Another Wall Street Confessional

[monk222]

“Mike,” he told me when denying my request [to become a trader], “can you really look for people dumber than you and then take advantage of them? That’s what trading is all about.”

-- Michael Osinski for New York Magazine

I think Paul Krugman and them are right when they say we need to go back to a smaller finance sector and more of a real economy of true goods and services. These wheelers and dealers and Masters of the Universe give capitalism a bad name, and it's not like capitalism enjoyed a sterling reputation outside of the Anglosphere beforehand.

Comments

Das Kapital

[poovanna.livejournal.com]

These wheelers and dealers and Masters of the Universe give capitalism a bad name, and it's not like capitalism enjoyed a sterling reputation outside of the Anglosphere beforehand.

I was reading N.N Taleb's stuff, when I came across the following idea:

In distributions with high kurtosis (eg. fat-tailed distributions), the chances of deviating from the mean are much higher, compared to distributions with lower kurtosis (eg. normal distribution).

It is Statistics 101, but it got me thinking about your post.

The distribution of folks competing for various things in life, is highly skewed. For example, everybody wants to get:

• their kids admitted to a prestigious school;
• a position that pays 6 figures;
• a house in a particular neighborhood etc., etc.

In a super-competitive, capitalistic society, it is reasonable to assume that this distribution is even more skewed/fat-tailed.

As mentioned above, fat-tails are worrisome because:

• the difference between a winner & you could be minuscule - even a tiny amount makes a huge difference.
• the risk of losing your crown, is also much higher - considering the wild boom-bust cycles, this worry may not be irrational.

So, it may be (more) true (for capitalism) that whatever you make up with money, you lose with worry? :-)

Re: Das Kapital

[hardblue.livejournal.com]

I don't know. First, from that article, the impression I got is that we tend to under-rate the risks of catastrophe. And in any case, with respect to capitalism, it seems to me that the game is more stable than, say, your basic dictatorial arrangements, which mark communisms, because "booms and busts" can be more erratic, with coups and overthrows much more likely, and when you live in a such a society, you have to be more insecure about what can happen since the law is essentially the will of the ruler, whereas capitalist societies thrive only with great stability, which markets require in order to function.

Re: Das Kapital

[poovanna.livejournal.com]

Sorry for the length of this comment, but I would love to hear yours & your readers thoughts on this!

I think communism & capitalism are both extreme & thus flawed approaches. (I feel European style socialism, while far from ideal, is more ``correct,'' in contrast to ideologies which see things in black/white.)

Perhaps a reason why capitalism has so far escaped communism's brickbats, is cuz it is harder to recognize if something is wrong - It is easier to blame a group of dictators than an intangible, ``invisible hand of the market.''

I do not hate capitalism. But I think that many of your politicians are doing you guys a disservice by viewing the world as only black/white - a dogma that capitalism is the cure-all for everything.

I think there are 2 major problems with this kind of view:

• Excessive market focus tends to make humans invisible.
• Market decisions may not be fair.

I think we are aware of how simply letting the market decide on issues like health care, social security etc., may not lead to the most fair/humane outcomes. So let me instead focus on the first point here i.e.

Excessive market focus
American companies may be the most profitable in the world & its C.E.Os, the majority on billionaire lists. But the problem with focusing so much on market metrics is that you only get to see the winners of this market game. The rest become invisible.

Other than the C.E.Os, I doubt much of the benefits are trickling down to most citizens. This disparity has worsened as the US became richer. Forget an 80-20 distribution, this graph is more skewed! For example, during the time period 1975 to 2001, this was how income levels in the USA rose for:

1. College graduates - by less than 1% per year (great incentive for a poor kid to go to college eh?)
2. Rich folk at the top 90% percentile of income - 34% overall (or about 1% per year)
3. Folk at the top 99% percentile - 87%
4. Folk at the top 99.9% percentile - 181%
5. Folk at the top 99.99% percentile - 497%

Find the paper containing the stats here. Better yet, read this, where Krugman gives a good analysis of the above paper.

We talked last year, about the stats showing how American workers across the board, now work the longest number of hours, take the least number of vacations, given the least amount of maternal or paternal leave etc. as compared to the rest of the world. The income gains shown above, do not seem to reflect this, perhaps cuz the current system focuses its rewards on those who win in the market more than anything else.

In such a skewed environment of income distribution, the riskiness of fat-tail mathematics kicks in. This is what I meant in my earlier comment about those at the top sitting pretty, while there is is increased worry amongst the rest of the individuals about suddenly losing everything they have made to unforseen factors like crazy economic cycles, outsourcing, or some other thing.

I am not sure if capitalism is well protected against fat-tail events at the macro level. The more extreme the ideology, whether it is communism or capitalism, the more danger it may face from uncertainties. Given the zeal with which US companies have pursued market efficiency & cost cutting, I think the situation has become more fragile - an incident at a processing center in Bangalore, could have a debilitating effects for a company based in Seattle.

To conclude, I do not hate capitalism. I just think anything blindly followed to the extreme is bad. There is a human element to public policy that cannot be just wished away by leaving it to the vagaries of the market. And I do not think this is being adequately realized by US leaders.

What do you guys think?

Re: Das Kapital

[hardblue.livejournal.com]

I appreciate the wisdom of being skeptical of black & white perspectives and looking out for a more grey reality. Though, I feel moved to point out that it’s not like America is close to a pure example of extreme capitalism, especially since the New Deal of Franklin Roosevelt. True, America is to the right of the more posh western European countries, but we are all mixed economies, based on private property and significant government management.

We do have a significant party in America that favors a much harder capitalist, anti-government line, but as you can see under the Obama Administration, we are only heading further left. Obama essentially just fired an auto exec, and our finance sector is practically socialized at this point, albeit in a way that only seems to further favor the financiers over the general taxpayers, but more regulation is supposedly coming. It also looks like we are poised to head to a more nationalized system of health care which would only make us look more like those European countries.

Dude, it’s not like I’m a rich guy. I’m most sensitive to the idea that capitalism isn’t a Utopian scheme and that it’s hardly perfect. But I’ve also seen enough history to see that alternative systems - communisms or other sorts of command societies - only seem to bring out the worst in leaders. Mind you, I’m not counting the European countries as an alternative, but only a somewhat more left version of the same system of democratic capitalism.

The problem is that power corrupts. So, even if you do have a vanguard of true egalitarian humanists that takes control, in time that hold of complete power corrupts and leads them into Stalinized sorts of hell. The main virtue of democracy and capitalism is that it better keeps power dispersed. Instead of one small band of ruling cadres, or even just one all-powerful leader, in our system you have a decentralized network of property owners and a government kept limited so as to better maintain that dispersal of power. So, we may have a lot of asshole fat cats, but at least they aren’t as bad as an all-powerful communist or dictatorial government.

Since you are inviting discussion, I’ll point a friend to this discussion to see if he want to participate. He incidentally is one of those who favors a much harder capitalist line, being an Ayn Randian libertarian. He’s pretty busy though, so he might let this pass, but I’ll ask.

Re: Das Kapital

[hardblue.livejournal.com]

I believe you did say that your business is pretty recession-proof. It's getting a little nasty for others. I saw a news item today of a man who held up a convenience store and used his little girl as a look-out, as he laments to the store clerk that he lost his job. I'm wondering if that's a put-on, but it can get rough, heh.

Re: Das Kapital

[poovanna.livejournal.com]

I found your comment insightful & disagree with nothing, except maybe the penultimate paragraph. In addition to dictators & fat cats I think people lose their freedom to intangible economic systems like free market etc., & need more protection from it than currently provided. However, this difference in opinion maybe a cultural issue more than anything else.

In this respect, I am reminded of an interesting article, on how people judge whether something is fair. Americans seem to value procedural fairness, where everyone gets an equal shot at the prize. While folks in Europe (and many of us who grew up in socialist countries), tend to value equivalent outcomes as being more fair. (see the section titled ``Different Strokes'' on page 2)

So, although we would like to see Obama have tighter government regulations, taking it to the level of Europe, may not be compatible with the values & aspirations of your countrymen and so, may not be the right action.

Similarly, telling the world that the only way to overcome this crisis, is by joining your government in blithely pumping mad amounts of money into the financial markets, will naturally attract indignation, as evidenced from the scathing reactions from France & Germany.

But we need to work together, & hopefully, with this new G20 agreement, we have arrived at a compromise that respects both our values + solves the crisis.

Re: Das Kapital

[hardblue.livejournal.com]

Going by Krugman, Europe is in much more financial trouble than Americans are, and it remains to be seen what they can do to get back on track. More generally, I still think it's only a question of degree rather than a qualitative difference in values. Germans and Europeans have wealthy people and poor people, too. True, America has richer people and it has poorer people, but it's not like one sees anything like equal outcomes in any country, including European ones.

Re: Das Kapital

[poovanna.livejournal.com]

More generally, I still think it's only a question of degree rather than a qualitative difference in values.

I said ``tend to value equivalent outcomes as being more fair.'' That this is a difference in degree, is implicit in the language.

True, America has richer people and it has poorer people, but it's not like one sees anything like equal outcomes in any country, including European ones.

I did not say otherwise. Of course every country has its rich & poor classes! But relative to Europe, this unequality is much larger. Also widening the gap for the US is the relatively sorry state of social safety, health care etc., for the poor & uninsured.