

Like BOE lends money to the King, the King issues promises to pay that he will literally never fulfill

haha the whole point is that king is in fact very likely to fulfill his promise!!

Lamp, Tuesday, 24 April 2012 15:38 (2 years ago) Permalink

yeah, I'm not used to reading statutes, but looking at the full version i think there are also systems of annuities built into the act - so there's income from various customs sources, and investors get paid back from that.

woof, Tuesday, 24 April 2012 16:04 (2 years ago) Permalink

Thanks for digging up that full version woof. They sure were terrible at spelling in those days though.

s.clover, Tuesday, 24 April 2012 17:01 (2 years ago) Permalink

So to get back to the original point, I'm just trying to understand whether what Graeber was saying about the origins of British money is accurate and not overly reductive, and more broadly whether the foundations of his ideas about debt and money are really well-grounded.

i don't believe in zimmerman (Hurting 2), Tuesday, 24 April 2012 17:05 (2 years ago) Permalink

It's a mix of correct and incorrect, I think. The specific bit you quoted was fine, but then look at this: "Just as the King can never repay his debt to the Bank of England, or else the British currency system would collapse, the US has to maintain a national debt – as indeed, it always has, we've always been in arrears since independence – or there'd be no money. (Or if you want to be technical, private banks would have to make up all the money by making loans, but of course, at the moment, our big problem is that they aren't doing that.)"

And y'know, technically, the debt was payed back as far as I know. But then more debt was borrowed. And there was nothing magically different about a king doing it or some merchant named Joe or whatever doing it except the king had more means to pay it back. And I think he's even more off about the origins of the u.s. national debt since we didn't have a natl. govt. backed currency until like the civil war (though of course there was natl. debt prior to then -- it just wasn't coupled to a natl. currency). And prior to the war of independence the individual colonies already issued paper -- and the crown trying to stop that was one of the events leading up to the american revolution actually. The coinage act (after the revolution) didn't print paper, but produced metal coins with intrinsic value. Meanwhile the first bank of the u.s. only made short-term loans to the govt. and mainly loaned to others.

Ok, that's a digression, but anyway, it sort of makes the point that Graeber plays fast and loose in sort of common ways, and I think he confuses causality sometimes too. I thought there was good material in parts of his book, but I honestly couldn't extract a straightforward set of "ideas about debt and money" except that he's consistently working to put the state front and center, which is a useful corrective to thinking about the market as existing ex-nihilo, but often goes too far.

s.clover, Tuesday, 24 April 2012 17:21 (2 years ago) Permalink

Just grasp that a fiat currency is much more elastic than a currency pegged to a metal. It increases both the supply and the velocity of money, and therefore it increases and speeds up economic activity. A well-managed fiat currency strengthens an economy.

A return to the gold standard would be a catastrophe far worse than the hyperinflation the gold bugs seem to fear. It would not only shrink the money supply, it would slow down the velocity of money to a snail's pace as deflation set in. There would be a cash famine of epic proportions.

Aimless, Tuesday, 24 April 2012 17:24 (2 years ago) Permalink

Ok, that's a digression, but anyway, it sort of makes the point that Graeber plays fast and loose in sort of common ways, and I think he confuses causality sometimes too. I thought there was good material in parts of his book, but I honestly couldn't extract a straightforward set of "ideas about debt and money" except that he's consistently working to put the state front and center, which is a useful corrective to thinking about the market as existing ex-nihilo, but often goes too far.

― s.clover, Tuesday, April 24, 2012 1:21 PM Bookmark Flag Post Permalink

Yeah this is pretty much my impression as well (I have not read his book yet but I've listened to at least six or seven different interviews, podcasts, etc. where he outlines the ideas).

i don't believe in zimmerman (Hurting 2), Tuesday, 24 April 2012 17:58 (2 years ago) Permalink

Just grasp that a fiat currency is much more elastic than a currency pegged to a metal. It increases both the supply and the velocity of money, and therefore it increases and speeds up economic activity. A well-managed fiat currency strengthens an economy.

A return to the gold standard would be a catastrophe far worse than the hyperinflation the gold bugs seem to fear. It would not only shrink the money supply, it would slow down the velocity of money to a snail's pace as deflation set in. There would be a cash famine of epic proportions.

― Aimless, Tuesday, April 24, 2012 1:24 PM Bookmark Flag Post Permalink

As for this, you are preaching to the converted. I'm not questioning the preferability of fiat currency over the gold-standard, I'm just trying to understand exactly the mechanism by which modern money was created by looking at it in slow motion.

i don't believe in zimmerman (Hurting 2), Tuesday, 24 April 2012 18:00 (2 years ago) Permalink

Aimless: this takes us pretty far afield from what Graeber's talking about, but I suspect that what you're saying isn't true anymore, and perhaps was less true than people ever thought. Like the bank of england didn't yet introduce a fiat currency -- it was still gold backed in some sense. It was just that the debt itself became fungible in a very immediate way. But that's just the nature of debt! (and like even when the u.s. dollar was gold backed or whatever that didn't mean that they actually held enough gold in reserves to make good on every bill printed afaik). But we can see this very immediately now with measures of the money supply. The money supply sort of works by its own rules and the current standard measures only capture a part of it -- far more is currently unmeasured in the "shadow banking system" of circulation of collateral. What I'm getting at, if it makes sense, is that money supply is an artifact of market demand, and that tends to determine both velocity and supply (writ large -- i.e. think M3 and then some). So money is a commodity like any other in a sense, but that commodity isn't determined by the actual supply of bills (or electronic equivalents) but instead that coupled with the transaction costs of "multiplying" money through leveraging up and the recirculation of loans and collateral. And to the extent that those transaction costs are now much cheaper than they were, then the "cost" of money is much less tied to anything in particular the government does (except to the extent that e.g. the Fed has lots of resources to throw around and so can move the market the same way any other player with an equiv. checkbook could).

s.clover, Tuesday, 24 April 2012 18:06 (2 years ago) Permalink

& his history there looks right, if maybe a little simplified (for the format presumably) - foundation of Bank of England is normally taken as foundation of paper credit + national debt currency system (and it is to fund the 9 Years' War with France), but obvs causes, consequences, politics, etc look a bit messier or more complicated if you get a bit closer.

My copy of Graeber's book arrived today. looking forward to it.

woof, Tuesday, 24 April 2012 18:16 (2 years ago) Permalink

the u.s. dollar was gold backed or whatever that didn't mean that they actually held enough gold in reserves to make good on every bill printed afaik

It was just this fact which eventually drove the U.S. off the gold standard.

In the late 1960s France was choosing to redeem its dollar reserves as physical gold, which it had the right to do under the Bretton Woods agreement. It soon became abundantly clear that the gold reserves in Ft. Knox could easily be drained by such actions, if they were allowed to continue.

In fact, this was DeGaulle's intention. He wished to make it plain that the US dollar had floated far above its presumed anchor, so that it had been de facto heavily diluted against gold while still being accepted at par, thereby creating an unfair trade advantage for the USA. Needless to say, he made his point.

Aimless, Tuesday, 24 April 2012 18:35 (2 years ago) Permalink

I guess I've approached him with curious skepticism because his ideas seem appealing but I'm ultimately doubtful about any claims of "X is the source of oppression in the world, and we should eliminate X and build an oppression-free society with no hierarchical relationships." I also don't really see what the logical conclusion of his ideas could be other than a sort of small-scale utopianism, because I doubt a modern industrial society could run without either debt finance or some more direct form of coercion.

i don't believe in zimmerman (Hurting 2), Tuesday, 24 April 2012 18:45 (2 years ago) Permalink

He's not actually anti-debt. That would be at least something to hold on to :-)

s.clover, Tuesday, 24 April 2012 18:46 (2 years ago) Permalink

Yes, I do find him a bit slippery.

i don't believe in zimmerman (Hurting 2), Tuesday, 24 April 2012 18:50 (2 years ago) Permalink

So can anyone recommend essential books on these kinds of things (central banking, monetary policy, history of money, etc.)? I'm going through Niall Ferguson's Ascent of Money right now and I find it to be way to cursory and jump-aroundy.

i don't believe in zimmerman (Hurting 2), Thursday, 26 April 2012 13:59 (2 years ago) Permalink

Ferguson can be interesting at times but largely I'd say AVOID AVOID AVOID cause he's kind of a right-wing nutjob

GoT SPOILER ALERT (Gukbe), Thursday, 26 April 2012 15:09 (2 years ago) Permalink

Yeah I'm sort of just glossing over anything that strikes me as explicitly right-wing ideological. Parts of the book are very well told and others are incomprehensible. It's a slapdash book that would probably need to be multi-volume to be any good.

i don't believe in zimmerman (Hurting 2), Thursday, 26 April 2012 15:10 (2 years ago) Permalink

Anyone have thoughts on this?
http://www.amazon.com/Primer-Banking-Bernsteins-Finance-Classics/dp/0470287586/ref=sr_1_4?s=books&ie=UTF8&qid=1335453048&sr=1-4

Available at the B&N by my work, should I pull the trigger?

i don't believe in zimmerman (Hurting 2), Thursday, 26 April 2012 15:11 (2 years ago) Permalink

Galbraith's Money: Whence it came, where it went is very readable, but it might be too cursory as well.

in the sandbox 'what are you reading' thread I mentioned:

Casualties of Credit: The English Financial Revolution, 1620-1720. Pretty good - clear, good topic, more history of ideas than history; a bit narrow or superficial in places - the book-from-thesis air.

It might be worth looking at if you want a sense of the arguments about money and credit that were going on then. Goes into alchemy etc iirc, gives a sense of the messiness and unsettledness of the period. Not a lively read though.

woof, Thursday, 26 April 2012 15:20 (2 years ago) Permalink


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