Brain Drain

techcrunch.com, 3/26/11: friends-don’t-let-friends-get-into-finance


Too Many Top Engineering Grads Go to Wall Street.

"You say you want a revolution......well you know, we all want to change the world." ~ J. Lennon


I am with this Techcrunch guy.



The validity of his point, however, has the danger of leading to quota control instead of market-based controls.

Government-chosen quotas would not be the best idea.



However, you could solve the problem with a market based solution:

1. All commercial banks must divest all of their investment banking operations. Restore the Glass Steagall Act.

2. All investment banks and private equity firms must be capitalized as unlimited partnerships, so that risk activities are risking the capital of the people taking the risk. Crucial! This is how it was before 1970, and it was that way for a reason.

3. A cap of 25% of the value of the stock market could be owned as indexed investments. *



Items #1 and #2 have been mentioned by several unbiased market observers, but due to the campaign contributions of banks & Wall Street, they are DOA in Washington.

Item #3 is one of those "Emperor has no clothes" stories. So many people make so much money this way. It is like kudzu. One introduced to the habitat, it takes over. And, consistent with the author's claim of ongoing exotic financial engineering, more derivative-type indices are being constructed and traded every day.



My Queens history professor, a determined yet respectable liberal, pointed out to me a real flaw of capitalism -- it is regulated by boom-and-bust cycles. I grant that her observation is true, however, insightful financial regulatory oversight can modulate the peaks and valleys. Those are:

the Federal Reserve's management of the money supply and their supervisory role over national banks;

the SEC's supervisory role with investment banks, mutual funds and securities broker-dealers

the Glass-Steagall Act that separated commercial banks and investment banks;

The FDIC and the Comptroller of the Currency who audit banks to determine they are making sound credit decisions.

You may notice that all of these regulatory activities were suffocated under the Bush Administration. If we would just enforce the regulations that we have, that would greatly diminish the boom and bust cycles. Since the Bush Administration failed in this way, I fear that the author's notion of "friends don't let friends go to Wall Street" will get hijacked by some well-intended liberal partisan, or some hack like Pelosi, and artificial restraints will get imposed. I totally agree with the author's plaint -- the brain drain needs to stop. But I sincerely hope we will do it in a way that admits that Govco is not qualified to allocate intellectual capital.










*[You can invest your money in specific stocks and bonds, in specific mutual funds, or you can just invest in an "index" fund that is guaranteed to mimic the value of the index, such as the Dow 30 or the S&P 500. The problem with this is that when markets are volatile, individual investors {"retail" investors in industry parlance} retreat and just put their money with an institutional money manager. Also, volatility causes retail and institutional investors to just give up trying to pick smart investments, and they put their money in "index" funds, being resigned to the belief that nobody can outsmart the market. As the percent of the stock market "held as an indexed investment" increases, this concentrates the investment decisions in the hands of those (usually institutional investors) who still buy and sell securities outright. Sadly, (a) the index investing phenomena and (b) the trend of retail investors giving up and just letting institutional money managers make the buy/sell decisions, stokes the volatility of the market because with fewer people making independent decisions, liquidity in the market is reduced. Liquidity is the presence of many interested buyers and sellers in a marketplace. Low liquidity = high volatility. High volatility = downward pressure on stock prices, since most investors don't know how to profit in volatile markets or don't have the stomach for it.]

Government Spending Tyranny

Would Mecklenburg taxpayers ever DEMAND efficient use of tax dollars?  If so, many of the painful cuts could be avoided.  Obstacles:  1.  The people who do not want the cuts are the people with all the relevant information:  the staff.  Yes, the budget is public record, but no, the insight is not.  2.  Every dollar spent has a passionate or powerful advocate in our community.  What would be required to cut spending is to tell that advocate, “No.”  The Elected Ones would prefer to avoid this conflict:  to get along, go along.  3.  The people protecting spending are sophisticated, organized, and experienced.  The people who want more efficient spending and no tax increases are poorly informed, disorganized, and inexperienced.  The people in the Middle East are demanding an end to despotism.  It must take tyranny to get people to act.  I certainly feel the tyranny of the intractable spending.

Heartless budget cutting?

1. Is the current level of government spending justified? Instead of saying, “Raise taxes,” consider, “Get the waste out.” Demand that money be spent more effectively.

2. Local governments do not aim to allocate resources to efficient producers. Their goal is to maintain a “service level” and this is how they evaluate themselves.

3. The only cost containment device: whether aggregate spending will require a tax increase.

4. A clever government budgeteer can deflect budget cuts with proposals to cut only sacred cows: police, teachers, street repair. The electorate will cry, “Woe is me! Don’t do that! OK, you can raise taxes.”

5. Yes, our society is judged by how we treat our most vulnerable. I hear that line frequently at budget talks, but not so often at talks discussing the humane treatment of prisoners, the indigent elderly, the mentally ill, and children of negligent parents.