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More Gravy for Wall Street

You've got to hand it to John Maynard Keynes, the British economist who saw this whole train wreck before it ever happened. Keynes was a supporter of capitalism, but had a good understanding of its structural flaws. He summed it up succinctly like this:

"Our analysis shows... that long-run development is not inherent in the capitalist economy. Thus, specific 'development factors' are required to sustain a long-run upward movement."

What Keynes is alluding to is the fact that mature capitalist economies tend towards stagnation. The basic idea is this: The rate of return on investment begins to dwindle as overcapacity builds up. Declining profits, in turn, lead to belt-tightening, layoffs, falling demand and slow growth. That chokes off investment which puts the economy into a long-term slump. This is the challenge that all aging capitalist economies face. The solution--as Keynes notes--lies in "specific development factors", which in today's terms means "financial innovations".

Financial innovations, like derivatives contracts and securitization, have created vast new opportunities for investment and profitmaking. This complex netherworld of highly-leveraged debt-instruments and off-balance sheet operations constitutes a shadow economy where the process of capital accumulation persists despite inertia in the underlying economy. That's why the Fed and the Treasury have been doing their best to stitch the system back together without changing its basic structure. The same is true of Congress, which has gone to great lengths to preserve the profit-generating instruments which brought the global financial system to the brink of disaster. This is from the Wall Street Journal:

"Lobbying by Wall Street has blunted efforts to step up regulation on derivatives trading by carving out exceptions or leaving the status quo in place.

Derivatives took blame for some of the worst debacles of the financial crisis. But a year after regulators and critics began calling for an overhaul in the way they are traded, some efforts have been shelved and others have been watered down.


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