Left Flapping in the Breeze

 

Unlike the windstorm, the current fiscal mess has a human cause that is relatively easy to determine. The intermediaries gamed the system and destroyed a lot of wealth. Many of them walked away with a lot of money. This has happened before and will happen again if we don’t change the system substantially.

 

Our neighbor has abandoned the idea of putting a false roof over his atrium area. The idea lasted five years and cost a bit of money. The winds here have damaged it before. This time they just tore it off and blew the whole thing into my yard. Like a lot of ideas that look OK when the weather is fine the atrium covering is gone for good.

 

Luckily the real roof is still sound. Unfortunately, the financial system is not as sturdy as the roof over my head. When you tinker with it too much the problem tends to infect the healthier parts until the whole thing looks sick. Our financial system has a dread disease and will not get well until the blockage in its interior is cleared.

 

What we have is a serious inflammation of the role of the intermediary. In our financial model the intermediary companies have reigned supreme. Financial Instruments, that are designed not to secure our wealth but to inflate the income of our bankers, brokers and other members of the intermediary class, are the problem. 

 

In a world where the total annual economic value of all production is under one hundred trillion dollars we are trading hundreds of trillions of dollars in securities. This is inflating the income of traders and Financial Intermediaries far above what they actually generate in real value. We need to reduce complexity and the role of the Financial Intermediary.

 

Absent rules that prevent this churning of assets we will continue to suffer from the instability this falsification creates. These trades are being made in an international market without adequate regulation. Regulation may not be an optimal solution from some perspectives but it is all that prevents the intermediaries from emptying the till into their own pockets.

 

The use of financial instruments that were supposed to secure the system against losses has failed. Moreover the expansion of role of the intermediary is part of the problem not part of the solution.

 

We need to think about what we are trading and how many ways there are to hedge against losses. We also need to reduce the impact of finance on the total economy. This can be done by direct investment in some cases. The barriers to disintermediation need to be removed. The use of insurance is vital but the misuse is destroying the system. Simplification is the answer in many cases and reducing the role of the intermediary will help accomplish that in the end.