
The Financialization of the American Elite - masterrobot
https://americanaffairsjournal.org/2019/08/the-financialization-of-the-american-elite/
======
Qasaur
Very interesting article.

I think what a lot of these articles lack is a discussion of the role that
monetary policy plays in the financialization of the American (and, indeed,
global) economy. While I agree that there are other factors that lead to the
rise of shareholder primacy, I think the most important one is the distortion
of relative capital proportions in the economy largely caused through the
mechanism of monetary inflation.

I find it odd how there is so little literature on this apart from books and
papers from the relatively fringe (but no less accurate) Austrian school of
economics. Inflation is _not_ something that happens everywhere in the economy
at the same time (the Cantillon effect). Inflationary central banking policies
benefit those who are closest (relatively) to the money printer, and in modern
Western economies this is almost always financial firms and those who marshal
capital. Large inflows of money (inflows that have vastly increaed sinced 2008
after the advent of extensive quantitative easing) allow those close to the
central bank to have a larger purchasing power than the rest of the economy as
inflation has not "trickled down" yet. This allows said financial firms to
purchase assets, invest in companies, and capture value in ways they would
otherwise not be able to do and in scales that are _completely_ unnatural. And
yes, this includes venture capital firms (for many of us who work in startups,
we are among those who are relatively closer to central banks, hence the
ridiculous salaries). As there is much more money flowing in the system but
less "real" wealth, much of this money heads to equity markets to chase
returns, and the result is what is described in the article.

This distortion of the capital base allows financial firms to hold and direct
more capital than they otherwise would, so it is no wonder that the
financialisation of the American economy and increases in general economic
inequality globally largely began after the gold standard was abolished in
1971 and central bank printing presses were set free.

Indeed, I would go so far to say that the real fix to this problem is to
abolish inflation targeting (and by consequence the central planning of the
money supply through central banks).

~~~
solotronics
I think the firehose we have now of unconstrined fiat currency will go down in
the history books as an aberration in the history of money. Money and the
economy are part of the bedrock of modern society and the human interactions
that happen on a macro and micro level. When you get down to it fiat
currencies like the USD became uncoupled from reality when it went off being
pegged to a physical amount of gold/silver. I always see a lot of hand waving
when I bring this up. I am betting that our current system of fiat is smoke
and mirrors and we will return to money based on something concrete.

~~~
drtillberg
The Class of 1982 was special in graduating at the very inception of what has
become a nearly 40-year bull market in credit, which is mostly a story of
monetary and regulatory policy.

When the books are written 100 years from now, they will explain this period
as a hyperinflation that our HBS-trained leaders in government and finance
managed to trap mostly in financial assets, all the while counter-intuitively
justifying their money-creation activities based on a theoretical _potential_
to leak gradually out to the broader economy. Hyperinflation here to maybe
generate useful inflation there, but really useful primarily in creating
robber-barrons and oligarchs, who perpetuate the system through 'soft bribery'
and 'reputation laundering' described in the article.

This article and the speeches etc. discussed in it should be a clarion call
for folks to accelerate imagining what will come next, which may well go
beyond increasingly cosmopolitan admissions and instruction at HBS.

~~~
lisper
> they will explain this period as a hyperinflation

No, they won't, because it wasn't.

~~~
drtillberg
Ok, ok, asset price inflation measured by the S&P 500 has been about 9%
annually from $123 in 1982 to $2,920 in 2019. In addition, the availability of
debt amplifies increases. For example, the Case-Shiller Home Price Index
increased from 100 to 220 between 2000 and 2019 (about 4% annually), but
owners often leverage 80% at the start, and they actually have a 13% annual
return (less carrying costs)-- lets say double the nominal return.

If high finance generated a ROI of 9% x 2 on average since 1982, through asset
price gains magnified by leverage ... that would be 64% every 3 years, on
average for almost 40 years. That's a remarkable inflationary event, however
you choose to define 'hyperinflation.'

~~~
lisper
[https://en.wikipedia.org/wiki/Hyperinflation](https://en.wikipedia.org/wiki/Hyperinflation)

~~~
reallydude
Exactly. It fits for the world-wide inflation.

> In economics, hyperinflation is very high and typically accelerating
> inflation.

> It quickly erodes the real value of the local currency, as the prices of all
> goods increase.

This is in process. You seem to think there's a specific periodic minimum that
is absolute. If the period is decades, it looks the same.

> This causes people to minimize their holdings in that currency as they
> usually switch to more stable foreign currencies, often the US Dollar.[1]
> Prices typically remain stable in terms of other relatively stable
> currencies.

Given this has affected every currency (not counting some closed off systems
like NK) the flight currency is property/land/gold/etc

~~~
lisper
> This is in process.

Right. And Jesus is coming back any day now.

Part of the _definition_ of hyperinflation is that it happens fast. Price
increases that take place over decades is not hyperinflation, it's just
regular old inflation.

------
tlb
I rarely buy the "deeply flawed messenger" argument. Here, he's basically
criticizing short-term business thinking, which he also took advantage of as
an investor. Should we therefore put him in a hippo crate?

Few people in the tech community say "This guy exploited a security bug.
Therefore, we shouldn't listen to his bug reports."

In fact, you can't really understand a bug except by trying to exploit it. I
suspect the same is true in business. Everyone agrees vaguely that there's
some kind of short-term thinking problem in big American business. But this
guy understood the problem deeply enough to exploit it, while everyone else
just is just waving their hands.

I think PoC||GTFO applies to business advice too.

~~~
word-reader
It's demonstrated later in the article that he continued to take advantage of
short-term business thinking with probable bad externalities all the while and
after he was trying to repair his reputation with his Harvard donations and
conciliatory speeches.

In particular, the argument is that the critiques offered in conferences like
this are insincere and aimed at preserving the insiders' status rather than
actually changing any of the things they're talking about: "His career tells
us how he would advise those beginning their careers to navigate these
challenges: Loudly criticize political dysfunction, but make no effort to
explore its structural causes or remedies...[his] prominence conveys that
incongruence between words and actions is tolerable, even desired." And
further, that it would be "foolish to listen" to said finance people's self-
serving political solutions.

A closer equivalent in the tech community would be more like "this guy has
spent decades running shady adtech and addictive gaming companies, and
continues to traffick personal information and addict kids to pay-to-play
games, but is now also running an organization dedicated to digital privacy
and is building a reputation as an expert in parenting in the digital age and
voluntary gaming regulation".

------
seem_2211
_A considerable amount has been written about the financialization of the
American economy. Less understood is the financialization of America’s
business talent. Klarman, his alma mater, and its peer institutions are all
part of this story. What we confront today—a business elite dominated by
financiers and their squires, presiding over a disordered economy gutted of
both its productive energy and the ability to generate mass prosperity—is a
direct result of this economic and cultural evolution._

To some degree I think we see this in the startup world where a lot of the
aspiration seems to be: Operator -> Angel Investor (on the side) -> VC.

------
darawk
Hmm...this article, along with Elizabeth Warren's recent proposals make me
think that maybe the answer we ought to be looking at is something quite
simple: Provide significant tax advantages to compensating employees with
equity. If the problem is that employees are losing at the expense of
shareholders...well, let's make them shareholders.

~~~
solveit
It's a bad idea to put both your money and your career into the same basket.
Either the employees will immediately sell the equity, which will essentially
make this just a tax cut, or (if they can't) they'll be in a dangerous
position and the next recession will be devastating.

------
Animats
He's missing a big change since 1949 or 1974 - the demise of communism. It's
not that communism was all that successful, but _it was competition for
capitalism._ Capitalism had to do better for the voters than communism.

From about 1920 to 1980, American business was scared of communism as an
alternative system. In the 1950s and 1960s, when the USSR looked to be surging
ahead, there was heavy PR about how capitalism delivered a better life for
workers. (Some period cheerleading from when the USA really was #1: [1][2])
Businesses were in fear of being broken up, having executives arrested for
price-fixing, or even being taken over by the government. The British
government took over and ran big parts of the steel and railroad industries.
British telecom was government-owned already. US businesses feared that might
come to the US.

This fear, and fear of unions, kept wages going up, and prices stable. It
wasn't perfect, but there was a major force pushing back against corporate
greed. With that threat removed, capitalism has a monopoly, and now acts like
one.

[1]
[https://archive.org/details/4050_Meet_King_Joe_01_19_26_08](https://archive.org/details/4050_Meet_King_Joe_01_19_26_08)

[2] [https://archive.org/details/Productivity-
KeyToPlenty](https://archive.org/details/Productivity-KeyToPlenty)

~~~
tlb
Suppose you could create a system to compete with capitalism. What would it be
like?

~~~
Ididntdothis
We don’t need to create a new system. Capitalism is perfectly fine with a few
tweaks.

~~~
tlb
I think Animats' argument is that capitalism isn't getting those tweaks
because there's no competition. Capitalism as a system has a near-monopoly.
Back when it had serious competition from the Soviet Union, people tried much
harder to make it work better.

So the new system doesn't have to actually be better overall than capitalism,
it just needs to provide some competition to light a fire under policy makers.

~~~
Ididntdothis
I guess we will have to learn how to live without a competitor that brings
people together. Otherwise where can we get a replacement for the Soviet Union
that scares people enough? China?

~~~
yifanl
To me, China looks more like the logical conclusion of capitalism than some
competing economic system.

~~~
Animats
Too early to say. The "Asian tigers", Korea, Singapore, Japan, etc. had a
similar trajectory. If you believe Pikkety, that type of growth levels off at
the level of developed countries once catch-up is achieved. Which is not a bad
place to end up. There are then stagnation problems. Japan hit that first.

The countries that have hit stagnation, other than the US, tend to build good
public infrastructure. This pumps money into the economy, but not through the
banks.

------
themark
“Hedge funds, pri­vate equity firms, and investment banks are just the first
order play­ers.“

Aren’t these all basically the same thing?

~~~
pzone
Quick rundown:

\- Private equity firms invest in businesses that are not publicly traded. For
example, they invest in startups that are seeking to grow and eventually IPO.

\- Investment banks help existing firms undertake financial transactions such
as issuing new debt or new shares, and serve as brokers for e.g. sales of
small businesses to new owners.

\- Hedge funds make speculative bets on existing financial assets they believe
are over- or under-priced.

------
bob457
I thought this was going to be an interesting article. Then I read

>At first glance, this is sound—even admirable—advice for aspiring business
leaders. But a closer look at Klarman’s remarks, as well as the origins and
trajectory of his career, suggests a deeply flawed messenger.

And I realized this was just another article which refuses to engage ideas and
falls back to ad hominem. I don’t care if the messenger is flawed, or what
somebody thinks his or her motivation is for delivering a particular message.
I want to hear a critique of the message itself.

~~~
akiselev
The majority of the article is about shareholder primacy and the
disingenuousness of the messenger _and_ his message, as demonstrated by his
actions.

------
caycep
contextual background on the publication itself?

[https://www.newyorker.com/news/news-desk/a-new-trumpist-
maga...](https://www.newyorker.com/news/news-desk/a-new-trumpist-magazine-
debuts-at-the-harvard-club)

~~~
JetSpiegel
A Trumpist magazine extolling the virtues of Elizabeth Warren's platform? This
seems to be the classical criticism of analysts that look at Trump's policies
instead of painting anything he does as anathema.

Being BFF with Peter Thiel is a black mark, I'll give you that.

------
_bxg1
Capitalism is a system that sounds great on paper, but doesn't work in
practice.

~~~
dang
Maybe so, but please don't post unsubstantive comments to HN.

Especially not generic ideological comments, which tend to lead to generic
ideological flamewars, which we want to avoid because they're so predictable.

[https://news.ycombinator.com/newsguidelines.html](https://news.ycombinator.com/newsguidelines.html)

~~~
_bxg1
I felt it was substantive; lots of people worship the market blindly and this
article is an excellent deep-dive into exactly what's wrong with that
mentality. I was also drawing an analogy to the common refrain about
communism, which is true in that case as well. The world's most prosperous
societies know how to strike a balance.

~~~
dang
If you had posted that instead it would have been a fine comment!

------
tony_cannistra
I have to say, these three particular sections are able to finely articulate
what I've been thinking as I watch rich people try to run the United States.

> "At bottom, when many of our country’s wealthy citizens say “democracy,”
> what they really mean is “our class’s way of life.” If they respected
> democracy as fervently as they worship the “invisible hand,” they would see
> that the popular discontent simmering across the world today is the direct
> result of decades of elite hypocrisy and greed, hidden behind a façade of
> neoliberal economics.

> "The “center” is not where the best policy is made, or where public opinion
> converges; it is a place where political activity is fully dominated by
> financial elites and thoroughly subordinated to the mar­ket."

> "These are the same people who have left us with an upside-down economy and
> a weakened social fabric. Income inequality, financialization, and a
> socially inefficient distribution of both capital and tal­ent are the
> legacies of shareholder capitalism. Although these elites now mourn the
> erosion of the political “center,” they actively par­ticipated in the
> erosion of the American middle class. To add insult to injury, they insist
> on telling us elaborate stories about their entrepreneurial spirit and good
> intentions, and invite us to celebrate their virtue when they give back a
> tiny share of their captured wealth."

