Wealth Dispersion and General Thoughts on the Future of Economics on a Saturday Afternoon

Here is an interesting graph of wealth distribution, or dispersion, as I call it from Cherchez La Verite.

I am not sure I agree with his conclusions or even his premise, not because I disagree but because it requires some thinking and leisure to digest it. But the data is most interesting.

I wonder if any of the quant economists have performed simulations on virtual populations, and then examined the results of varying different tax rates, and concentrations of wealth because of fiscal policy and regulatory structure, among other things.

I have an hypothesis that great concentrations of wealth lead to economic stagnation, but I am afraid that I have not the means or the talent anymore to conduct that type of research.

The difficulty in a study like this is that the assumptions are greatly magnified into the results. If you assume certain buying, spending, and savings behaviours, the downstream impact can greatly alter, and even distort, the outcomes.

And when people reason through this verbally, rather than perform a structured simulation based on transactions, the distortions increase by an order of magnitude or more based on their own biases.

I used to create simulations like this all the time, for industrial and commercial purposes, and also did a decent amount of econometric modeling. So I am sure someone is doing it somewhere. But I suspect they are doing it in think tanks and places where the outcome is predetermined by the basis of their grant.

Concentrated wealth magnifies the needs and predispositions of the holder. Since the amount they require for basic necessities can only consume so much, one would think that the amount spend on the aggregate of necessities will eventually be reduced. And what they do with their excess of necessity wealth is going to be greatly influenced by their character. Are they a gambler, who inherited the wealth? Are they productive and beneficent? Are they dissolute and venal?

And what about government? Taxation can concentrate enormous wealth in the government. What sort of government does one have, or does one assume? Are they warlike, productive, redistributive, and how corrupt? What about corporations? They can be like small governments, and levy taxes through monopoly and persistent frauds. How are they managed? Corporations are not rational machines, as the efficient market hypothesis would probably presume. Indeed, corporations are often much worse than governments in terms of sheer blockheadedness, greed, and short-termism.

Hard to say. But there is a related field of study in decision making theory, which looks not at wealth but the distribution of decision making power in organizations. It is concerned with the validity and effectiveness of decisions made across a range of broader consensus to a narrow oligopoly and even a great man dictatorship.

The general observation I came to in this study was that decisions tend to be more valid depending on the quality of the information, the facility of the evaluation of it, or intelligence/learning/experience, less the biases and distortions.

A decision becomes a little better if the information is more widely dispersed and a variety of actors can exchange freely in increasing and refining it. There is a point of decision dispersion where the returns not only diminish, but become counterproductive because of the noise and inability of new actors to add value, and actually detract from the process. But finally what I found interesting is that in the aggregate personal error, bias and distortions tends to diminish quickly as a detractor from the result, assuming a non-homogeneous population with some independence of thought.

So too this same sort of study can be applied to the concentration of wealth, since wealth is power. But it is even more interesting because spending habits will vary since the percentage of spending on essentials changes much more slowly than wealth can increase.

And how one assesses the outcomes is also essential. What is thought to be a 'good outcome?' Not necessarily in a rough measure like aggregate GDP, but perhaps GDP with modifiers like the median wage, and a poverty level of essential spending. This is important because so often economic policy arguments are presented with the goal of optimizing short term GDP.

Alas, I have little hope that this will be done now, for the US has had a leadership role in quantitative economic studies, and their work has been twisted generally into the service of whores, robber barons, and gamblers as the speculative society reaches a crescendo. But some day this too will change.

SP 500 Daily Chart: Hanging On to Support

"Don't believe them, don't fear them, don't ask anything of them."
Alexander Solzhenitsyn

The pom poms and nearly everything else was swinging wildly in the breeze this morning as the American financial press was wildly cheering the earnings news from Bank of America and their brilliant acquisition of Merrill Lynch.

Does anyone bother to notice that none of these banks are making any money from traditional banking activity? You know, the kind that is supposed to be supporting the capital allocation process and growth in the real economy? Its as if all the carpenters, plumbers, engineers and teachers left their real work and became carnies and professional gamblers, or even worse, politicians. We're celebrating that as a sign of a rensaissance and economic recovery.

I wonder if Sir Alan provided any counsel to the Paulson fund on that Abacus deal with Goldman Sachs that just blew up in their faces. Greenspan is one of their advisors, after all.

The Michigan Sentiment number came in at a very disappointing 69.0 versus expectations in the 75 range. What is wrong with the public, don't they see that the stock market is hitting new highs almost every day? This is what the anchorperson asked this morning on Bloomberg TV. But she was obviously not chosen for her analytical skills.

The news on the Goldman fraud took the wind out of their sails, at least temporarily. I thought it was cute that the SEC chose to announce this on a stock option expiration day.

The spin maachine is working overtime to digest this latest scandal, and turn it into something more palatable for the folks at home. But really, it looks pretty grim here. What happens when you are in the middle of a crowded con game, and someone yells, "Fraud!"

"Goldman Sachs Are Scum:" Max Keiser on Goldman Sachs From July 2009

Here is a video interview on France 24 television with Max Keiser speaking on Goldman Sachs from almost one year ago.

By the way, NO ONE who is a serious player on Wall Street is legitimately surprised by this, and probably no one in regulatory bodies are either, unless they are just showing up to collect a paycheck and obtain free Internet access.

The antics of Goldman Sachs have been getting by on a 'wink and a nod' from the regulators and the market for some time. Why? Because they are powerful, and because like Lehman and their off balance sheet frauds, they are almost ALL doing it on Wall Street as part of the franchise. Goldman has just been a pig about it, and probably burned some insiders and powerful investors in their fraudulent Abacus trade.

The excuses being made for Goldman by some on Bloomberg Television and CNBC are setting new lows in journalism. It was just a simple failure to disclosure Paulson's involvement right? Almost a technicality. No one forced the customers to buy those fraudulently packaged and labeled assets or stocks (this was a favorite excuse from Joe Kernan during the Internet/tech bubble collapse). No involvement from the Ratings Agencies in the purposeful crafting of a fraudulent financial instrument. Guest Calls Cramer a 'PR Man for Goldman Sachs' and is ejected from the show by the resident money honey.

As you may recall, Mr. Cramer represents himself as highly experienced in manipulating stocks using CNBC reporters from his days as a hedge fund manager. So it might not be so outre to inquire if he is working the other side of that Wall Street scam these days.

Why, these derivatives were SO complex that the poor Goldman management barely understood them themselves. They were tricked by Paulson. Tourre is a rogue trader. Bernie Madoff ate their Series 7 cheatsheets. Compliance was seconded to the Riviera. Lloyd was busy doing missionary work in Bangkok. More regulation will just hurt the recovery.

Don't just regulate them. Break them up. And audit the Fed.



I am glad the professor is from HEC. I did my international business MBA sequence (an extended field trip for adults, but the refreshments were good) at the 'other' business school in Paris at La Defense, ESSEC.

Max Keiser

SEC Formally Charges Goldman Sachs In Derivatives Fraud with Paulson and Company - another 'Rogue Trader at Work?'

“Only fraud and falsehood dread examination. Truth invites it.”
Dr. Samuel Johnson

The SEC is formally charging Goldman Sachs with fraud in the derivatives markets, specifically with regard to Collateralized Debt Obligations related to subprime mortgages.

Investors in Goldman's Abacus CDO lost one billion dollars.

In addition to the company, an individual VP in Goldman's international group is being charged, Fabrice Tourre.

Paulson and Company, a major hedge fund, paid Goldman to structure a CDO based on mortgages that Paulson selected, so that they could bet against it.

"The product was new and complex, but the deception and conflicts are old and simple. Goldman wrongly permitted a client that was betting against the mortgage market to heavily influence which mortgage securities to include in an investment portfolio, while telling other investors that the securities were selected by an independent, objective third party,” said Robert Khuzami, director of the division of enforcement.

This could be construed as a deft way of throwing red meat to the angry mob, nailing a specific individual at Goldman while limiting the criminal charges against the company although there will be significant civil cases, and dealing with the billionaire hedge fund owner Paulson who made a fortune betting against the subprime market.

This could be more damaging if this includes other Goldman bets against its customers on products it represented and created, and it shows an overall intent to create fraudulent products for the purpose of shorting them. For now the SEC will not say if this fraud is a singular event or more systemic.

Goldman will almost certainly attempt to spin this as the actions of a 'rogue trader' who was an aggressive exception.

Last week the White House asked Jamie Dimon and Lloyd Blankfein to 'cool it' on their intense lobbying efforts against derivatives and financial reform.

Perhaps this will help them in their decision.

This is just the tip of the iceberg. The Wall Street Banks are knee deep in fraud.

No one can obtain the kind of consistently odds defying returns that Goldman was producing without either cooking the books or engaging in some type of gaming the system, which is a polite word for fraud. That is the same 'tell' as the steady and outsized returns that Madoff is producing.

Let's see if this goes any deeper, and if serious punishments and reforms result.

The SEC can only enforce the Securities Laws, but cannot bring criminal charges. Since Paulson is not being charged, since he made no representations regarding the products, only Goldman is being sued by the SEC. Their alleged gain in this is $15 million dollars, the fees it obtained from Goldman. And Goldman will say that they were only serving their customer, Paulson.

Certainly Goldman will be subject to civil lawsuits and discovery. But the real test of the Obama government will be any role that the Justice Department does or does not take in this. They could of course defer, using the show trials of the Financial Crisis Inquiry Commission as a rationale to take no action.

This is blatant fraud and white collar crime being conducted by an organization that is paying contributions to half the Congress and the Administration, and staffing key positions in the government with its employees. Do you really think it will be brought to full disclosure and equal justice?

In a statement Goldman says that "The SEC’s charges are completely unfounded in law and fact and we will vigorously contest them and defend the firm and its reputation." Fabrice Tourre was last seen being thrown under a bus, and could not be reached for comment.

Watch the Justice Department and the Obama Administration to see what they do or do not do, and you will be able to know their character and intents. But in fairness the big Broker-Dealers in the US are RARELY indicted for anything. They virtually own the country's political and justice system.

"I did not run for office to be helping out a bunch of fat cat bankers on Wall Street." Barack Obama to CBS News.

Time do something besides talk the US to death about what you are going to do, and how the Republicans and lobbyists are getting in your way, and how great it will be when you finally do it. The SEC is relatively toothless, and probably by design. The FCIC will be tramping in the weeds for the rest of the year.

You do not need the Republicans, and you do not need the Congress, to fully engage the Justice Department and the FBI in investigating this fraud, Mr. Obama.

The most likely outcome will be a disgorgement of profits and a wristslap, and a promise by Goldman to change its business practices, while admitting no wrong. That will be the 'business as usual' outcome, and a sign that reform is an illusion.

Meanwhile, the market manipulation continues. I thought it was cute the way in which the metals bears used this news to sell the market in an attempt to sustian their huge naked short positions. "Never waste a crisis."

The US Congress reacts to the scandalous news.


Breaking news on breaking the rules, more to follow.