Tag Archives: The Great Reset
Inventors of Derivatives vs. the Inventor of Disneyland – or, Why We Got in So Much Trouble
The evidence keeps mounting regarding the proliferation of traders over builders, and this has not been a good development for our economy.
I first saw this distinction described in Richard Florida’s book The Great Reset. I blogged about it here: “Traders” vs. “Builders” – the “Fantasy Economy” vs. the “Real Economy.”. Here is the key quote from his book, which I included in that blog post:
We’re witnessing a replay of the age-old conflict between “traders” and “builders,” as Geoff Beattie, the head of Woodbridge, dubs it. Traders make money off, well, trading things. They create little or no real wealth, because they do not engage in productivity; they profit through trading. Builders, on the other hand, focus on investing in real assets in the real economy… The landscape today is littered with instant tycoons who made their fortunes on tiny upticks in the stock market or by trading shares in other people’ debt. For far too many of these traders, the only productivity was profit and their only customers were themselves. I raise this to make this point: builders need to take their preeminent position back from the traders for the economy of the future to flourish.
This weekend, Frank Rich referred to this problem in his column Who Killed the Disneyland Dream? It’s a revealing column, but this one paragraph reveals the shift from builders to traders:
It’s a measure of how rapidly our economic order has shifted that nearly a quarter of the 400 wealthiest people in America on this year’s Forbes list make their fortunes from financial services, more than three times as many as in the first Forbes 400 in 1982. Many of America’s best young minds now invent derivatives, not Disneylands, because that’s where the action has been, and still is, two years after the crash. In 2010, our system incentivizes high-stakes gambling — “this business of securitizing things that didn’t even exist in the first place,” as Calvin Trillin memorably wrote last year — rather than the rebooting and rebuilding of America.
It’s not that I think we should “judge” those who are in the “trading” business. Men (and now women) have always gone where the jobs are that pay the most, and help them get ahead. If finance is the golden goose of this generation, then so be it.
But…but… our society needs to do a better job at building things. Who will rise up to fill these slots, and help us restore this economy in a real, not a fantasy, way? This really is the question of the day.
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(I just read the Calvin Trillin article that Frank Rich referred to. It really is worth reading!)
Jeffrey Immelt De-emphasizes “Traders,” Rediscovers “Builders”
Here’s the title of the article: G.E. Goes With What It Knows: Making Stuff by Steve Lohr (New York Times). The title really does say it all. And the fact that Jeffrey Immelt is understanding this, and acting on it, is significant.
Here’s the issue: should our best and our brightest make stuff, of should they move money around? Richard Florida, in his terrific book The Great Reset, summarized the problem this way:
Here’s the issue: “traders” (making money by trading things) vs. “builders” (real assets in the real economy).
The role of finance changed from being, in the words of William Black, a “servant” of the economy to a “predator.” Instead of supporting the real wealth producing parts of the economy, (the finance sector) has become a parasite on them.
…builders need to take their preeminent position back from the traders for the economy of the future to flourish.
(I blogged about this here).
(Fred R. Conrad/The New York Times) Jeffrey Immelt, C.E.O. since 2000, has pared down General Electric to rely less on financial wizardry in its lending unit and more on physical products from the manufacturing divisions.
Now it sounds like Mr. Immelt gets this, and says that our entire country needs to get this also. Here are some paragraphs from the article about Mr. Immelt and G.E.:
Perhaps no company outside of the banking sector was hit as hard by the financial crisis as G.E., certainly none that seemed healthy before the economic tailspin. Its big finance arm, GE Capital, long a cash machine that bolstered the mother ship’s bottom line, became an albatross, threatening to pull down the entire enterprise. G.E. cut its dividend for the first time since the Great Depression, lost its triple-A credit rating and hastily arranged a $3 billion investment from the billionaire Warren E. Buffett.
Having skirted disaster, G.E. is recovering gradually these days. Its finance unit is on the mend, with the size of its debts and troubled loans trending downward. Mind you, middling recoveries are a relative matter at G.E. After all, the company remains a colossus on track to deliver profits of more than $10 billion on sales of about $150 billion this year. But investors are used to getting more from G.E., which earned $22 billion on revenue of $173 billion in 2007.
So G.E. has revamped its strategy in the wake of the financial crisis. Its heritage of industrial innovation reaches back to Thomas Edison and the incandescent light bulb, and with that legacy in mind, G.E. is going back to basics. The company, Mr. Immelt insists, must rely more on making physical products and less on financial engineering — a path that, he insists, is also necessary for the American economy as a whole.
Mr. Immelt candidly admits that G.E. was seduced by GE Capital’s financial promise — the lure of rapid-fire money-making unencumbered by the long-range planning, costs and headaches that go into producing heavy-duty material goods. Other industrial corporations were enthralled with finance, of course, but none as much as G.E., which became the nation’s largest nonbank financial company.
So, after Jack Welch championed G.E.’s journey into finance, Mr. Immelt is calling for G.E. to get back to focusing on “making stuff” — “a path that, he insists, is also necessary for the American economy as a whole.”
Yes it is! We need far more “builders,” and can probably do quite nicely with far fewer “traders.” We really do need to “rely more on making physical products and less on financial engineering.”
Ever More Traders, Seemingly Fewer Builders – Consensus is Growing
The consensus is growing. The problem is truly coming into focus. The solution seems to elude us all.
A while back, I wrote this blog post: “Traders” vs. “Builders” – the “Fantasy Economy” vs. the “Real Economy.” (It is the most read post on our blog in the last quarter). It was prompted by my reading of the Richard Florida book, The Great Reset. Though the entire book is worth reading, it is a small section that jumped out at me most strongly. Here’s the key quote:
…builders need to take their preeminent position back from the traders for the economy of the future to flourish.
A long list of observers and authors are weighing in on this disconnect in our society. Here’s a quote from Frank Rich, Still the Best Congress Money Can Buy, from this morning’s New York Times:
As John Cassidy underscored in a definitive article titled “Who Needs Wall Street?” in The New Yorker last week, the financial sector has paid little for bringing the world to near-collapse or for receiving the taxpayers’ bailout that was denied to most small-enough-to-fail Americans. The sector still rakes in more than a fourth of American business profits, up from a seventh 25 years ago. And what is its contribution to America in exchange for this quarter-century of ever-more over-the-top rewards? “During a period in which American companies have created iPhones, Home Depot and Lipitor,” Cassidy writes, the industry reaping the highest profits and compensation is one that “doesn’t design, build or sell a tangible thing.”
The article Rich quoted is What Good Is Wall Street? Much of what investment bankers do is socially worthless by John Cassidy. He puts it simply:
For years, the most profitable industry in America has been one that doesn’t design, build, or sell a single tangible thing.
And here are excerpts from The Power of Failure by William D. Cohan (William D. Cohan on Wall Street and Main Street):
Despite the very dire consequences of the latest financial crisis that Wall Street perpetrated on the world, America cannot seem to shake its infatuation with Wall Street bankers and traders.
We continue to shower them with riches, prestige and glory. We make movies about them. We write books about them. We seriously overpay and then envy them. This year alone, while millions of others suffer from the Great Recession, bankers and traders are expected to be paid — incredibly — another estimated $144 billion in compensation and benefits. Accordingly, Wall Street remains the No. 1 destination for our best and brightest.
There is enormous power in failure, especially when one learns from it. Wall Street has been making a lot of mistakes lately. But will it bother to ever learn from them? And will we have the courage to return Wall Street to a less exalted place? The answer to these questions will increasingly come to define what America is all about in the future.
So, Wall Street has taken us down some blind paths, and failed spectacularly. Yet, Wall Street profits are up, and seems to already be back on top. Our best and brightest would still rather work there than elsewhere. And when they do, they build little or nothing – they master “trading,” not “building.”
We need our best and our brightest building an actual economy, not moving money around in a stagnant one. But we seem to be powerless to bring about any needed change.
So, what shall we do in this fantasy economy era?
Women In Business and The Knowledge Worker, The Knowledge Age, and Moving Forward (Insight from Richard Florida)
Richard Florida (The Rise of the Creative Class; The Great Reset) is one of the authors I just regularly “check in with/catch up on.” In a recent article, What Makes Women Rich, he makes a simple point very clearly and persuasively: them more opportunity for women, the more progress a nation can make. The article is worth a careful read. Here are excerpts:
Women make up the majority of the U.S. workforce and an even larger majority of knowledge, professional, and creative workers. In a provocative and controversial essay in this magazine, Hannah Rosin argues that the post-industrial economy is better suited to the types of skills and capabilities women possess. The current economic crisis has been dubbed a “mancession” by some – as men in blue-collar jobs have borne the brunt of layoffs and unemployment.
It stands to reason that economies that afford women more opportunity will gain economic advantage for the simple reason that they can tap a broader reservoir of talent and skill.
Economic opportunity for women is closely associated with the transition to knowledge-driven economic structures with higher levels of human capital and more creative class occupations. Women’s economic opportunity is also greater in nations which are more open and tolerant generally toward gays and lesbians and racial and ethnic minorities. Overall, we find an especially close association between the economic opportunity afforded women and our Global Creativity Index, a composite measure of national creativity and competitiveness. Nations where women have greater economic opportunity also have higher levels of overall life satisfaction and happiness.
Not only do women have greater opportunity in wealthier, more open, post-industrial nations, women are an integral component of the economic development equation. Nations that are more open to women and afford them more opportunity gain economic advantage by harnessing a greater level of human skill and potential. Now, more than ever, the path to economic prosperity requires further human development. Creating economic and social structures which develop women’s full talents and afford them the full range of economic opportunity is a key element in securing lasting economic prosperity.
Where Will The Jobs Be? – Maybe Not Available At All For The Over-55
I have posted a number of times about the series of articles written by Richard Florida for The Atlantic. Go here for links to all of his articles – they provide a terrific overview seeking answers to this question: “where will the jobs be?” And his answer is two-fold: where will they be geographically? and where will they be by “sector?” Florida is the author of The Rise of the Creative Class and The Great Reset, both worth your time.
But here’s another new question: where will the jobs be — by “age?” And, increasingly, they may be nowhere for the over 55 group (that’s me, by the way!).
The New York Times published this article by Motoko Rich: For the Unemployed Over 50, Fears of Never Working Again. Here are some excerpts:
Patricia Reid is not in her 70s, an age when many Americans continue to work. She is not even in her 60s. She is just 57.
But four years after losing her job she cannot, in her darkest moments, escape a nagging thought: she may never work again.
College educated, with a degree in business administration, she is experienced, having worked for two decades as an internal auditor and analyst at Boeing before losing that job.
But that does not seem to matter, not for her and not for a growing number of people in their 50s and 60s who desperately want or need to work to pay for retirement and who are starting to worry that they may be discarded from the work force — forever.Of the 14.9 million unemployed, more than 2.2 million are 55 or older. Nearly half of them have been unemployed six months or longer, according to the Labor Department. The unemployment rate in the group — 7.3 percent — is at a record, more than double what it was at the beginning of the latest recession.
“Their skills have atrophied for one thing, and technology changes so rapidly that even if nothing happened to the skills that you have, they may become increasingly less relevant to the jobs that are becoming available.”
So, this job market is the toughest in my lifetime. The unemployment rate is high, and may not come down any time soon. Jobs are scarce. People are needing to work later in life, postponing retirement. And for the older group, even the well-educatied, jobs are more scarce than they were.
A challenging time, indeed! Listen to the fear: “But four years after losing her job she cannot, in her darkest moments, escape a nagging thought: she may never work again.”
The Story – We Need More People Choosing to Work in the “Real Economy”
“Huge numbers of Harvard grads poured into finance during the 1990’s and early 2000’s, but all that’s changing now…”
Richard Florida, The Great Reset
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I have commented often that there are some rather obvious themes that crop up, often enough, from enough divergent voices, that one begins to think that they represent truth. In Womenomics: Write Your Own Rules for Success, Claire Shipman and Katty Kay, two journalists, confirm this idea with the language of their discipline. They are writing specifically about the rise of “Womenomics,” but the underlying truth is “pay attention to rising themes shared by many.” Here’s the quote:
As journalists, when we start to read successive reports that come up with similar conclusions, we call it a story. When the results are this conclusive and this notable we may even call it a headline.
So – here is the theme that I am now ready to put in the category of “this really is a story!” We have too many college graduates, and other workers, choosing disciplines that do not build our “Real Economy.”
I posted about this a while back with The Rise and Fall of Finance and the End of the Society of Organizations (a little “serious reading”), quoting from The Rise and Fall of Finance and the End of the Society of Organizations by Gerald F. Davis; and recently with “Traders” vs. “Builders” – the “Fantasy Economy” vs. the “Real Economy.” And the theme is cropping up seemingly everywhere. For example, here are some excerpts from a recent column by David Brooks, The Genteel Nation:
After decades of affluence, the U.S. has drifted away from the hardheaded practical mentality that built the nation’s wealth in the first place.
The shift is evident at all levels of society. First, the elites. America’s brightest minds have been abandoning industry and technical enterprise in favor of more prestigious but less productive fields like law, finance, consulting and nonprofit activism.
It would be embarrassing or at least countercultural for an Ivy League grad to go to Akron and work for a small manufacturing company. By contrast, in 2007, 58 percent of male Harvard graduates and 43 percent of female graduates went into finance and consulting.
Then there’s the middle class. The emergence of a service economy created a large population of junior and midlevel office workers. These white-collar workers absorbed their lifestyle standards from the Huxtable family of “The Cosby Show,” not the Kramden family of “The Honeymooners.” As these information workers tried to build lifestyles that fit their station, consumption and debt levels soared. The trade deficit exploded. The economy adjusted to meet their demand — underinvesting in manufacturing and tradable goods and overinvesting in retail and housing.
These office workers did not want their children regressing back to the working class, so you saw an explosion of communications majors and a shortage of high-skill technical workers. One of the perversities of this recession is that as the unemployment rate has risen, the job vacancy rate has risen, too. Manufacturing firms can’t find skilled machinists. Narayana Kocherlakota of the Minneapolis Federal Reserve Bank calculates that if we had a normal match between the skills workers possess and the skills employers require, then the unemployment rate would be 6.5 percent, not 9.6 percent.
There are several factors contributing to this mismatch (people are finding it hard to sell their homes and move to new opportunities), but one problem is that we have too many mortgage brokers and not enough mechanics.
Where people work really matters. Not the company, but the industry — the end product. When our smartest people built things that were tangible, usable, exportable, it really mattered. And it can again.
We’ve got a story here (to use the language of the journalists). And the bad news is that we can’t fix this by tomorrow afternoon. It will take a while. We have to champion and applaud jobs that represent and build the real economy. We have to reward people who go into such work. And it will take a few years of graduates shifting their plans and dreams to pull this off.
The Brooks article, and the Florida book, reveal that the movement away from “finance” has already started. But it has not yet created movement into the jobs that build the “real economy.”
I’ll end with this, another cautionary paragraph from Brooks:
The shift away from commercial values has been expressed well by Michelle Obama in a series of speeches. “Don’t go into corporate America,” she told a group of women in Ohio. “You know, become teachers. Work for the community. Be social workers. Be a nurse. … Make that choice, as we did, to move out of the money-making industry into the helping industry.” As talented people adopt those priorities, America may become more humane, but it will be less prosperous.
