Important enough to steal* from Rupert Murdoch (whose success with his trashing of the Journal and Barron’s has yet to get him much benefit *koff koff*), from my neighbor, Alan Abelson’s column in the 8 February 2010 Barron’s:
As luck would have it, to his latest quarterly letter to GMO shareholders, Jeremy [Grantham] appends his arguments rendered in a recent debate he engaged in on the topic: “Financial Innovation Boosts Economic Growth.” He passionately opposed the proposition on the grounds that the economy has “a painfully overdeveloped financial sector” that has been a serious drag on growth.
As he explains, owing to the flowering of those exotic innovations, in such profusion “clients can’t easily distinguish talent from luck or risk-taking.” The addition of new products — options, futures, CDOs, hedge funds and private equity — means mounting fees, and invariably as “the layers of fees and the layers of agents increase, so too products become complicated and opaque, causing clients to need us more.”
Thus, “the client world,” as he puts it, “pays up precisely in proportion to how bamboozled it is by unnecessary complexity, which among other negatives is what the fancy new instruments were offering: confusion, doubt and bamboozlement.” As you can see, Jeremy has a regrettable tendency to mince his words.
An admitted and highly successful member of the financial sector, Jeremy obviously knows whereof he speaks when he warns, “beware, the financial-industrial complex: they are eating your lunch.” And, he adds, “to be honest, I’ve eaten more than my share. It was a good lunch.”
Thanks to what he calls the “razzmatazz” of the past 10 to 15 years, finance has grown to 7.5% of gross domestic product today, from 3% in the economically halcyon ’60s. And that change, as intimated, strikes him as anything but sanguine. The financial system is overfeeding on and slowing down the real economy, he laments; it’s like having “a large, heavy and growing bloodsucker on your back.”
No little of the blame for the economic and financial disaster that in 2008 and early 2009 upended both the economy and the markets, he contends, should be pinned on those fancy new instruments, in league with the belief in market efficiency, as codified (and, we might interject, deified in some quarters) in the Efficient Market Hypothesis.
The damage this ugly combo caused, Jeremy asserts, was “cosmic and may indeed be not over yet.”
He chides academics in particular as so badly wanting their theories, notably including the Efficient Market Hypothesis, to be right that they assume them to be so, despite the absence of any concrete proof.
“They assume,” he observes, “not only that market participants are efficient and well-informed, but also they are good and worthy citizens.” In fact, he sighs, “they’re all self-serving and many are slightly wicked.”
Jeremy winds up by citing approvingly Paul Volcker’s on-the-money dictum that “the only financial innovation useful to the country in the last 20 years is the ATM.” To which, as a confirmed Luddite, we can only say “amen.”
And all I will add is that this is what RJR-Nabisco wrought….
(*Of course, the savvy know they can bust the paywall themselves by accessing the article with Google (no evil) News. Rupert’s disdain for that trick of Google’s is one thing he’s right about….)