This is something else I feel I ought to know more about.   For many, the revelations about how Goldmans and their client Paulson & Co operate will be enough; do people really make a career out of this sort of thing – let alone a fortune? Clearly wicked, clearly wrong.

But the debate in the blogosphere looks like being more nuanced, coming down to who said what in which documents.   After all, for derivative contracts, you need to find another party.  Google my name in 2004 and you get stories about me trying to match buyers and sellers on the future direction of the housing market.  Without punters in one direction, you can’t get them in the other; and, presumably, they have taken a decision for themselves to have their views on the price and future direction of housing …

Here are some links on the whole subject:

Did Goldman’s use Computational complexity to hide Lemons?

Economist Free Exchange has several good links, including one to a typically forensic Brad De Long explaining how finance creates win-wins.   RA explains why this case is so important:

Of course, Goldman is unpopular enough that this might let loose a wave of subpoenas and hearings, one of which might turn up something Goldman can’t beat, even if it wants to.

Here are the League of Gentleman, who explain the essence of the charges nicely:

how this is going to be taken is that GS (and other investment banks – see Magnetar) were double dealing with utter contempt for the buy side.  On one hand, they were creating portfolios that were designed not for the long-term economic interests of the investors, but for hedge fund clients looking to bet against the subprime mortgage market.

At the more shrill end (but quite possibly correct) are Johnson and Kwak, who call Goldman “Too big to obey the law“.   This observation strikes me as very pertinent to our own:

Jamie Dimon (the articulate and very well connected head of JP Morgan Chase) already told Treasury Secretary Tim Geithner over the weekend, if we “demonize” our big banks in this fashion, it will undermine our economic recovery and could weaken financial stability around the world. Dimon’s points are valid, given our financial structure – this is exactly what makes him so very dangerous. Our biggest banks, in effect, have become too big to be held accountable before the law.

We have a financial system that is overly dependent on banking.  This is surely what Liberal Democrat proposals to change the economy must amount to – beneath all the moral bluster essential to electioneering.  As I observed in Credit where It’s Due, our financial structure relies too much on banking being solvent and vigorous and well incentivised, the lack of which conditions is undermining the effectiveness of QE.  (I am not sure about what ‘forcing them to lend’ means, though).

It is interesting how neatly this ties in with my theme of the previous post about market decisions.  And again, I don’t have a neat answer.  The glory work is done by theorists, the real world needs solid empiricists.

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2 thoughts on “The Goldmans Sachs Charges: again, when are market decisions uncoerced?

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