Masters of the Universe: The ‘Sucker Born Every Minute’ Business Model

By way of Digby, we come across this NY Magazine article about how Wall Street traders will be making a lot less money because all of the chicanery will be gone. As Peter Radford put it (boldface mine):

Which leads me to a beef of mine, something that has dogged me throughout the crisis. I wish we could stop calling the yahoos who destroyed our economy ‘bankers’. In my day we referred to them as ‘traders’. Its a better description of what they do. They sit at desks and move mountains of money about. They do not do banking. They trade. Their incentives are built around rapid movement of bulk capital and cash in order to turn wafer thin spreads into huge profits. It is a volume business. It is largely self-contained. It has very little to do with banking.

Bankers take positions. They own the assets they create when they lend. They husband those assets when necessary. They are in contact with customers. They assist when credit weakens. They build reserves to offset losses. They stay very far away from speculative capital flows. They are the epitome of dull and boring.

We need bankers. We don’t need traders.

Radford is being too kind. Much of the ‘financial engineering’ over the last decade was simply fleecing the guilible (boldface mine):

We used to rely on the public making dumb investing decisions,” one well-known Manhattan hedge-fund manager told me. “but with the advent of the public leaving the market, it’s just hedge funds trading against hedge funds. At the end of the day, it’s a zero-sum game.” Based on these numbers—too many funds with fewer dollars chasing too few trades—many have predicted a hedge-fund shakeout, and it seems to have started. Over 1,000 funds have closed in the past year and a half.

We don’t need more traders, and we don’t need to reward them so greatly.

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1 Response to Masters of the Universe: The ‘Sucker Born Every Minute’ Business Model

  1. Pingback: Index Funds Are Not Evidence of Efficient Markets: Why Investor Psychology Matters | Mike the Mad Biologist

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