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Finance, Telecom, Tech & the Interconnectedness of All Things

By 14 May 2010 One Comment

In an article on Making Finance Easy to Fix, Not Hard to Break in yesterday’s American, I comment on the Populist outrage against the bankers, who have a serious problem of providing a satisfactory explanation of exactly what social functions they perform that justify their habit of collecting 30% of all the profits that accrue to the S&P 500.  It is followed up with a blog post on an excellent article on the financial crisis by George Mason University economist Russ Roberts, called Gambling with Other People’s Money: How Perverted Incentives Caused the Financial Crisis.

My piece is itself, I admit, a bit of a Populist rant, and it raises a basic problem: Populist anger, however justified, does not usually end well. As the Hong Kong investment firm GaveKal commented (proprietary):

Which Will Win? -- Source: New York Graphic, 14 August 1873

There is a real risk of a vicious cycle emerging in the financial sector. As banks make easy profits on treasury carry-trades, the backlash against the sector will intensify. We will see more articles in publications ranging from Rolling Stone to the New York Times about how bankers are playing the system. This backdrop will then make it all the more politically feasible to pile new regulations, red tape and taxes on financial institutions, which in turn will make banks even more cautious and even more likely than ever to just stick to bottom-feeding. This is not good for banks, is not good for credit creation and, of course, not good for sustained GDP growth.

This is relevant to the Digital Society for two reasons.

One is that tech and telecom need a healthy financial sector, and especially one that helps finance both new inventions and new business models. Current financial reform proposals do not do this; for example, they disfavor the angel investing that is vital to startups. And while, as GaveKal notes, many of the proposed restrictions are not good ideas, there is a double whammy — many provisions have been thrown in to help the special interests that helped cause the crisis, not to the advantage of the rest of us.

The second is that Populist anger is like a flash mob in that it can be diverted to the wrong targets. An interesting dimension of the movement in support of net neutrality is that the proponents are rather skillfully trying to focus the Populist anger that is boiling over out there beyond the beltway on telecom companies and ISPs, and in favor of — Big Government.

It is an old story, and,  in U.S. history, the 19th Century Populist anger against big business, railroads, and others contributed to the founding of regulatory regimes that led to inefficiency and stasis. But large industrial organizations are easily visible and make good targets, whereas the special interests of the elite professional, academic, and governmental classes that support net neutrality are not so readily identified. And, to be blunt, the telecom companies are large, bureaucratic institutions with large staffs of lawyers who make a good living out of their DC contacts and expertise. Dealing with Populist flash mobs is not their strength.

One Comment »

  • James DeLong (author) said:

    Arnold Kling, of whom I am a serious fan, makes a good Populist point on EconLog:

    The point of [my] widely-unread Unchecked and Unbalanced is that knowledge has become dispersed, making central government less and less effective. The model of Big Finance working with Big Government has produced catastrophic results. Of course, no one in Washington or Brussels can imagine anything other than Big Finance plus Big Government. What they call “financial reform” is an exercise in blame deflection. The goal for the past two years has been to get back to where we were in 2006, with a promise to regulate more cleverly next time.

    This project requires massive transfers of wealth to the undeserving. Some of the transfer goes to undeserving borrowers. Most of it goes to undeserving lenders. The ruling class is certain that this is the right thing to do, and the challenge is to keep democracy from getting in the way. I continue to believe that we live in a time like World War I or Vietnam, where the ruling class is so off the rails that you can only find sanity on the outer fringes of society.