I think not. But it is the end of capital markets as we knew them a couple years ago.
I just started to understand the rudiments of financial engineering back when I read Derman's 'My Life as a Quant'. The career I might have had, if I had stayed in NYC, would have been to be a programmer for the guys on Wall Street. I often think about the moola I might have made, but actually it's the technology that excites me. On the other hand I might have just been another tool at Bloomberg. But what's clear is that there have been a number of technological innovations over the past two dozen years that have given brokerage houses enormous power in altering the physics of trading securities. In addition, there has been, like with CAD, a revolution in the types of financial instruments that can be created. I can remember when stocks weren't traded in pennies. Don't you?
Sheila Bair rightly said that financial institutions are providing too much fake money into the GDP. Our nation should not expect upwards of 30% of GDP to come from the finance industry. It has become too self-serving and not serving enough of the nation's proper economy. We shouldn't make so much money just by playing with money, but by creating goods and services that people need.
We need to get back to a world where our financial sector supports the functioning of our economy, and not the other way around. And we need to fix what caused the crisis by reforming our mortgage lending and securitization practices. Only by getting back to basics in these most fundamental areas of our financial system can we begin to restore balance to our broader economy and confidence in our economic future.
As I think about the future of the US economy, there are several things that stick out in my mind.
1. Biotech is the future.
2. Smart money will remain in America
3. Fewer banks is OK.
4. Chimerica will continue.
But here's the big thing. My goto guy, David Goldman says we're going into a zombie bank economy. It basically means that the banks will not take risks, they will not lend much. It will slow the entire economy. To me that means people sitting on capital are going to slowly bleed it rather than to aggressively risk it. The institutions that could more or less guarantee >7% returns on capital just won't be able to.
I can't predict much from that. I can't tell if that's good or bad for the innovative businessman. On the one hand, I think money would get clubby as it is now and only go to super safe investments like US Treasuries. On the other hand, the opportunity to make a killing just making regular businesses smarter is very real. There will be *some* growth industries in America, even if that growth is only 8%. It won't be the whole economy, but when Wall Street was promising that, it was all bubble anyway.
Capitalism isn't going away. This is just the business cycle reminding us that it's permanent. Nobody is inventing a new kind of accounting, and accounting standards are going global and getting written into the substrate of IT. The human race doesn't even know another way to think about money other than through the tools capitalism has provided.