The Financial Times’ Martin Wolf Discovers that Rentier Capitalism and Financialization Increase Inequality and Hurt Growth

Surprisingly, no one commented on a link to an important article by the Financial Times’ esteemed economics editor, Martin Wolf, Martin Wolf: why rigged capitalism is damaging liberal democracy, that weighed in as a major feature, as opposed to his usual column length. Wolf’s article is noteworthy by virtue of singling out, above all, rentier capitalism as the underlying culprit in rising inequality and disappointing productivity growth, and depicts financialization as one of the biggest contributors.

On the one hand, readers of this site are very familiar with these arguments, particularly via Michael Hudson’s long-standing focus on how neoliberal economists chose to ignore a key insight of classical economists, that rentiers are a drag on productive activity and governments need to keep them in check. One of the favored policy of classical economists was usury ceilings. If lenders could charge whatever they wanted, funds would go to wealthy gamblers, who would out of recklessness or desperation, pay high rates, as opposed to productive industry. Similarly, we’ve posted on or linked to many economic studies that started to crop up when secular stagnation was a hot topic, and concluded that overly large financial sectors were a drag on growth. One of the particularly unproductive activities is secondary market trading and asset management. For instance, a 2015 study by the IMF found that the optimal level of development of a banking sector was that of Poland. A bigger finance sector might be OK only if it were tightly regulated.

On the other, Wolf is a barometer of leading edge conventional wisdom, so his calling out rentiers and Big Finance is a sign of a major shift underway, if nothing else, splits among the elites. Admittedly, the editors downplayed both of Wolf’s big points via their title and subhead, and Wolf arguably buried his lede by a first explaining that all is not well in the economy, a fact that in fairness may not be obvious to the top 10%ers that constitute the pink paper’s audience.

But Wolf makes no bones about his big message:

So why is the economy not delivering? The answer lies, in large part, with the rise of rentier capitalism. In this case “rent” means rewards over and above those required to induce the desired supply of goods, services, land or labour. “Rentier capitalism” means an economy in which market and political power allows privileged individuals and businesses to extract a great deal of such rent from everybody else….

Finance plays a key role, with several dimensions. Liberalised finance tends to metastasise, like a cancer. Thus, the financial sector’s ability to create credit and money finances its own activities, incomes and (often illusory) profits….

Finance also creates rising inequality. Thomas Philippon of the Stern School of Business and Ariell Reshef of the Paris School of Economics showed that the relative earnings of finance professionals exploded upwards in the 1980s with the deregulation of finance. They estimated that “rents” — earnings over and above those needed to attract people into the industry — accounted for 30-50 per cent of the pay differential between finance professionals and the rest of the private sector. 

Wolf criticizes other forms of rent-seeking, such as tax avoidance.

The reluctance to acknowledge the importance of rentiers is because it contradicts the all-important legitimator of our class structure, that of meritocracy. God forbid that most people who attend top colleges do so because their parents directly or indirectly greatly improved the odds for them, via giving to the schools, sending the children to high-standards private schools, paying for tutors, arranging for them to do eye-catching, impressive-sounding things over their summer breaks.

We wrote many years ago that meritocracy is unattainable. From a 2007 article in the Conference Board Review:

OK, so diversity programs may not serve the people they are designed to help. One of the reasons is that these initiatives are assumed to undermine merit-based hiring and promotion. Indeed, as [transgendered Stanford professor Ben] Barres points out, citing research, “When it comes to bias, it seems that the desire to believe in a meritocracy is so powerful that until a person has experienced sufficient career-harming bias themselves they simply do not believe it exists.” But the idea that an organization can be truly meritocratic is, alas, a fiction.

On a practical level, the best a company can hope for is that, taken as a whole, the people it hires and promotes are “better”—as defined by the com- pany—than the people it rejects. On an individual level, the role of luck, com- bined with inherent shortcomings of per- formance-appraisal systems, make it im- possible to have confidence in the fairness and accuracy of any particular staffing decision….

Now, for most people, it’s well nigh impossible to pick apart the importance of ability versus good fortune….Other factors can thwart an organization’s meritocratic efforts (many of these observations derive from a 1992 paper by Patrick D. Larkey and Jonathan P. Caul- kin, “All Above Average and Other Unintended Consequences of Performance Appraisal Systems”). Many people, for instance, run up against conflicts between individual and organizational interests. Implicitly, any employee’s job is to serve his boss, when his check is actually being cut by the company. If the employee views his role as being different than his boss sees it, the boss’s view prevails, whether or not it is correct. In an extreme case, if the boss wants the employee to run personal errands, and the employee refuses, he runs the risk of getting a neg- ative review.

There’s the Peter Principle conundrum that the skill requirements at one level may bear little relationship to the demands of the next. You’ve heard the old chestnut, “Promote your best salesman, and you lose a good salesman and gain a lousy manager.” But this situation puts bosses in a real bind. If you promote the person who is best in a department, his skills may fall woefully short of the requirements of his new role. But if you promote the person you deem best suited for that job, and not the top performer at his current role, you will demoralize his former peers, create resentment against him (undermining his authority and effectiveness), and raise questions about your

And then there are difficulties in ranking employees across organizational units….

But most people recoil from the notion that society is capricious or deeply unfair. Yet MIT professor Simon Johnson in many ways went further than Wolf in his famous 2009 Atlantic article, The Quiet Coup. Johnson didn’t simply point out how the average compensation of employees in finance, once on a par with all workers, had started moving up even as employment in the banking sector also rose. He had no compunction about depicting the US as an finance-led oligarchy long before that was respectable:

Typically, these countries are in a desperate economic situation for one simple reason—the powerful elites within them overreached in good times and took too many risks….As masters of their mini-universe, these people make some investments that clearly benefit the broader economy, but they also start making bigger and riskier bets. They reckon—correctly, in most cases—that their political connections will allow them to push onto the government any substantial problems that arise….

Squeezing the oligarchs, though, is seldom the strategy of choice among emerging-market governments. Quite the contrary: at the outset of the crisis, the oligarchs are usually among the first to get extra help from the government, such as preferential access to foreign currency, or maybe a nice tax break, or—here’s a classic Kremlin bailout technique—the assumption of private debt obligations by the government. Under duress, generosity toward old friends takes many innovative forms. Meanwhile, needing to squeeze someone, most emerging-market governments look first to ordinary working folk—at least until the riots grow too large.

In the US, the middle and lower classes took the big hits. 9 million foreclosures, many of which could and should have been avoided. A wipeout of black wealth. Protracted negative real interest rates, which economist Ed Kane described as a $300 billion a year transfer from savers to banks.

So why have economists who got it right, early, like Hudson and Johnson, been largely ignored as their colleagues chewed over why the recovery was so weak? Why, until a few years ago, was the work of Emanuel Saez and Thomas Piketty on rising inequality, politely noted but not seen as a cause for concern?

Johnson had it right. As he and others, including yours truly, pointed out, the priority after the crisis was restoring status quo ante and not a reset, as occurred in the wake of the Great Depression. And the authorities convinced themselves they’d done a good job because they didn’t see evidence that the pain was more than the patient would tolerate.

But the riots did come. It was in the form of Trump, and Farage, and Johnson.

And this blowback likely explains the odd emphasis in the article, of denying that globalization has played much of a role in the story of flagging first-world growth and rising inequality. One economist dismissed Wolf’s assertion: “The claim is absurd on its face.”

Wolf acknowledges that a lot of manufacturing moved to China. The Stolper-Samuelson theorem led to the conclusion that in sectors exposed to international trade, lower-skilled laborers in generally high-skill countries will suffer as trade volumes rise. Wolf airily responds with what amounts to “Let them eat training”:

The shift in the location of much manufacturing, principally to China, may have lowered investment in high-income economies a little. But this effect cannot have been powerful enough to reduce productivity growth significantly. To the contrary, the shift in the global division of labour induced high-income economies to specialise in skill-intensive sectors, where there was more potential for fast productivity growth.

Please tell me how a country as big as the US specializes in skill intensive sectors, yet provides enough jobs, particularly since outsourcing and offshoring is already making substantial inroads into “skill intensive” work like computer programming and the law. For the last decade plus, Slashdot regularly features an article from a new computer science graduate lamenting at the lack of entry-level jobs, and oldsters confirm his dire take. Robert Cringley has written at length how Silicon Valley companies all hired Indian outsourcers even though they know the results will be inferior (and not even necessarily cheaper) than hiring well-trained Americans, yet they are caught in a frenzy to cut costs to boost stock prices:

Now let’s look at what this has meant for the U.S. computer industry.

First is the lemming effect where several businesses in an industry all follow the same bad management plan and collectively kill themselves…

The IT services lemming effect has companies promising things that can not be done and still make a profit. It is more important to book business at any price than it is to deliver what they promise. In their rush to sign more business the industry is collectively jumping off a cliff.

This mad rush to send more work offshore (to get costs better aligned) is an act of desperation. Everyone knows it isn’t working well. Everyone knows doing it is just going to make the service quality a lot worse. If you annoy your customer enough they will decide to leave.

In the legal business, research, which is yeoman’s work, has been sent overseas for years and now is also being displaced by AI. So how will we train the next generation of lawyers?

Wolf also laments the loss of competitiveness, as measured by a fall in new business starts, while business deaths haven’t dropped as sharply. While, following other economists, Wolf fingers the rise in monopolies, the more obvious perp again is financialization. The drop starts in the early 1980s, just as the finance boom began. Remember how Wall Street was hoovering up quants? And in the 1990s, it was not hard to hear of scientists looking for a way to join the finance gravy train. In the last fifteen years, student debt has almost certainly put a damper on young people taking an entrepreneurial flier.

This is a long-winded way of saying that while Wolf is finally willing to say some taboo words out loud, he goes overboard in depicting Trump as all wrong. Trump does have occasional insights, but even with them, he seems to think that throwing enough Presidential weight around will change things, or at least create enough of an image of Doing Something to allow him to take credit for achieving progress.

While it’s easy to decry Trump’s theatrics and bullshitting, it seems awfully naive to see the recent Corporate America public recanting of shareholder capitalism as more than a combination of eyewash and self-delusion. Even though CEOs don’t like short-termism much, they are badly out of the habit of being accountable to broader constituencies, particularly workers. It’s hard to see their old habits changing any time soon.

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    1. Steve H.

      Ignacio, in this case the link is to FT, and I think Yves is noting the unusual lack of comment by FT subscribers. However, Yves has occasionally noted lack of comments on important NC posts in the past.

      I’ve been reflecting on similar issues in my own sphere. I don’t want to distract from the meat of the post for a tangent, so I’ll reply to my own comment in a bit.

      It starts with the root of communicate, communicare “to share, communicate, impart, inform,” literally “to make common”. “This is from a reconstructed PIE compound *ko-moin-i- “held in common,” compound adjective formed from *ko- “together” + *moi-n-, suffixed form of root *mei- (1) “to change, go, move,” hence literally “shared by all.””

      When something is new and powerful, presented by an individual, it may be so powerful that it cannot yet be shared. While the perspective may by taken as given for NC readers, for Wolf’s audience at FT, they may be new and powerful, and potentially subversive.

      1. Ignacio

        OK, I’ve got it. I thougth Yves referred to NC commenters because the link was posted here. So, the article was received with a deafening silence at FT.

      2. Steve H.

        There’s more than one reason for no comments, including:

        : not turned on
        : not engaging enough
        : nothing to add but ‘+’
        : mind too boggled
        : dangerous to comment

        For Wolf’s post, the only unlikely one is the second. The third is like some of Yves posts on CalPERS, too technical and complete for a response to add much value. The last once must not be discounted, a career can slip easily in a competitive environment that doesn’t tolerate heresy.

        Outrage increases response likelihood, and NC’s commitment to critical thinking means that many links are extensively torn apart by our Bacchae. The dogs seem to like troll meat here, too.

        The size of the commentariat makes a difference, as well. Mederators have been hired at NC to help with comments, and the pool doesn’t seem to be larger than the Dunbar limit on an ongoing basis. The community of the NC commentariat has also become more personable with each other, and I’ve wondered if that coincided with beginning to have meet-ups.

  1. David

    Like Ignacio I don’t have an FT subscription so I missed this yesterday.
    From the quotations given, though, I think that Wolf needs to define rentier capitalism a bit more widely. After all, “rent” originally referred to income from land, which required no work at all on the part of the owner, and today refers to parasitic activities which add cost without adding value. Indeed, capitalism can be defined as the replacement of inherently simple processes by complex and expensive ones, such that people are obliged to pay good money for things they shouldn’t need to people who don’t do any useful work to deserve it.

    1. Rick

      Many of the links here are pay/advertisement walled. I just do a [DuckDuckGo] search on the title and almost always find the article on alternative site. I did it with this FT article and it was indeed an interesting read.

      I try to promulgate the word ‘rentier’ with people, in my circle a lot of people aren’t familiar with the word though they obviously know the concept. Having a word for something helps people notice it.

      1. Lewis Padgett

        Perhaps a more down-to-earth phrase like “tollbooth economy” would resonate more than “rentier economy.”

    2. Ignacio

      I concur. My questions: do you consider monopolies a class of rentier capitalism? Isn’t it concentration in large corporations another form of this?

  2. Larry

    If the global Trumpism hailed by Mark Blythe didn’t cause an awakening of our elites, I seriously doubt an article by Martin Wolf will. Look how unserious the Democrats are by propping up Joe Biden as a viable candidate for President.

      1. Clive

        Yes, that’s just it, isn’t it? It’s like we’ve got two, duelling Ancien Régime, each of which is a pot, calling the kettle black.

        “No, you’re the unreformable reactionaries”

        “No, it’s you who are the unreformable reactionaries”

  3. michael hudson

    For many years Martin Wolf has been focusing on land rent and the need to tax it. His article extends his critique of (absentee) landlords to the financial sector, using classical value theory defining rent as the excess of market price over socially necessary cost-value.
    He has wisely avoided any mention of Henry George’s nutty followers in Britain — to avoid guilt by association, just as I do — and instead, focuses on classical economics from Adam Smith through Mill to Alfred Marshall. I think his point is that the financial sector today is in the dominant rentier position that landlords were in the 19th century. That’s the essence, and many FT writers (including my own op-eds) have pressed this point.

    1. John Zelnicker

      @michael hudson
      September 19, 2019 at 9:08 am

      A bit of a tangent: We have a Henry George-type town here in South Alabama.

      Fairhope (one of the most desirable places to live in this area), in Baldwin County on the east side of Mobile Bay, follows George’s theories by having all of the land in the town owned by an entity that rents parcels to homeowners and businesses on a long term basis. It seems to work well for them.

    2. eg

      I see the financial sector as the modern day heirs of the rural userers of antiquity described in your book about Bronze Age civilizations and the deror, Michael.

      But who are the modern day heirs of the kings who proclaimed the Jubilee?

  4. Frank Little

    While it’s easy to decry Trump’s theatrics and bullshitting, it seems awfully naive to see the recent Corporate America public recanting of shareholder capitalism as more than a combination of eyewash and self-delusion.

    This is exactly right. It’s as if these CEOs had a memory wipe and forgot all the decisions they made and now want credit for being late to the party. The ongoing UAW strike is perhaps the best example of how this supposed shift in sentiment isn’t to be believed. Barra is a member of the roundtable and presumably signed on to their supposedly important statement, and GM just cut striking auto workers’ health insurance.

    I don’t know if this link was shared at the time as it’s from November 2018, but I saw this today and shows how short they expect us peons’ memories to be. From CBS:

    GM bought back $10 billion in stock since 2015, double what job cuts will save

    When General Motors announced it was cutting up to 14,000 jobs and idling five automotive plants, it justified the massive cuts by citing long-term savings. The cuts would free up $6 billion in cash, for a net savings of $4.5 billion in cash by 2020. … But GM started its stock repurchasing program back in 2015, less than six years after a bankruptcy process that cost U.S. taxpayers $11 billion.

  5. The Rev Kev

    Rentiers seemed determined to eat every company’s seed corn. Under the present setup, if it came down to a choice in investing in research & employee training or to put money towards shareholders with a commensurate investment in executive bonuses I think we know how it would play out. The bean counters have taken over but apparently have no further vision than that financial quarter.
    You do have to wonder though. In the decades to come, how will future historians write about this period? How will they explain the reasons why this was so. It makes no financial sense nor does it make any common sense. And yet here we are. Is it just greed? A case of I-have-mine? A sophisticated version of IBGYBG? Have they even asked themselves what the landscape will look like in twenty years or do they simply not care?

    1. Procopius

      Several years ago (probably in The Economist magazine, which the school I worked at subscribed to for the staff) I read that average tenure for a CEO is now a little over two years. Maybe it’s as long as three years, but that isn’t much difference. That means that when a man is promoted to CEO he has a relatively short time available to feather his nest. No matter how good their severance package is, they will want more, and the easiest way to get it is to loot the company, so that has been a large part of executive performance since Milton Friedman. A few years ago it was revealed in the form IBGYBG, “i’ll be gone, you’ll be gone.” Eating the seed corn is a great analogy.

    1. notabanker

      The resets have been artificially propped and delayed. When it inevitably happens, it will be of epic, catastrophic proportions. This is why I was so disgusted at TARP and the bailouts, then QE. We are now well past a decade of propping up those props. It won’t take much for the entire house of cards to fall.

    2. barefoot charley

      Manjoo’s half-blind sight lines amused me. He’s saying Obama’s loyal toil on behalf of his employers was a ‘mistake,’ as if he could have worked for anyone else. As if his party works for anyone else. As if his ‘mistake’ is correctable (just try, Bernie!). Points for politeness though!

  6. Susan the other`

    It’s more than sobering to have the former captains of capitalism begin to question themselves. At a time like this when, imo, we could use lots of capitalist can-do. The comparison of our existential crisis with the focus and energy of the Chinese and the Russians is interesting. They aren’t depressed at all and they are going forward with confidence. Whereas we seem to have one big hangover. I remember back in the 80s and 90s everyone in my generation was hoping to retire in their early 50s with enough money to live well on passive income, somewhere on a golf course in the sunbelt. The prospect of living sustainably just doesn’t dovetail with that goal. And denial doesn’t work because we just cannibalize each other. Everybody knows it was all hubris. Even Martin Wolf. So that’s the good news. Retiring to a gated golf course community is the equivalent of sticking your unhappy head in the sand. So is blaming finance – they didn’t come up with a diabolical scheme to destroy the planet and then the economy – they just went along for the ride like the rest of us.

  7. Stephen Mack

    I’m a regular subscriber to @FT and comment regularly on the political writers Luce. Rachman and feuilletonist, now writing about American politics, Janan Ganesh. As a polemicist these three are easy targets for burlesquing, especially Mr. Ganesh, whose strength is not American politics, but Sunday Supplement cultural critique , framed by a London Tory Hipster sensibility.
    Mr. Wolf seems to suffer from a economic/political schizophrenia, as if there is a continuing battle between his ‘internal Piketty’, and his ‘Capitalist apologetic self’. (Polemic is what I do!)
    I posted an extensive part of Yves’ essay as a comment on Mr. Wolf’s essay. Look forward to the comments that might appear in reply.

  8. DJG

    I went back to the Cringely article, cited in this post by Yves, because my biz is book publishing, and I’m seeing way too much reliance on dodgy outsourcing and way too many fantasies about the durability–flexibility, good design–of software and the “software product.”

    Neither outsourcing nor product design by the Masters of Digital is working out well.

    It is often more than evident that the outsourcing is an attempt not to have to page U.S. wage rates and an attempt to keep what would have been wages “off the books.” Off-shoring is just ye old “paying under the table” with a fancy nam.e

    But I do recommend this:

  9. grizziz

    While it is obviously true that globalization has hurt the the US workforce’s standard of living and it is easy to blame the capitalists and their mandarin helpers for exploiting the incentives built and refined over the centuries to protect property rights over human rights, its hard to imagine in the age of climate disruption and its downstream effects that the USA can ever return to national self-determination and the economic sovereignty to which this post appeals.

  10. JimTan

    The reason companies love rent seeking is because its so easy – they simply lobby for some exclusive benefit or to ignore some law that everyone else must follow, and then collect a risk free guaranteed profit for essentially doing nothing. Examples of this include Uber ignoring taxi and labor laws while transferring most operating costs to its drivers, and small drug companies like Turing Pharmaceuticals which simply acquire widely used drug patents then raise prices by 5,456%.

    Too many risk free rent seeking opportunities, however, can overwhelm an economy filled with corporations who are all chasing the highest risk adjusted rate of return. When there are too many rent seeking opportunities in an economy then its companies will select only these risk-less rent seeking strategies, while abandoning all riskier but socially productive profit strategies like the pursuit of new breakthroughs, product innovations, design quality, superior service, and product reliability. What magnifies the negative consequences of this ubiquitous corporate rent seeking is that most rents offer particular exclusions from laws designed to protect society like those prohibiting consumer or investor fraud, prohibiting worker exploitation, ensuring consumer safety, and maintaining financial market stability.

    So an economy with systemic rent seeking often incentivizes its corporations to abandon their socially productive profit strategies, and then replace them with risk-less ‘rent’ strategies where profit comes from ignoring laws that protect our society from fraud, exploitation, and economic disruption.

    1. Roberto

      “can overwhelm an economy filled with corporations who are all chasing the highest risk adjusted rate of return”
      You make it sound as if seeking the highest risk adjusted rate of return is bad. No matter whether we are shopping for groceries, planting a garden, driving a taxi or practically any other human endeavor that requires us to make conscious decisions we take risk and return into consideration. Seeking the highest risk adjusted rate of return is embedded in human nature.

  11. notabanktoadie

    Thus, the financial sector’s ability to create credit and money finances its own activities, … Martin Wolf

    “Bank loans create bank deposits” which are liabilities for fiat. However, due to government privilege for the banks such as deposit guarantees*, the liabilities of banks toward the non-bank private sector are largely a sham.

    Sham liabilities mean the accounting is a sham too.

    Does anyone think we can have a just, sound economy with sham accounting?

    *instead of inherently risk-free accounts for all, or at least all citizens, at the Central Bank or National Treasury itself.

  12. templar555510

    When I read a piece like this and the comments that follow, I think ‘ hypernormalisation ‘; the term Adam Curtis used as the title of his film in which he shows how, just before the collapse of Soviet Communism, everything appeared to be normal , but wasn’t. How those who held power knew, that everybody else knew, that those in power knew that the game was up and shortly thereafter the whole shitshow collapsed. Doesn’t it seem rather similar in these United States right now ?

    1. Yves Smith Post author

      Yes. It turns out that, in a weird biological world parallel to the societal, if someone has an extremely regular heartbeat, they have high odds of having a heart attack very soon.

  13. Josephus P. Franks

    I haven’t yet looked into the measurement of productivity used here, but total factor productivity is a treacherous guide (e.g., dump a bunch of workers out onto the streets and voila, by lowering the denominator your TFP goes up). But let’s say we call productivity the number of units (or dollar value of units) produced per worker. Then economy-wide productivity would include industries with massive productivity gains, as automation allows the fewer remaining workers to produce far more units, and low-productivity industries fired manufacturing workers have to enter to keep a roof over their heads, like service and retail. The latter would drag down the effects of the former on economy-wide productivity. Seems Wolf’s wishful thinking about unregulated global “trade”, most of which is intra-firm anyway, is blinding him.

  14. Irrational

    Aside from Wolf’s hypocrisy, I found it an extremely thought-provoking read right after the one on the health industry as a threat to the middle class – just one aspect of the rentier capitalism syndrome. Well placed, Yves.

  15. KiWeTO

    Stop hating the sinner, hate the sin?

    Too much private taxation of economic activity is damaging to overall health of the economy. Any economy can survive a certain percentage of rentierism. (The number is for the numerically inclined to argue over). Like corruption, any system can survive a small percentage of grifting. Or Parasitism on a living organism.

    Too much is bad. And right now, we have a situation of too much of everything that is bad, and not enough of what is better for a sustainable economic system (one could argue that such a state of existence has never existed?)

    But, to the main question, how do we stop the economic abuse? It is not upon any single business decision maker’s power to effect positive change. Their own individual benefits win out (stock options that rise in value due to buybacks, cutting long run investments for short run profit quickies, excessive abuse of their working serfed un-employees(uber). (The litany of complaints against fair practices could go on.) Any decisions they make that is not shareholder-priori results in punishment by the market. They cannot be the odd one in the pack. Even if they wanted to ne different, the flood of bodies behind them gives them no choice. And this abused position akin to the fake news that was the suicidal lemmings in documentary White Wilderness. found here..

    But as when i was a student of accountancy 20 years ago, and my professors commented on the incoming dangers of the start of quarterly reporting, I agreed. It has killed any incentive for the long term. It is all about the now for the decision agent. And the agent’s interest has unfortunately been for itself first rather than its principal.

    So, hate the sin, and start figuring out how to un-sin it. Do CEOs as a class really enjoy their precariously short tenures? Highly doubtful? Perhaps some do enjoy multiple golden handshakes and parachutes.

    How can regulation recover its position in being overseer to a functioning market, by slowing down the need for instant returns? How can we change an economy’s impetus without resorting to war?
    (We already have economic destruction of the middle classes).

    1. Yves Smith Post author

      Quite honestly, I don’t know what you are talking about. I started out on Wall Street in 1981, when quarterly earnings were well established. No one cared about them much as long as earnings weren’t a big positive or negative surprise. Analysts and investors knew that quarterly earnings were not audited and therefore didn’t regard them as gospel.

      IMHO the big problem was the SEC’s push to greatly reduce equity trading costs. That made it attractive to trade on short-term moves.

  16. KiWeTO

    Apologies for dashing out the earlier comment in 5 minutes and the resultant clutter of thoughts.

    in the sense that QR encourages short termism, and its possible immediate impact on share prices and senior decision-makers’ choices. Two examples of more coherent thoughts than mine:

    In quarterly earnings reporting, guidance is the real tyranny – FT

    Quarterly Reporting – Is Less More, or is More More? – ISCA Especially on points 3&4 raised.

    Will the move back to Semi-Annual lead to better analysis and decision making for all involved? Perhaps something to be studied in 20 years time.

    As for the reduction in the friction (transaction costs) of trading being a more significant contributor, unless share investing could have be seen as series of slower strategic decisions and not who had the fastest response to a stimuli, it was inevitable that such costs would have had to come down with the passage of technological improvements. At the very extreme of low transaction-cost trading, high speed trading does not bring much value to purposes of equity raising (perhaps it is some good for ongoing valuations), but it seems like effort for effort’s sake to eke out micro-wins every second. It supposedly improves the informational quality of current share prices, but probably adds more froth than trend information. Without outright bans on certain forms of share trading, all individual actors will strive for any perceived micro advantage they can find to give the selves their desired edge.

    Which essentially comes back to the question of regulation: how does it seek to slow down (and perhaps make fairer) a game where all the players want to go faster, better, smarter?

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