Sunday, September 18, 2011

Extreme Money - how financiers play us for fools on risk and debt

EXTREME MONEY: The Masters of the Universe and the Cult of Risk.
by Satyajit Das,
Penguin, 514pp.
Reviewed: 17 September 2011

The best economists are the not the best mathematicians. They are those with the most realistic appreciation of human nature. Too often, its the mathematicians and algorithm apostles who have garnered the Nobel Prizes for their construction of dizzying theses and techniques for the management of "risk".

Satyajit Das is an economist who worked decades in risk management for banks and investment houses, but he is also humane and no fundamentalist. He recognises a truth glaringly obvious to all but the economic fundamentalists and their self-serving acolytes. "The Market" is never pure, correct, or inevitable, except in hindsight. The unseen hand that guides the market, so beloved of those who fatten themselves on speculation with funds they have not earned, is no more than the sum of unequal interests.

The "market" will never be fair when knowledge is unequal. Every practical adult knows that and has experienced it in daily life. "Buyer Beware" may be an adequate baseline for barbarians, but when human societies try to be better than barbaric, we construct agreements and rules about how we will do business with each other.

Money is the way we measure exchange of goods and services. Finance is the tactics and technologies for directing the circulation of money, for any private or public purpose. Economics is the study of production, exchange and consumption of goods and services.

Styajit Das's book delivers a horrifying picture of how Extreme Money (under-regulated, manipulative finance) has corrupted both the world of money and the world of academic and government economics.

Masters of the Universe are the class of financial operators in Wall Street, London and their equivalents, who build, operate and protect a financial system based upon fake valuation of assets and the concealment of risks, so as to turn other people’s real savings into real losses, while the Masters pocket stupendous fees and “performance” bonuses for themselves.

Rarely do we understand the extent to which our personal risks can be manipulated by the financial Masters of the Universe, essentially to their own private benefit. Risk is abstracted, repackaged and traded by the financiers, using derivatives and hedging techniques, to the point that neither buyer nor seller really knows the risk (and therefore the value) of the instruments being transacted. Ultimately, buyers exchange cash for false expectations of security. The smarter financiers take their bonuses in cash.

Das exposes the shambles of a system characterized by bogus and failed economic market theory, a shamelessly rapacious finance industry, and a broad failure by governments to protect either their citizens or their productive industries from a finance industry driven by the most perverse incentives.

The Chicago School of Economics was espoused and funded enthusiastically from Wall Street, and has garnered several Nobel Prizes for economic theories that, when put into practice by financial institutions, have proved shallow and bankrupt. The fundamental flaw has been failure to account for the greed, fear, dishonesty and ignorance that drive opportunistic human behaviour in the real world.

Alan Greenspan, long-time Chairman of the US Federal Reserve, had a lifelong ideological commitment to Ayn Rand extreme individualism, which blinded him and his like to all evidence of failure in de-regulationist neo-liberal finance policy. A whole generation of politically-favoured economists were essentially fundamentalists, who dismissed any contrary interpretations or inconvenient facts that did not suit their ideology.

The Masters of the Universe exploited these flawed policies to make personal billions from useless or destructive market manipulations, and the global economy still pays for that. Behind the financiers’ marble fa├žade is a flimsy wooden shack riddled with termites.

Das's book is packed with facts, case studies and incidents to support its harsh polemic.

He quotes widely from ancient historians, industry insiders and even post-modern cultural critics to show that underlying issues of trust, governance and human market behaviour are as old as history and as present as the sun. Don’t believe anyone who says, “It’s different this time”.

Ultimately, the challenge is to the credibility of governments. Today, while financiers in Wall Street, London and Sydney resume their well-resourced rent-seeking campaigns, governments in all the capitalist democracies face a crisis of public confidence in their ability to manage their economies.

Read my published review here ..