h a l f b a k e r yRenovating the wheel
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Segregation
Ensuring (ensuing) public and primary --- secondary and tertiary isolation... | |
Jim recalls a time when an individual could sit on the side line (as it were) and (just) watch the titans of the private sector form, conquer and eventually perish...
This situation relied on a sector of the economy that was immunised against risk. Jim recalls that this sector was actually the "primary"
sector from a time when its financing was independent of the high (risk) finance of the secondary and tertiary economies. In the past this segregation was more a matter of tradition than regulation --- primary sector output is essentially fixed (profits depend a great deal on excess of supply and foreign exchange)
Jim reckons that immunising individuals against the risks of "high" finance requires a primary sector economy that does not water at the same trough as the secondary and tertiary economies. So if their trough runs dry we can watch them perish just like the good old days...
Wikipedia: Primary sector of the economy
http://en.wikipedia...ctor_of_the_economy
Turns natural resources into goods. E.g., mining, fishing, agriculture. [jutta, Oct 06 2009]
Pleonasm - black darkness, tuna fish, or burning fire
http://en.wikipedia.org/wiki/Pleonasm
"not to be confused with neoplasm" [normzone, Oct 07 2009]
The costs of reducing (banking) risk
http://www.bbc.co.u...ks_to_be_virtu.html
It will cost alot to eliminate risk in banking [madness, Oct 07 2009]
Landesbanken
http://en.wikipedia...German_public_banks
It appears that this form of banking regulation worked in Germany... [madness, Oct 08 2009]
Wikipedia: Banking Panic of 1907
http://en.wikipedia.../wiki/Panic_of_1907
Lots of small banks that dealt largely with single-industry concerns and local-run banks caused havoc across the US in 1907. [zen_tom, Oct 08 2009]
[link]
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I don't understand this - and the third-person presentation doesn't help either. |
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Government-run banks that give credit only to 'primary sector' companies would be a solution. But since the 'trough' companies are watering from is partly constituted by people individually indebted to the '2nd/3rd sector' the idea is inherently flawed. |
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yet another idea by Jim that isn't an idea, more of a let's-all, or WIBNI. Write the idea without couching it in fanciful, obfuscated locution. |
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And furthermore, eschew at all costs tautological pleonasms. |
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[8th], your badinage beguiled upon my abdomen some considerable
degree of gargalesis. Kudos to you. |
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Hmmm --- I see that the usual suspects have misunderstood (so I would not expect to seem them next year :). |
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1) This is not a free market --- well even free markets must be regulated. This regulation prevents any bank from tapping into every market and this is exactly the isolation that is required. |
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2) The same banks service private sectors (and individuals) --- this appears to be a restatement of the above... |
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Hmm --- can do better I think... |
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(Perhaps you should read something other than monty python) |
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Jim doesn't understand that when it pours, it rains on everybody, no matter what the regulations do. One example: Regulations do not prevent job losses or job transferrals or people moving to different economic sectors looking for work and affecting the market there. |
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Regulations can never comletely prevent risk of loss. All they can do is raise its level to catastrophic levels once the dam breaks. |
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Imagine, if you will, two separate (pre globalisation) island economies --- one can go broke while the other prospers... |
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I think.... the effusive.... use of elipses..... leads me to the following.... ...conclusions |
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1) The momentum equation states that the net force in the x-direction on the control volume equals the rate of outflow of x-momentum minus the rate of inflow of x-momentum. This gives |
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pA - (p+dp)A = (Apc)(c-du) - (Apc)c, |
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where viscous stresses have been neglected. |
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2) The previous point had nothing to do with the post at all. |
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Maybe I'll post an idea that explains a certain aspect of fluid mechanics, and when people ask what I'm talking about, I'll just provide different points about fluid mechanics, ignoring the fact that I haven't actually made an idea about anything. |
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Imagine if you will, that given enough pressure, imaginary lines of economic separation evaporate. The Mexicans will start to come over the border if that's the only way they have to survive. |
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BBC economist Robert Preston (linked) recently commented on the cost of reducing banking risk. He made a comparion to saftey on the railway and said "We need to decide the maximum price we're prepared to pay to avoid crashes. And we should recognise that the cost of eliminating all risk of crashes is prohibitive." |
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His statement disregards the possibility of eliminating the risk of a crash on only some of the lines. |
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Assuming you understand Prestons analogy I can simply extend it. Under segregated risk the chances of crashing when traveling on some lines will be greater than on other lines. It is easy to see how segregated risk is accomplished on the railways --- periodic checking of the actual line, for example, will be less frequent on a high risk line. |
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To understand how segregated risk works in banking you need to understand what Robert Preston is saying when he talks about banks being required to hold more liquid assets. He has assumed that all banks will be regulated equally. |
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In a segregated risk economy different banks will be required to hold different levels of liquid assets and inter-sector bank lending needs to maintain the regulated risk. |
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Landesbanken, anyone? They got rather stuffed up by regulatory changes in the 1990s, but they used to work quite well at sheltering proper industries from speculative fads. |
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/Jim recalls a time when an individual could sit on the side line (as it were) and (just) watch the titans of the private sector form, conquer and eventually perish...// |
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How old is Jim, and when did this fairy-tale state of affairs exist? |
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//This situation relied on a sector of the economy that was immunised against risk.// |
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//"We need to decide the maximum price we're prepared to pay to avoid crashes. And we should recognise that the cost of eliminating all risk of crashes is prohibitive." ... His statement disregards the possibility of eliminating the risk of a crash on only some of the lines.// |
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Where in that statement is there an allusion to limiting this to "some of the lines"? And if you're looking at it the other way, it says nothing about limiting risk on the roads. Or the pavements. Or tubes. Or air-travel. Or boats. |
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When you say "primary industry" do you mean like farming, mining, fishing, energy production etc? |
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How does aligning different banks to align themselves along industry sectors help? |
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Worse, by isolating finance and production within sector-based silos, you introduce a whole new area of risk, because previously the risk was spread across the whole business environment, whereas under this scheme, when one sector goes down, the fall isn't cushioned by everyone else. |
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Oh and the "watering at the same trough" analogy is bollocks since the secondary and tertiary industries by their very definition rely on the products generated by the primary industry. If that goes down, so does everything else. Conversely, though it takes a longer time, failure in the secondary and tertiary industries has a knock-on effect on primary industry. |
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Finally, finance *is* risk. That is what it is for. You *can't* de-risk it completely because risk is its very reason for being there - the fundamental purpose of finance is to take existing risk, monetise it, and then spread that risk out among as many people as you can. That's what finance does. If you limit the distance that the risk can be spread out, rather than removing risk, you actually increase the chance of things going tits. If you make a train line 100% safe by running constant safety checks on it, there will never be any time to run any trains. |
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Even more finally, different banks already specialise on catering for the differing needs of different industries - that's why you have merchant banks, investment banks, commercial banks, retail banks, private banks and banks that offer mortgages - each of them deals with different types of risk. |
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//segregated risk is accomplished on the railways --- periodic checking of the actual line, for example, will be less frequent on a high risk line.// |
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Time flies like an arrow; fruit flies like a banana. See the connection I made there? We went from talking about something to talking about something else, and it was totally like, kablam! and then I was like, woah, and then it was all like, different, and stuff. |
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Common currency= Common risk
Economic interdependence=Common risk
Service Economy=Common Risk
Manufacturing=Common risk
Selling=Common Risk
Buying=Common Risk
Employee=Common Risk
Entrepreneur=Common Risk |
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Divorcing your personal economic outlook from the dangers of other people's risk taking is impossible unless you are totally self reliant. As long as you are a participant in the society and the economy you suffer communal risk. |
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That's what Enron tried to do. |
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[zen_tom] You say that "the fundamental purpose of finance is to take existing risk, monetise it, and then spread that risk out among as many people as you can" |
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The assumption here is that there is a fixed amount of risk to finance --- and that the total amount of risk is directly proportional to the population. In this case it is pointless trying to isolate some forms of risk. |
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On the other hand --- with banking deregulatoin of the 1990s banks were in a position to create risk. An invester could finance a risk position on pretty much anything --- much like financing a bet on the hair colour of the next person to walk into a bar. |
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In other words there is no longer a relationship between risk and domestic output --- which is exactly the point at which risk isolation/ segregation or what you will is required. |
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In Enrons case actual criminal law had to be broken before a remedy could be found. If the risk that Enron financed (based on fradulent asset valuations) was isolated to a single sector of the economy then individuals could have decided how much of that risk to back. And the cost of Enrons loans would have altered as a result. |
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The alternative as we have already just seen is to force the tax payer to back any and all risk without choice. |
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Robert Preston's point is that the cost of reducing risk AND maintaining the status quo IS prohibitive AND this cost will be born by the tax payer. |
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I think that the cost of safe guarding against financial melt down is better born by the banks and the private sector ( primary, secondary, tertiary, automotive or whatever) and that the way to do this is to offer investers the choice of which sectors of the economy to back. |
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The cost of dividing up the total pool of currency is going to be increased interest rates for those sectors of the economy that have proportionally less backing than before. |
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Contrast this with Robert Preston's estimation that the cost of finance will increase across the board. |
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[Note that what is proposed here is completely different to specialised banks offering different types of risk backed by a single pool of currency.] |
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I added a link to the wikipedia page on landesbanken --- which looks pretty much what is proposed here. |
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But Enron was (for the purposes of this argument) a single-sector bank - located very much within the primary industry of energy production - and as events later proved, it wasn't a particularly good example of de-risking the finance industry. |
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//The assumption here is that there is a fixed amount of risk to finance// |
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Is that your assumption or (in your perception) mine? Either way, it's wrong. I'm not sure if you're in agreement with me or not on that one. |
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Risk isn't proportional to population alone - more to do with what that population gets up to. And the population will get busy along primary, secondary and tertiary industries. If you want the finance industry to align themselves with each of those industries, then they will rise and fall with the rise and fall of those industry sectors - each of which will be more closely exposed to cyclic fluctuations. Is it better to have lots of small boats in lots of storms, or one great big raft of interconnected boats tethered together? I suppose it depends on which boat you're in I suppose. |
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//I think that the cost of safe guarding against financial melt down is better born by the banks and the private sector ( primary, secondary, tertiary, automotive or whatever) and that the way to do this is to offer investers the choice of which sectors of the economy to back.// |
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The problem with this is that as each sector tends to go up or down (quite naturally), people will move their money from one area to another. If there are banks operating solely within each sector, then this will exacerbate fluctuations, causing not just stock and commodity prices to rise and fall, like now, but it will also create more uncertainty in these "all-eggs-in-one-basket" financial institutions. I think this would create more uncertainty and risk, not less. |
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If you as an individual wanted a balanced investment portfolio, you wouldn't put all your eggs in one basket - why force the banks to? It just makes them more likely to go bust, not necessarily a good thing. |
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On Landesbanks - they are essentially mutual building societies protected by government to operate within single geographical areas - nothing to do with primary industry at all. |
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On a counterpoint, compare Northern Rock (originally a mutual building society) that collapsed because it didn't have enough reserves and operated within a limited set of operations. |
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Or, as another example, consider the Icelandic banks who started off very much in the same vein as the German Landesbanks - but which overstretched themselves on capital vs lending and again collapsed, primarily because they weren't diverse enough in their business operations. |
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Diversity is a good, protective strategy, and short of being propped up and protected by governments (like the German Landesbanks) a non-diverse strategy will always be weaker than a diverse one. |
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I think I win --- the point is that there is only one basket. And this is because banks spread risk out across the board. If an invester wants to beat the market there needs to be more than one basket and they need to have the ability to choose which ones to put eggs into. |
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The point with Enron and the financial crisis we face/faced is that the toxic risk created within some sectors of the economy spread across the board through normal banking practice. To some extent this is an indication of how well banks perform at spreading risk. |
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But this is exactly the problem... |
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It seems that our difference of opinion lies in whether a bank should be allowed to fail. |
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I think that banks financing a sector of the economy should fail if that sector fails. And that individuals should spread their risk as they see fit. |
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In the UK private investors money is insured up to something like 50k so it is not important if an individual bank fails --- so long as that failure is isolated. |
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The question is - since both points of view suggest a single basket - is it better to have one big safe basket that can ride local fluctuations, or lots of small risky ones that can't - remember, you are suggesting here that you can only choose one basket. |
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If you count the number of local (non-diverse) failures and compare against the number of global (diverse) ones, you'll find the local ones are greatly outnumbered. |
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To make an analogy with farming, it's safer to grow a number of different crops, because if one goes bad, you've got something to fall back on. |
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//To some extent this is an indication of how well banks perform at spreading risk....But this is exactly the problem...// Ahh, that's where the disconnect is - the problem wasn't that risk was insufficiently spread, or that it was spread too far out - it's that there was far too much riding on a single sector of the economy - in this case US house prices. That's the fault of banks not being diverse enough (they were just looking for the best (imaginary in this case) returns) - forcing banks to cover only one sector would (like in Enron's case) be far more damaging, cause more instability, and create (like in the Icelandic banks, or Northern Rock) regular runs on banks, like in the pre-central bank days of the US. Not cool. |
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//It seems that our difference of opinion lies in whether a bank should be allowed to fail.// |
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No, that's a different question altogether - the benefits or otherwise of allowing a bank to fail or not isn't linked to whether it covers one sector or another. Forcing banks to do that does make them more likely to fail -yes - But the question of deciding whether to prop them up (like in the German Landesbanks) or let them fail (like Lehman Brothers, or Northern Rock) is completely unrelated. |
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//In the UK private investors money is insured up to something like 50k so it is not important if an individual bank fails --- so long as that failure is isolated.// In this instance, all you are doing is moving the risk up to governmental level - i.e. across industries, across sectors - it's the same thing, you've still spread the risk across the whole population, you've just funded it with taxpayer's money rather than private sector fees. |
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risk is not limited to banks and investments. risk is a integral part of all economic enterprise. Choosing one crop over another, one kind of mill over another, locating a city in one location or another, digging a well in one location over another, all of these represent real economic activities that represent risk to the "investors" and to others who, through interdependence, also come to realize the risk/benefit of the "investment". The real problem that everyone is ignoring like an elephant is that this financial crisis wasn't caused by poor choices (bad crop choices, poor well locating, faulty milling technology) it was caused by the falsification of investment. Documents were produced to indicate that crops had been planted and wells dug when no such crops or wells had been produced (ditches and fields of weeds more like) and then the rights to fruits and water that would never be forthcoming were sold. Money taken, and hot potato thrown. The fucks who packaged these fake fields and dry wells knew they were committing fraud and would never have to face the consequences. They took our money and walked away from the table. Then the smart money took the bad paper and sold it again, taking more money (your money) again. Eventually the pyramid collapsed because anybody who wasn't blind could see that the fields being traded were barren and the wells were dry. In the end vast quantities of worker produced wealth was transfered into the coffers of (IMHO) an amoral criminal class, and the rest of us sit around peeing ourselves about "risk" and the nature of banks. Fuck that. (rant over) |
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In some instances it is probably best to handle economic risk with a good dose of state sanctioned ultra violence. That way people that make bad choices are eliminated --- corruption is far to weak an answer. |
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//nothing to do with primary industry at all// |
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Well, not directly, but I think there's a strong indirect connection. A retired London stockbroker I know is fond of passing on his accumulated financial experience in the form of little proverbs and one-liners, and one of those that has stuck in my memory is this: "Nothing ever happens in engineering". |
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On the face of it this seems bizarre, but what it means is that the things that *do* happen in engineering (stuff getting developed and built) don't happen *fast* enough to be of interest to a financial community where rate of churn is of great importance. |
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Bearing that in mind, the role of landesbanken can be seen in these terms; their geographical terms of reference (and other regulations - I forget the details) keep them away from where 'something' (i.e., speculative churn) is happening, and force them to focus on financing 'nothing' (i.e. engineering and other boringly constructive stuff). |
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At least, it used to be that way, but then British pressure led the EU to override some of those rules in the name of harmonisation, so the landesbanken all loaded up with dodgy debt like everyone else. Sad, in my opinion. |
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If you think this is all just lefty paranoia, then you might like to consider the words of entertaining Conservative maverick Alan Clark. I forget the exact quote, but he said something like "Of course, [in England] your banker isn't really interested in your business at all - he's just in a boring intermediate stage of his career, and longs only to get to head office in London, where he can join in the great game of Corporate Reorganisation". ... except he said it more pithily than that. So, you can think of landesbanken as a solution to that problem. |
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Of course, if you're a true market zealot, then you may insist that industries sustained in this way must in some metaphysical sense be the product of misallocated resources. But still, one way or another, this 'capitalism with an attention span' has meant that Germany still has a manufacturing sector. Some of us might envy that. |
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surplus naturally moves to those who are cunning and able to hide it most craftily. When faced with the truly tremendous amount of material wealth and power in the hands of only a few only a truly demented person would imagine that it is so apportioned on the merits and due to the honest labor of the ruling class. Instead it is undeniable that a system of labor transfer must so exist as to concentrate wealth and power. The production of fraudulent investments is not a punished crime because to a great extent our entire economic system is designed with the same function. A large fraction of every dollar spent, every hour worked, every resource harvested, goes to the overlords. End result is nothing short of economic rape. |
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(insert necessary Monty Pithon SFTHG; "see him repressin me" clip here) |
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Meanwhile, we in engineering are fond of wondering what it is that stockbrokers do for humanity, and whether they evolved from the telephone sanitizers, the hairstylists, or the management consultants. |
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Definitely the hairstylists. I say this because one of the problems with the finance industry is that it is a fashion industry, and one of the things that gets in the way of its ability to manage risk rationally is the predominance of what is fashionable over what is substantial. |
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One of the merits of this idea is that it might inhibit the global spread of any given investment fashion. |
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Essentially, you're talking about creating two classes of banks: high-risk banks, and low-risk banks, separated by regulation. Is that correct? |
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If so, it is entirely feasible and sensible. I remember low-risk banks. They were called "banks". |
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If you wanted to play fast and loose, you weren't a bank; you were something else. You couldn't hold reserve-protected deposits, or do retail banking. |
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Bring back the <s>Volks</s>Commonwealth Bank! |
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