A brief note about our financial system: Intermediation, disintermediation, and soon re-intermediation
This is a brief note expanding on one forecast in The USA *after* this financial crisis – part 2, a new economy for America:
The changes might be larger than this, but space and time limitations prevent exploring them in this post. Just to mention one: an end to disintermediation, a return to when household investments were channeled into financial institutions which in turn allocated long-term capital to the economy.
This was an illustration of the radical changes coming to our finanical system. Talking of reform now is like suggesting a diet for Joe — while viewing his coffin. When the dust settles from this collapse, we will consider what form of financial system will work better for a free-market economy plus large-government State. While I doubt we will move to either a Socialist or Libertarian system, the changes probably will be substantial.
Hopefully this will be done after much research, wisely and carefully. Thoughtless short-sighted decisions brought us to this crisis.
When voting in November, please consider who you want directing this process.
We had Intermediation, then disintermediation, and soon re-intermediation
“An end to disintermediation” was poorly phrased as a double negative.
“Intermediation” was the usual method of financial management in the US until the late 1960′s and esp the early 1980′s. Individuals placed their savings in banks and insurance companies, who invested the money. Any losses belonged to the financial institution, not individual savers.
Disintermediation means people directly invest in the economy, so that they own the resulting gains or losses (institutions facilitate this, as agents). This might work if people were locked into their investments, forced to become long-term investors. But the system (for many and complex reasons) offered the illusion of liquidity, allowing people to be short-term investors — providers of “hot money” — to the economy.
This was a illusion since people cannot collectively buy and sell in response to systemic events. Who will take the other side of their trades? This system is inherently unstable, and I doubt will last through this cycle. It also has other flaws, such as being both extremely expensive and inefficient.
For almost anything about economics, Lord Keynes has a powerful insight (most of his lay critics have never read his work). Such as this…
The spectacle of modern investment markets has sometimes moved me towards the conclusion that to make the purchase of an investment permanent and indissoluble, like marriage, except by reason of death or other grave cause, might be a useful remedy for our contemporary evils. For this would force the investor to direct his mind to the long-term prospects and to those only.
But a little consideration of this expedient brings us up against a dilemma, and shows us how the liquidity of investment markets often facilitates, though it sometimes impedes, the course of new investment. For the fact that each individual investor flatters himself that his commitment is “liquid” (though this cannot be true for all investors collectively) calms his nerves and makes him much more willing to run a risk. If individual purchases of investments were rendered illiquid, this might seriously impede new investment, so long as alternative ways in which to hold his savings are available to the individual.
This is the dilemma. So long as it is open to the individual to employ his wealth in hoarding or lending money, the alternative of purchasing actual capital assets cannot be rendered sufficiently attractive (especially to the man who does not manage the capital assets and knows very little about them), except by organising markets wherein these assets can be easily realised for money.
— From “The General Theory of Employment, Interest, and Money” (1936), Chapter 12 – The State of Long-term Expectation.
If you are new to this site, please glance at the archives below. You may find answers to your questions in these, such as the causes of the present crisis. I have been writing about these events for several years; since November 2007 on this site. As you will see explained in these posts, the magnitude of the events now happening is beyond what most Americans have — or can — imagine.
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For more information from the FM site
To read other articles about these things, see the FM reference page on the right side menu bar. Of esp interest these days:
- about the Financial crisis – what’s happening? how will this end?.
- about The End of the Post-WWII Geopolitical Regime.
- A solution to our financial crisis
Key posts about the financial crisis
A solution to our financial crisis, 25 September 2008
A picture of the post-WWII debt supercycle, 26 September 2008
- America has changed. Why do so many foreigners see this, but so few Americans?, 1 October 2008
- A sitrep on the financial crisis: why has the treatment been so slow, so small?, 8 October 2008
- Forecasting the results of this financial crisis – part I, about politics, 13 October 2008