Goldman's new money machine: warehouses

What makes you think that Goldman is doing this for anyone other than themselves?

"Investment banks do provide valuable services: market making (providing liquidity in many markets), capital raising, the creation of financial instruments so investors can hedge against certain kinds of risk and so on."

I hear this argument a lot. While I think it would be an exaggeration to say that what Wall Street does benefits no one, at the same time it's clear that what Wall Street does is designed primarily to benefit themselves. Any benefit to society is merely a happy accident that gets leveraged for propaganda purposes, whereas on a day to day basis what they're really doing is earning money off the backs of those that are actually trying to do things that benefit society.

> at the same time it's clear that what Wall Street does is designed primarily to benefit themselves.

So what?

I don't begrudge them making a profit. Capitalism is the engine that propelled us from riding around on horses to putting a man on the Moon in the span of one man's lifetime.

But there are builders and extractors [1]. Allowing a farmer to forward-sell his crop so his income is known adds value. It also allows consumers to know what price they're paying in advance. Both of these make a profit for the bank but they provide value to both parties. This is not a zero sum game.

But when banks create funds that stockpile food for the purpose of driving up prices, the only real beneficiary is the bank's investors. In the short term, suppliers benefit from higher prices but long term you face increased inflation if the price rise is sufficiently large and you start applying the inevitable "me too" to other industries.

If you'd like to see how well denying the profit motive works you need look no further than the former Soviet Union.

[1]: http://cdixon.org/2010/06/19/builders-and-extractors/

There is really only ONE possible and proven sustainable solution to this mess. It was realised in the aftermath of worst financial crisis ever seen, the Great Depression. It worked so well to create such stability, or at least certainly did not cause any harm to the real economy for so long, that the world saw the longest sustained period of growth it has ever seen and is also considered by all economists to be the "golden age" of capitalism from 1945 to 1971 (they only differ on precisely how the combination of all factors came together).

The solution in the aftermath of the Great Depression was Glass-Steagal and capital controls globally. This meant,

1. The money supply effectively only circulated within each country and transfers between countries were always linked to trade. Since jobs follow business investment, this meant very high employment per nation.

2. Financial instability had minimal to zero systemic impact in advanced countries because banks were only permitted to engage in funding and financing directly related to the real economy.

3. In addition, a side effect due to the partitioning and lack of artificial wealth interconnectedness, TBTF was not possible.

4. All manner of speculators were able to exist even then, but they knew they only had one chance with the capital they had since completely different types of financial activity were not allowed to co-mingle under the same organisation or group.

5. Finally, money was linked to the gold standard and debt creation (including printing) that did not relate to trade was very difficult - though not impossible, especially for governments which wanted to run or extend huge war machines for their empires.

Having to pay for the Vietnam War and coinciding with domestic inflation, caused Nixon to move the dollar off the gold standard in 1971, a fitting end to the Golden Age on 15 August 1971. Almost exactly 40 years later, here we are - in real (inflation-adjusted) economic terms per capita for median person effectively back to square zero with the worst in the real economy still to come as the ripples of the crises continue on through entire sovereigns.

An alternative way to look at it, is that the combination of financial deregulation and financial "innovation" since 1980 caused capital to move well-ahead of the globalisation of the real economy. Like a very strong wave, it caused ripples and bubbles in the assets available to it before real growth and high quality assets (including highly educated workers) backing it caught up. In a sense, the financial industry became too efficient at shifting liquidity and wealth transfer relative to the underlying economy. Combine this with the enormous increase in money supply generated by the political masters of the new fiat currencies, this meant the mother of all deleveraging and financial crisis was being deferred into the future. Well, the future is here now.

In short, there is a reason why in every country above subsistence level in the world, the financial industry is almost as heavily regulated as the nuclear industry. Like writing a good, large and complex computer program, having a few huge procedures with many side effects is far worse along every dimension than having many much smaller and well-organised functions with minimal to no side-effects.

The solution is "Compartmentalization" aka. Glass-Steagall on steroids for the financial industry. It is even advocated by high profile economists and others who publicly foresaw the 2007 crisis.

"Capitalism is the engine that propelled us from riding around on horses to putting a man on the Moon in the span of one man's lifetime."

Except for that it was actually socialism that put a man on the moon, seeing as it was a government project.