June 23, 2014
The Solution to the Hoarding Society and the Piketty Book
"Interactive finance" will encourage trading in illiquid markets -- and benefit insurers.
Jacques Louis David, The Emperor Napoleon in His Study at the Tuileries, 1812, National Gallery of Art, Samuel H. Kress Collection, Washington, D.C.
Every so often, a big book comes along that, in the words of Ralph Waldo Emerson, can rock people “clean out of my own orbit” and turn us into “a satellite” of the new ideas. French economist Thomas Piketty’s Capital in the Twenty First Century is lodging lots of Emersonian punches just now.
He shows us that we have a pervasive problem, a hoarding society. The implications reach to the world of insurance, where many companies hoard what can be toxic securities, such as residential mortgage-backed securities, because a lack of information about the underlying assets makes for an illiquid market and makes companies fear an economic loss. In general, the near-absence of a secondary market for many types of securities retards economic growth in America and Europe for all companies, including insurers. The solution is interactive finance, by which I mean rewarding institutions and individuals with financial or strategic advantages for voluntarily revealing information detailing the risk in assets. Interactive finance resolves hoarding by creating liquidity and stimulating volumes in new risk vehicles and, crucially for insurers, puts incentives in place to enable the insurance industry and other institutions to shed toxic securities.
Books like Piketty’s have come along before. Following World War II, John Hersey’s Hiroshima and Norman Mailer’s The Naked and the Dead became best-sellers among a public hungry for information after wartime censorship. At the time the Cuban missile crisis threatened World War III, Rachel Carson’s Silent Spring struck a chord about the fate of the earth. Francis Fukuyama’s The End of History and the Last Man resonated because of the collapse of Soviet communism. Nothing rivals the 9/11 Commission Report, with its stunning conclusions that failures of national imagination and surveillance agency cooperation explain the World Trade Center and Pentagon attacks.
Now comes Piketty with the arresting insight that inherited wealth will in all probability exert disproportionate control in mature economies well into the 21st century, to the detriments of meritocracy and democracy. He describes a permanent class of inherited wealth, augmented by vast new wealth in winner-take-all areas of information technology and in parts of finance that some have been able to game. As long as the top 1%’s capital has a higher rate of return than the overall economy, that top 1% consolidates power and protracts family wealth for succeeding generations. (“He… car’d to hoord for those, whom he did breede,” Spencer wrote in the Faerie Queene roughly 425 years ago.)
In other words, Piketty shows that we have a hoarding society — and a crisis. The super wealthy will invest what they want when they want where they want, and, from here on out, investments stimulating economic growth in national economies would weaken their power, prestige and income by helping disproportionately those less fortunate. So, a long stagnation awaits salaried professionals and wage earners and their progeny. The stagnation will curtail meritocratic achievement and compromise democratic participation and institutions.
John Maynard Keynes would find all this unsurprising — but concerning. “The moral problem of our age is concerned with the love of money, with the habitual appeal to the money motive in nine-tenths of the activities of life, with the universal striving after individual economic security as the prime object of endeavor, with the social approbation of money as the measure of constructive success and with the social appeal to the hoarding instinct as the foundation of the necessary provision for the family for the future,” the neoclassical economist observed in 1925.
At the very least at this moment, Piketty is our Antigone. With every successive response, the powerful show themselves to be self-serving. The Financial Times generated buzz by claiming Piketty’s numbers were wrong. Many used that analysis as an excuse to dismiss Piketty. But numerous pieces have shown that he is, in fact, correct – for instance, here and here.
His J’accuse punctures, equally mercilessly, Obama palliatives, libertarian rants, big business platitudes and regulator palaver. There have been unremitting waivers, settlements and failed prosecutions of large financial institutions by the Obama administration for billions and trillions of dollars of securities fraud. This comes amid vigorous prosecution of and fines imposed on European banks. The U.S. approach evokes Emile Zola’s withering indictment of corruption in the Third Republic general staff and War Office.
In 2014, Thomas Piketty reigns as the Napoleon Bonaparte of neo-classical economics. No one dominates economic discourse so pervasively or as persuasively. Like Napoleon before him, Piketty is consolidating the ideals of the Revolution: liberty, equality and fraternity in a teleology brooking no refutation. In Piketty’s heuristic, the wealthy retain liberty to invest; nation states will exert new laws to tax global wealth to restore equality; and fraternity can then express itself with adequate resources. All the financial engineering on Wall Street and with the euro since the late ‘90s, coupled with all the vast new wealth in Internet, Silicon Valley, Seattle, oligarchic Russian and Chinese state-chartered enterprises, has dislocated vast numbers of people and segments of national economies outside privileged participants. Obama and discordant, multi-various Europe are but a place-holding Directory, so many wanting Talleyrands, achieving temporary stability but no real order, so economic growth never really happens. Hence, Piketty proposes a global tax on wealth, a 21st century economic and public policy correlative to the Code Napoleon.
Think of Antoine-Jean Gros’s monumental, heroic painting of Napoleon touching plague-stricken soldiers in Syria in 1799. Like Christ touching the leper, Napoleon reaches out to the afflicted to convey hope. Metaphorically, at this time, Piketty plays the same role in economic and public policy discourse.
Tiketty’s triumph in Capital, like Napoleon’s at the Bridge of Arcole, the 1796 battle displaying heroism and brilliance outmaneuvering Austrian troops, may eventually give way to the scholar’s Waterloo, but, for now, none is in sight.
No one can deflect the stunning realization that the rich have accumulated and are taking off with the wealth, and nothing any leader has yet achieved on behalf of salaried professionals and wage earners realistically addresses oligarchic shifts in economic power and wealth in national and international economic life. The top 1% are intent on locking in and growing their ever-increasing share of national incomes, which increased from 8% in 1970 to 17% in 2010 in the U.S. An estimated $30 trillion, floating around the world with few owners and whereabouts unknown, according to a 2013 report, simply ices the cake.
Invisible elites now control and game inefficient markets and public policy so thoroughly to their advantages that political and social institutions are not equal to the challenge of addressing their hegemony or displacing their dominance. Contemporary regulation, originated in the Progressive period to spur investment and police wrongdoing in industrial capitalism, fails miserably addressing casino capitalism.
With all this concentration in wealth, as if to prove there is no fairness in life, Janet Yellen, a capable economist and administrator and first woman to serve as chairman of the Federal Reserve Board, suffers the indignity in Senate testimony of complaining about the weather to explain protracted economic lethargy. She shares that plight with other economic monitoring authorities.
In popular culture, “Shine Bright, Jamie Dimon,” Lauren Windsor/aka Lady Libertine’s American Family Voices YouTube hit, lampoons the CEO of JPMorgan Chase:.
“Shine bright, Jamie Dimon
Shine bright, Jamie Dimon
Fined light by the S-E-C
None from Sarbanes Oxley
To the sky/to the sky
Chasing profits ever high
Thirteen billion penalty
From mortgage securities
Fraud you sold me
Chasing profits ever high
The regulators let you get away
Admission of wrongdoing you don’t have to say
Paltry the fine your power buys
So sleep tight
in your lies
Crimes provable sealed from the public eye
No jail time
Foreclosures spike just like your bottom line
Shine bright, Jamie Dimon
Shine bright, Jamie Dimon….”
Jason Furman, chairman of the Council for Economic Advisors in the second Obama administration, is coming forward with what might be characterized as the American response to Piketty. Furman offers a rehashed take on le defi Americain, articulated so eloquently by J.J. Servan-Schreiber in Charles de Gaulle’s latter days, seeing American dominance in information technologies as a threat to French control of its nuclear arsenal.
While Furnam demurs from calling Piketty naughty, he suggests that Piketty is too French. Let’s shy away from Belle Epoque Third Republic wealth metrics and celebrate the frontier, Furnam says.
Furnam acknowledges in a thoughtful address at the Institute of International and European Affairs that between 2001 and 2007 “the typical family did not share in the economic gains in the broader economic gains, the first time an economic expansion did not translate into rising middle class incomes.” He says that, because of the 2008 asset implosion, “there has been no net increase in incomes since the late 1990s.”
Still, Furman disputes Piketty’s assertion that the return on wealth will necessarily be greater than growth in wages. Furman says “there is no a priori basis to predict [because] of unpredictable technological developments, norms, institutions and public policies.”
To appreciable degrees, news from Silicon Valley vindicates both Piketty and Furman. In April, Apple, Google, Intel and Adobe Systems reached a $324 million settlement with salaried professional workers to avoid litigation alleging that the four firms had conspired not to solicit others’ employees lest each pay higher salaries. The suit called for $3 billion in damages, with $9 billion in potential liabilities.
The wealthy hoard their riches and suppress labor, the settlement suggests, vindicating Piketty.
Institutions and law now enable a labor market to flourish and challenge inequality, vindicating Furnam.
Aren’t new money elites supposed to be less greedy and flagrant than aristocratic, merchant, manufacturing and landed elites, given how recently the new wealthy have attained their riches and how supposedly meritocratic they are? Apparently not. In Silicon Valley, salaried workers had to litigate simply to secure labor participation and capital accumulation rights they always held.
Picketty’s suggestion for correcting the hoarding problem partly through a tax on international capital strikes me as a non-starter in the U.S. Thirty-four years out from the election of President Reagan, those with millions are not likely to join with those with little to assail those with billions. It may happen, but the constant din of so-called free market, libertarian and socialist-fear-mongering rhetoric make for a very, very long shot.
The Solution: ‘Interactive Finance’
The surest means to address the hoarding society and crisis is, in practical terms, interactive finance, by which I mean rewarding institutions and individuals with financial or strategic advantage for voluntarily revealing risk detailing information.
For starters, let’s take a breath, look around and recognize information as the 21st century’s distinct commodity, analogous to steam in the 19th and oil in the 20th. In the U.S., information is to the 21st century as continental investment and settlement was in the 19th and industrial development was in the 20th.
System architectures, information technologies and the Internet are adequately mature and mobile and broadband communications networks sufficiently widespread that information is now commoditized and monetized. Even digital currencies like bitcoin, though classified as property by the IRS, are emerging. Cognitive computing, big data, parallelization, search, capture, curation, storage, sharing, transfer, analysis and visualization are commonplace. Three-quarters of American households pay for broadband access. Nine in 10 Americans carry mobile telephones. Global mobile transactions are projected to show more than 33% average annual growth.
User-generated information now creates significant assets. With each additional user, wealth creation shifts toward originators. “As value creation shifts from well-connected MBAs to the innovators themselves, so does wealth creation,” Reddit founder Alexis Ohanian observes in Without Their Permission.
Interactive finance will increasingly take place over the Internet and mobile devices. Consumers and institutions will embrace interactive finance to participate in value they are creating. Many shrug off sale of metrics about their data to advertisers as inescapable tradeoffs for Internet and mobile telephone use. But, with interactive finance, users would receive financial or strategic advantages and rewards for information that they create in all these transactions and that they forego more or less involuntarily now.
Amid these circumstances, eight in 10 millennials, those born between 1983 and 2003, concur with the statement that “there is too much power concentrated in the hands of a few big companies” and express dubiety about Wall Street, according to a recent Brookings Institution report.
While it is amply clear that interactive finance enables users to become more efficient traders, more importantly interactive finance stimulates massive communities of use to capture and to monetize risk-detailing information for those willing to share and those willing to reward information revelations with financial or strategic advantage. By enabling each person’s control of his or her information when he or she chooses to reveal some part of it, interactive finance establishes open and free markets in information. These markets will complement the data miners, credit agencies and Internet behemoths that currently act as sole gatekeepers, repositories and traders of the data.
While this may sound rather highfalutin’, interactive finance is wholly pragmatic. Corporate bonds are all dried up. Residential mortgages are so lethargic that lay-offs are legion. Two key sectors lack adequate liquidity to stimulate aggregate demand. And, as long as the largest too-big-to-fail banks receive lifelines to the tune of roughly $7 billion a month from the Federal Reserve through its Orwellian-named quantitative easing program, a crisis is averted only at stinging, life-altering and phenomenal costs to all but those privileged institutions and their regulators.
For instance, Brookings Institution economist Charles L. Schutlze contended in The Public Use of Private Interest (1977), that “according to conventional wisdom, government may intervene when private markets fail to provide goods and services that society values. This view has led to the passage of much legislation and the creation of a host of agencies that have attempted, by exquisitely detailed regulations, to compel legislatively defined behavior in a broad range of activities affecting society as a whole. …Far from achieving the goals of the legislators and regulators, these efforts have been largely ineffective; worse, they have spawned endless litigation and countless administrative proceedings as the individuals and firms on whom the regulations fall seek to avoid, or at least soften, their impact. The result has been long delays in determining whether government programs work at all, thwarting of agreed-upon societal aims and deep skepticism about the power of government to make any difference.”
“Strangely enough in a nation that since its inception has valued both the means and the ends of the private market system, the United States has rarely tried to harness private interests to public goals. Whenever private markets fail to produce some desired good or service (or fail to deter undesirable activity), the remedies proposed have hardly ever involved creating a system of incentives similar to those of the marketplace so as to make private choice consonant with public virtue.”
Technology now affords, as risk expert David M. Rowe points out, the vehicles to obsolesce regulatory inefficiencies and to challenge ever-worsening inequality by rewarding candor and providing incentives for reciprocity. Persons can do well by doing good.
Marketcore, an intellectual property innovator that I am advising, is developing interactive finance with system architectures that reward originators, intermediators and investors alike without bias toward seller or buyer. Its technology enables interactive finance and turns the tables on hoarding and gaming. For instance, any time a borrower of a loan reveals information, the creditor is able to offer a credit toward a future transaction or to provide information that will be of strategic advantage to the borrower. Any time an issuer of a bond reveals projected cash flow, say in connection with scheduled payment, the holder of the bond can offer a credit toward a future transaction or provide information that will be of strategic advantage to the issuer. Because of its robustness, Marketcore system architectures clarify risks for institutions dealing in structured products like residential mortgage-backed securities or bonds, contracts, insurance policies, lines of credit, loans or securities.
At this stage in technological and market development, large financial institutions and insurance companies are still incorporating Internet and mobile phones into their business models on terms that sustain revenues and market shares and that maintain margins and ownership of the all-important customer. And, large Internet firms like Google, Facebook, Amazon, Apple and Microsoft exert first-mover advantages by controlling use-generated Internet value-add to sustain market power.
Salaried professionals, wage earners and the public generally will find that interactive finance will chart the surest paths to address and reverse hoarding and to supersede regulations now so thoroughly compromised by the elites they were created to regulate that they neither promote nor protect citizens they were designed to serve.
For financial services professionals, interactive finance should prove a gold mine by leveraging domain competencies in financial data, creating voluminous new data for repurposing and analysis.
Notice, too, that interactive finance channels the best of Piketty and Furman. It achieves egalitarian wealth creation, which each economist champions, more efficiently than contesting market administration systems stacked against average persons or raising taxes. As crucially, interactive finance entails no new 21st century Code Napoleon and instead enables markets to thrive.
No one is doing as much as Piketty to clarify middle-class fragility and impotence in contemporary America. Piketty has stated middle class insecurity, so crucial to Marx in The German Ideology and his earlier Capital, in the precise way that makes Americans gasp at, respect and resent the French. If only Louis Althusser could have commanded a simple sentence and hadn’t murdered his wife, or Michel Foucault had found public leaders as compelling as private pleasures.