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Post details: Vampire State Building

Vampire State Building

Today's financial news proffered this tooth of wisdom:

Raghuram Rajan, professor of finance at the University of Chicago, and former chief economist at the International Monetary Fund was interviewed on Yahoo Tech Ticker peddling a message for Washington: Stop Targeting "Greedy Bankers" and Focus on Growth:

I am sure the IMF has plenty of vested interest in the jugular of perpetual growth, but perhaps it would behoove its brain trust to acknowledge that it is kind of hard to focus on growth while your productive economic body serves a never ending all you can eat buffet to a blood sucking parasite.

Yes, I mean the Wall Street, and by extension the whole financial system.

There used to be times when bankers borrowed money at 3% and then lent it out with some risk at 5% and that was pretty much their standard business model. They rightfully pocketed the spread as a reward for all the troubles associated with the loaning operations: they did the due diligence during the client research phase, they worked out the details of the transactions, they kept up-to-date paperwork and they also carried the risks in case any of the parties defaulted on their promises.

But then one day as they were soaking in their silver bath tubs, they decided that this was not good enough. They wanted golden bath tubs.

And lo and behold, suddenly they figured that money that was no longer backed by gold is a very stretchable and multipliable object. They realized they can conjure it into existence and then lend it to unsuspecting public at high interest. They envisaged complex securities in which they hid the risks of the loans and sold them to gullible investors in a sort of institutionalized shell game. They created financial insemination. They designed derivatives that enabled them to leverage all the dirty tricks known to man. Their accounting prestidigitation never produced anything of value, but it created a mighty swirl of watermarked paper which gave a perfect illusion of wealth. But it was just that - an illusion.

Any high risk industry that operates under the assumption that if any of their vampirous enterprises go wrong taxpayers will pick up the slack satisfies your basic definition of a parasite. And God knows that there was a lot of slack to be picked up in the last few years. The sooner we flush this tapeworm down the toilet, the sooner we can return to an organic growth, free of steroids of deficit spending. It is as simple as that.

Unfortunately, the financial reform concocted by Congress left much to be desired. Sometimes it wasn't even clear whether the lawmakers were still representing the people or were just giving the big bankers a lap dance. Loopholes galore, toothless measures and no effort to break the too big to fail cabal or curtail their risky behavior. Instead of rescuing the economy from the incisors of irresponsible credit peddlers and driving sharp wooden stakes through the heart of the failed institutions, we have been building a state of vampires. That is not a feasible economic strategy.

Here is a snippet from the last year's Atlantic, penned by Simon Johnson, the Ronald A. Kurtz Professor of Entrepreneurship at the Sloan School of Management at MIT.

Simon Johnson: Quiet Coup (The Atlantic magazine, May 2009)
"From 1973 to 1985, the financial sector never earned more than 16 percent of domestic corporate profits. In 1986, that figure reached 19 percent. In the 1990s, it oscillated between 21 percent and 30 percent, higher than it had ever been in the postwar period. This decade, it reached 41 percent..."

So from 16% to 41% in several decades, huh?

How about we return to the banking business as it was originally conceived: providing prudent loans to select applicants and standing by them. We were able to put a man on the Moon back in those days. So it shouldn't be too economically crippling.

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