1. There was a time when people blamed quants and their models for the GFC. Now, conventional wisdom is changing. Nevertheless there are still the “why don’t real engineers make as much as financial engineers?” op eds, most recently Luke Johnson in the FT yesterday, who rejoiced that very few of the smartest people were now going to work in high finance on Wall Street or in the City.
I looked up Luke Johnson on the FT writers info page, from which I quote:
Luke Johnson is chairman of the Royal Society of Arts and runs Risk Capital Partners, a private equity firm.
He studied medicine at Oxford and subsequently joined investment bank Kleinwort Benson as an analyst. In 1992 he organised the acquisition of PizzaExpress and floated the business on the stock market at 40p.
I’m not sure what “studied medicine” means. It may mean he didn’t finish the program. But either way, isn’t it sad that floaters of Pizza Express make more money that doctors? And wouldn’t the world be better off if Luke Johnson were practising medicine?
2. But conventional wisdom, which I accept — Krugman in the NYT, Skidelsky in the FT — is that the GFC is the fault of the Chinese. Skidelsky’s version is that, reacting to the flight of our hot money in the last Asian crisis, they decided to hoard their currency.
3. As I understand it now, this is what’s going on:
We outsourced the provision of material stuff to the Chinese.
They make lots of things we want and we pay them in US dollars.
They end up with a lot of dollars.
But they don’t want to buy anything themselves.
So what can they do with their dollars?
Buy US equity, which will bring them more dollars? Or buy US debt, which keeps our interest rate low and our currency high, and brings them more dollars too, though not much these days?
4. Savants want the Chinese to start consuming, buying stuff from us. But what do we (the US) make that they want?
Increasingly, we produce information tools and education rather than the material things manipulated at the bottom of the information chain that you ultimately need to survive.
But information tools have become increasingly free, paid for by advertising or given away, like Linux. Open systems means giving away valuable stuff for free. And graduate school doesn’t cost that much.
So, make people pay for information tools. Charge foreign governments lots and lots of money to educate their students. Go back to proprietary systems, like DEC VAX/VMS, and sell them at high prices. And of course enforce copyright conventions and clamp down on software and IP piracy, so that producers of material things have to use up their hard-earned dollars to buy stuff we make. Charge 10K for a DVD of Inception, and make sure no one can copy it.
Bit late for that, I suppose.
The alternative is for everyone to be self-sufficient and produce most of what they need.