"China mostly invests in activities that raise productivity, raising the amount of goods and services that they can produce. This could be manufacturing or infrastructure or various kinds of services. Agriculture lags but continues to get some new investment. And of course they pour money into education. I'm not a fan of the Chinese way of organizing their economy or their society.... But contrast their pattern of investment in recent years with ours. What sector in our economy has expanded more than any other? ....Finance.... What has this really added in terms of productivity?"
"The ATM and the credit card were great breakthroughs, but they are old. What has "financial innovation" brought us since the 1980s? ....Because financial innovation has mostly facilitated a big increase in finance.
....Rent-seeking means effectively a tax extracted by one sector from the rest of the economy.... Finance is rent-seeking. The sector has devoted great resources to tilting all playing fields in its direction. Consumers are taken advantage of; consumer protection is vehemently opposed. And great risks are taken, with the downside handed off to the government (and the consumers again, as taxpayers). This downside protection allows an overexpansion of debt-financed finance - reaching the preposterous levels seen in mid-2008 and now re-emerging.
Finance in its modern American form is not productive. It is not conducive to further sustained economic growth. The GDP accruing from these activities is illusory - most of finance is simply a tax on what is done by more productive members of society and a diversion of talent away from genuinely productivity-enhancing activities.
The rise of China does not necessarily imply slowdown or demise for the United States. But if they specialize in making things and we specialize in finance, they will eat our lunch."
In Johnson's comments section, the Mike Rulle comment thread provides a useful counterpoint with good questions. The aptly-named Bond Girl offers, I think, the most common sense reply, StatsGuy the most detailed one. It's a good and worthwhile debate, because there is an element of overstatement in Johnson's formulation of finance as a pure rent-seeking industry.
On the other hand, you look at banks insisting on tying corporate loans to derivatives, and marketing "structured notes" to small investors before the smoke has even stopped issuing from the crash, and "rent seeking" seems like a pretty obvious description. This is an industry that hasn't changed a bit, or learned a thing - and significant aspects of what they do magnify both the probability and extent of losses in the economy.
This is not currently a left-wing vs. right-wing argument - vid. guys like Peter Schiff (getting cheered on Jon Stewart, no less!), and also some smart Democrat politicians among the other side. Obama's Consumer Protection initiative might even have a lot more going for it than the other side of the aisle will acknowledge.
This could become a partisan issue in future if the GOP remains clueless, Obama decides he needs a lifeline/scapegoat as his other economic policies catch up with him, and financial firms continue with deceptive and fraudulent practices on a grand scale, leading to further financial shocks. The perfect storm O is generating for the American economy (exploding deficits and unemployment, coming jumps in interest rates and inflation, imploding energy exploration and production) is the GOP's biggest asset, and most of them realize that.
Even as they fail to see that Wall Street is shaping up to be President O's biggest political asset, possibly even his "get out of jail free" card.
Sure, it would mean throwing all of his loyal, high-contribution financiers under the bus, but that never stopped O before with power at stake. Especially if the GOP is stupid enough to be uncritical of Wall Street practices beforehand, then offer a Pavlovian defense of the so-called "free market" afterward. All without further thought re: what that market truly needs in order to be transparent and efficient.
Fraud is not capitalism. Paper is not productivity.
It's time for a wide, deep rethink in America, coupled with quick action to address the seeds of the next crash. Which have already being planted, and could well bear fruit before 2012.
If we want to get off this path, it's going to take dedicated, smart critics on both sides of the aisle. Maybe then we'll get to a happy future of fewer lawyers, curbed financiers with lower average earnings presiding over a much more stable base system, and fewer public employees - and more engineers, more domestic energy, more science grads, and more domestic manufacturers (the latter 2 merging as we speak in some areas).
Throw in steady savings, and we could have a prosperous America again. Fail, and the best scenario looks like Britain's long economic fall from the grace. The worst scenario looks like Germany's.