Another link change

Steve Waldman only blogs about once a week. You'd think it'd be easy, then, to keep up. Alas, Guambat has fallen behind even the slowest of the slow.

But on the chance, Guambat did re-visit Steve's blog, Interfluidity, and once again admire his tone, substance and perspective. Sigh. It left Guambat feeling so, I don't know, ... Guambaty.

A taste to maybe whet your appetite:

One of the more depressing bits of emerging conventional wisdom is the notion that the financial system took on "too much risk" in recent years. I think it is equally accurate to suggest that the financial system took on too little risk.

Consider the risks that were not taken during the recent credit and "investment" boom. While hundreds of billions of dollars were poured into new suburbs, very little capital was devoted to the alternative energy sector that is suddenly all the rage.

We gave the building boom the benefit of the doubt because it was a "market outcome". But the shape of that outcome was more matter of institutional idiosyncrasies than textbook theories of optimal choice. It resulted as much from people shirking risk as it did from people taking big bets.

The big central banks, whose investment largely drove the credit boom, were (and still are) seeking safety, not risk. The banks and SIVs that bought up "super-senior AAA" tranches of CDOs were looking for safe assets, not risky assets.

Finance is not a closed system, a zoology of exotic contracts and rocket scientist equations. The job of a financial system is to make real-world decisions, "What should we do?" A good investment is a simple answer to that question, with clear consequences for getting it right or wrong.

Foregone consumption does not automatically convert itself into future abundance. People have to make smart decisions about what to do with today's capital. When huge institutions treat the financial system like a bank, depositing trillions in generic "safe" instruments and expecting wealth to somehow appear, they are delegating the economic substance of aggregate investment to middlemen in it for the fees, and politicians in it for whatever politicians are in it for.

We've trained a generation of professionals to forget that investing is precisely the art of taking economic risks, then delivering the goods or eating the losses. The exotica of modern finance is fascinating, and I've nothing against any acronym that you care to name. But until owners of capital stop hiding behind cleverness and diversification and take responsibility for the resources they steward, finance will remain a shell game, a tournament in evading responsibility for poor outcomes.

Investors' childlike demand for safety has made the financial world terribly risky. As we rebuild our broken financial system, we must not pretend that risk can be regulated or innovated away. We must demand that investors choose risks and bear consequences. We need more, and more creative, risk-taking, not false promises of safety that taxpayers will inevitably be called upon to keep.

he vulgar Keynesian prescription is to encourage consumption, when a dynamic of precautionary storage takes hold. And in extremis that might be a good idea, because if all everyone does is hoard, it's hard to figure what to invest in, except maybe storage tanks. But it's much better to develop a financial system that actually performs, that identifies fruitful projects and allocates claims fairly. Storage eats wealth, while productive enterprise creates it. People know this. No one "invests" in gold or oil when a financial system is working. They do so when it is broken. Like now.

In a way, the credit crisis comes out of a tension between the broad-middle-class America of our collective imagination and the economically polarized nation we have in fact come to be. We borrowed to finance an illusory Mayberry.

Credit was the means by which we reconciled the social ideals of America with an economic reality that increasingly resembles a "banana republic". We are making a choice, in how we respond to this crisis, and so far I'd say we are making the wrong choice. We are bailing out creditors and going all personal-responsibility on debtors. We are coddling large institutions of prestige and power, despite their having made allocative errors that would put a Soviet 5-year plan to shame. We applaud the fact that "wage pressures are contained", protecting the macroeconomy of the wealthy from the microeconomy of the middle class.

But what kind of economy are we building when we take the price of past mistakes out of future wage-earners' pay packets, while protecting the accumulated wealth of those who profited by erring?