Counterparties: The American growth divide

January 22, 2013

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The world’s plutocrats are currently heading to a more “dynamically resilient” — and possibly more complacent — Davos. Don’t expect much introspection, and definitely don’t expect much debate on the hard-to-define “value of finance”.

At the DLD Conference in Munich today, Peter Thiel had an interesting take on the rise of financial services. America’s past 80 years, he said, can be divided into two periods: From 1933 to 1973, real incomes rose 350%; from 1973 to 2013, they rose just 20%. While Americans have remained optimistic about economic growth, Thiel thinks they’ve become uncertain about its sources. That uncertainty, Thiel says, drives Americans to try to benefit from the economic value of others rather than creating it themselves. Because of this, investing in markets generally takes priority over funding specific businesses.

Thiel’s theory of how America prefers to take risks may help explain why the financial reform has been so slow. Washington has been working on finalizing the Dodd-Frank financial reform laws for four years, and it will be another four before we know if it worked, the Washington Post’s Suzy Khimm writes. Along the way, regulators have missed 37% of their rulemaking deadlines. It’s not that the sweeping Dodd-Frank bill has been delayed in full — Jared Bernstein notes that the Consumer Financial Protection Board is thankfully up and running. But the wait to see the Volcker Rule, in particular, will be a long one, Dan Primack writes: Goldman Sachs has gotten around the rule by simply waiting for it to be finalized.

Thiel’s theory also helps explain why today’s reforms aren’t likely to change finance’s role in the economy, and why the white-collar service sector more broadly is a larger and larger part of GDP. It also provides a structural rationale for Bob Rubin’s twenty years of “extraordinary proximity to political power”. — Ben Walsh

On to today’s links:

What could go wrong
The new “holy grail” for money managers: leveraged bonds and derivatives – WSJ

A short history of wildly inaccurate predictions made at Davos – Andrew Ross Sorkin

Central Banking
Bank of Japan notices last decade or so hasn’t been great, raises inflation target – BOJ

The case for deficit optimism – Ezra Klein
A conman faked a career as an economist and became an adviser to the World Bank – Independent
Inequality is holding back America’s economic growth – Joseph Stiglitz
Yes, you can have full employment “based on purchases of yachts, luxury cars, and the services of personal trainers” – Paul Krugman
Why financial markets are inefficient – Roger E.A. Farmer

Feelings are hard to forget – Science

Missed Opportunities
Why we don’t have a la carte pricing in cable TV – Sports Economist

Regulators have asked Germany’s biggest bank to simulate its own break-up – Bloomberg

Long weight-loss, short eternal youth – NYP
A bunch of hedge fund managers jump in a freezing lake for some reason – Bloomberg

EU Mess
And now workers at 3 bailed-out Spanish banks are going on strike – Reuters

Lionel Barber’s full memo to FT staff outlining a “digital-first” strategy – Guardian


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