In my previous post, we talked about sick institutions.
If institutions get sick, what makes them sick? And how do we make them well again, and keep them healthy?
To find the answers, I need to challenge conventional thinking, and take you out of your comfort zone of what you think you know about markets and politics and government and finance and pensions.
Mostly, pensions.
Let’s try this.
I just started reading Adam Tooze’s impressively long tome Crashed. How A Decade of Financial Crises Changed The World, giving us one academic economist's views on the Global Financial Crisis of 2008.
Towards the end of his Introduction, the author writes:
As this book will show, what the history of the crisis demonstrates are truly deep-seated and persistent difficulties in dealing “factually” with our current situation.
At the end of his beginning, Tooze writes:
Looking back is...necessary...to...figuring out what went wrong. To do that there is no substitute for digging into the workings of the financial machine. It is there that we will find both the mechanism that tore the world apart and the reason why that disintegration came as such a surprise. pp 21-22
Yes! Excellent. Agreed.
But also this.
I suspect that thinking about finance as a machine, rather than seeing it as a human social structure for human social decision making, an institution created by human laws to speak with its own unique language and make decisions according to its own unique logic, will prove to be an obstacle to insight.
So, I jump ahead, and go right to the end of the book’s Conclusion. There I find this long list of unanswered questions that the author tells us Modern Society has been trying, without success, to answer for over 100 years.
There is a striking similarity between the questions we ask about 1914 and 2008. How does a great moderation end? How do huge risks build up that are little understood and barely controllable? How do great tectonic shifts in the global order unload in sudden earthquakes? How do the “railway timetables” of giant technical systems combine to create disaster? How do anachronistic and out-of-date frames of reference make it impossible for us to understand what is happening around us? Did we sleepwalk into crisis, or were there dark forces pushing? Who is to blame for the ensuing, human-induced, man-made disaster? Is the uneven and combined development of global capitalism the driver of all instability? How do the passions of popular politics shape elite decision making? How do politicians exploit those passions? Is there any route to international and domestic order? Can we achieve perpetual stability and peace? Does law offer the answer? Or must we rely on the balance of terror and the judgement of technicians and generals?
These are the questions that we have asked about 1914 for the last one hundred years. It is not by accident that their analogues are also the questions we ask about 2008 and its aftermath. They are the questions that haunt the great crises of modernity.” pp 615-616.
It seems that over the course of some 600 pages that separate his Introduction from his Conclusion, Economist Adam Tooze was not actually able to “figure[] out what went wrong”.
This is perhaps the first place where we can begin to disturb your comfort with conventional wisdom: why can’t the experts figure out what went wrong?
This is the first tug I want you to feel as I try to take you out of your zone of comfort with the experts in conventional thinking.
Of course, I have not yet read those 600 pages of Tooze’s “digging into the workings of the financial machine” so maybe I judge too soon.
We shall see!
…
OK. Didn’t get very far before I came upon this gem, in Chapter 1, on page 26,
But since the 1970s wages had not kept up with productivity.
Think about that for a moment in conjunction with this other thing that happened in the 1970s: the law of fiduciary duty for institutional fiduciaries - Pensions and Endowments - was changed to allow the Fiduciary Owners of society’s shared savings aggregated to programmatically provide certainty against certain of life’s future uncertainties - income security in a dignified retirement and grants to support various civil society institutions and activities - to speculate in share prices on Wall Street, as long as they did so prudently, by diversifying their portfolios according to Modern Portfolio Theory.
As my friend and law partner, Cody Thornton, likes to say,
Almost everything our Pensions are doing with our money today was against the law before 1972.
Over the decades following that 1972 change in law, as trillions of dollars owned by Pension and Endowment fiduciaries began pouring into the Wall Street speculative trading markets, share prices rose, corporate bureaucracies grew through consolidation and conglomeration (mergers and acquisitions) and Corporate Executive compensation skyrocketed. While workers' wages remained flat.
Pensions that are created to provide retirement income security to workers were investing in corporate growth that was keeping workers’ wages from going up in step with the wealth of Wall Street traders and corporate executives. The disloyalty inherent in that takes a little pondering. But please do ponder it.
Do you still think pensions don’t matter, as conventional wisdom tells you you should?
There’s more.
Before even leaving Chapter 1, we come upon this additional tug on your comfort with conventional thinking at page 39,
The lesson of the 1930s was that the Fed must act promptly not just to prevent the money supply from exploding but also to prevent bank failures from causing it to implode.
There is another lesson, a more important lesson, to learn for the 1930s, by which Tooze means The Great Depression, which began with the Stock Market Crash of 1929 when the speculative asset pricing bubble of The Roaring Twenties burst, catastrophically.
It is the lesson of Glass-Steagall, the law that separated what I will call Money Banking from Investment Banking in response to the Crash and its cascading cavalcade of catastrophic consequences.
By Money Banking I am referring to what most of us think of as just plain banking. That is, taking deposits for safekeeping, transaction processing and accounting; and lending those deposits at interest, against promises to repay and pledges of collateral as security for that repayment. Let’s call that Banking & Lending. It is an institutional social structure for social decision making through Finance that has its own unique language of debits and credits and profitability and liquidity and seasonality and capital adequacy and collateral security for expressing its own unique logic of money and credit and commerce and lending.
By Investment Banking I am referring to what is popularly known as Wall Street, or the Capital Markets, or sometimes just the Markets, which is a very different institution from Banking & Lending, an institution of Exchanges & Funds that speaks with its own unique language of issue, price, volume and time for expressing its own unique logic of growth in share prices and transaction volumes, of trend lines and Creative Destruction, of Moral Hazard and Market Corrections and of securitization for speculation through share trading on market-clearing prices. And many other words and phrases. Wall Street is very, very good at making up new words and phrases to describe its basic logic of securitization for speculation. In fact, making up new words for new kinds of securities is what passes for financial innovation in society today, because that is how Wall Street innovates: with words, and securities.
If this makes you feel uncomfortable, it should.
If you are not yet getting uncomfortable yet, let’s keep going.
The lesson that Glass-Steagall teaches us is that one institution for financial decision making should never be allowed to be taken over by another institution for a different kind of financial decision making: Banking & Lending has to be required to make its banking and lending decisions according to its own proper language and logic of money and credit and the temporary monetization of property. Exchanges & Funds have to be required to make their own securitization and speculation decisions according to their own logic of market making. And, most importantly, the institution of Exchanges & Funds has to be prevented from ever taking over decision making by other kinds of financial institutions.
Because Exchanges & Funds have a history of doing just that: taking over other institutions for social decision making through finance, corrupting the decision-making logic of those institutions, and fueling speculative asset pricing booms that go bust with catastrophic consequences for society.
This happened in The Gilded Age. Then, it was Insurance.
It happened again in The Roaring Twenties. Then, it was Banking.
Today, it is happening again. This time with Pensions & Endowments. And nobody is doing anything to stop it. In fact, conventional thinking is telling us we don’t need to stop it, because “this time, it will be different”.
Yea. Sure.
That’s what they tell us every time it happens (and it happens in smaller ways just about every 10 years; in devastatingly catastrophic ways, less often). And it is different each time. In the details. The pattern, however, is always the same: institutional decision-making gets corrupted through monopolization by another institution. And the monopolizing institution is always the same one, although it goes by many different names: Wall Street; Corporate Finance; the Capital Markets; the Markets; Speculation; Capitalism; Free Enterprise; Exchanges & Funds, and more. Today, it is Asset Management.
Recognizing that institutions get sick is an important recognition. Asking how we can make our sick institutions get better is an important question.
But conventional thinking just keeps telling us that institutions don’t matter. They are just aggregating points for individuals making decisions individually in an economy that is just the sum total of the aggregated decisions made by individual self-interested, utility-maximizing rational actors acting rationally to match Supply to Demand (or Demand to Supply) through competition on price under conditions of scarcity in markets for maintaining a rationally determined market clearing price.
One of the most important places where conventional thinking about economics and finance diverges from common sense is right here, in this theory that institutions don’t matter.
Anyone who has ever worked in any organization of any size knows from personal experience that we do not make decisions for organizations based on our own personal morality and sense of what is right. We have to decide according to the morality of the organization, and what the organization thinks is right. Or, we get pushed out. Sidelined. Marginalized. Perhaps even fired. We lose our jobs.
Financial Institutions of various kinds - including Banks, and Exchanges (which are two very different kinds of institutions for making very two different kinds of financial decisions) - are just very large organizations organized for very specific purposes with very specific values. The institution tells us what to decide, according to its own institutional morality. We don’t tell the institution what to decide.
This is true whether we work inside the institution, or protest from without.
So, institutions do matter. A lot. Conventional thinning is wrong on that. And that should make us very uncomfortable with conventional thinking, more generally: what else have they got wrong?
So, here is perhaps a place where we can start taking you out of your comfort with conventional thinking, and start bringing you into a new way of thinking about institutional decision-making, and about the social structures for social decision making by which Modern Society decides what our future can, should and will be made to be, more generally.
Before we get into the complexities of the different social structures - their different purposes, languages and logic - of different institutions for social decision making through Finance, we can perhaps ease into things by discussing these questions:
Do we have the right Economy?
Is the money going where we need and want it to be going?
Who decides?
Who decides who decides?
How do we hold the deciders accountable for the decisions that they make?
That’s the point we need to be focusing on: accountability. How do we hold our financiers accountable for the financing decisions they are making for us?
And more specifically, how do we hold Pensions & Endowments, as financiers, accountable for the financing decisions they are making for us, and for our future?
Because Pensions & Endowments are the only financial institution with the size and the power to really make a difference in what our future can and should be made to be that also have a legal duty, enforceable at law, to make the right difference.
We can start by talking about how good a job they are doing, and how we can help them do their job better.
Or, if you need to be convinced that Pensions & Endowments are actually not doing their job AT ALL, that they are, in fact, violating their fiduciary duty of intergenerational loyalty to future generations, and the future of current generations, and to us, then we probably need to begin by opening up the Black Box of Modern Finance, to see what is actually inside.
SPOILER ALERT: There are no machines inside.