Too Big Not to Fail
The financial industry really is like the auto industry, only with more devious accountants.
Something clicked while I was reading experts talking about overcapacity in the financial and banking sector and also came across an old quote from the heyday of GMAC: "We build cars so we can lend money on them." And we all know how well that turned out, so why should we be surprised when the same thing happened in the finance industry: they wrote mortgages so that they could sell securities made out of them, and they issued securities so that they would have something to write swaps against.
In both GM's case and the financial industry's case, there's a good argument to be made that what should have been an ancillary business ended up wagging the tail of the main enterprise: if you're making piles of money financing each care, then you don't have to look as seriously at how the auto industry is going, because that's not really what drives your profits -- what drives your profits is the spread between what you can borrow at and what you can make your customers pay. If you're securitizing mortgages, what drives your profits (like the auto industry, till the whole thing goes south) is how much paper you can push out the door, because you're taking a cut of each billion. If you're insuring credit defaults (that you believe will never happen, or at least not before you've cashed out) it's the same thing: volume, not quality.
When the car industry started its long decline, pretty much everyone knew it, because you can watch how many cars are being sold and what incentives dealers have to offer to get them off the lot. With the financial-industry bubble, things were less obvious because the markets were private -- even now, no one seems to know exactly how much of this crap is out there. So it was easier for the tail to wag the dog because most people had no idea this multi-trillion-dollar tail even existed.
Yeah, yeah, you know all that. So why should anyone care? Because overcapacity breeds stupid risk-taking. If you have a dozen car factories you don't want to write off, that's a million-plus cars a year you have to sell whether it makes business sense or not. If you have 10,000 masters of the universe who all insist on their next yacht, that's $100 trillion in deals you have to do, whether they make economic sense or not. The biggest banks simply have too many smart people for the volume of sane deals available, so they're bound to take on crazy ones instead.
That's why the financial sector has to get smaller -- not just because so many parts of it are actually or effectively belly-up, but because operating the rest of the economy in such a way that finance wizards can take an ever-increasing cut of the profits is unsustainable.
Something clicked while I was reading experts talking about overcapacity in the financial and banking sector and also came across an old quote from the heyday of GMAC: "We build cars so we can lend money on them." And we all know how well that turned out, so why should we be surprised when the same thing happened in the finance industry: they wrote mortgages so that they could sell securities made out of them, and they issued securities so that they would have something to write swaps against.
In both GM's case and the financial industry's case, there's a good argument to be made that what should have been an ancillary business ended up wagging the tail of the main enterprise: if you're making piles of money financing each care, then you don't have to look as seriously at how the auto industry is going, because that's not really what drives your profits -- what drives your profits is the spread between what you can borrow at and what you can make your customers pay. If you're securitizing mortgages, what drives your profits (like the auto industry, till the whole thing goes south) is how much paper you can push out the door, because you're taking a cut of each billion. If you're insuring credit defaults (that you believe will never happen, or at least not before you've cashed out) it's the same thing: volume, not quality.
When the car industry started its long decline, pretty much everyone knew it, because you can watch how many cars are being sold and what incentives dealers have to offer to get them off the lot. With the financial-industry bubble, things were less obvious because the markets were private -- even now, no one seems to know exactly how much of this crap is out there. So it was easier for the tail to wag the dog because most people had no idea this multi-trillion-dollar tail even existed.
Yeah, yeah, you know all that. So why should anyone care? Because overcapacity breeds stupid risk-taking. If you have a dozen car factories you don't want to write off, that's a million-plus cars a year you have to sell whether it makes business sense or not. If you have 10,000 masters of the universe who all insist on their next yacht, that's $100 trillion in deals you have to do, whether they make economic sense or not. The biggest banks simply have too many smart people for the volume of sane deals available, so they're bound to take on crazy ones instead.
That's why the financial sector has to get smaller -- not just because so many parts of it are actually or effectively belly-up, but because operating the rest of the economy in such a way that finance wizards can take an ever-increasing cut of the profits is unsustainable.
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