It matters whether the investment is good or bad

Regarding Paul Krugman's editorial "Bits and Barbarism" I'll leave it others to comment on Gold and Bit-coins and dwell on the Keynesian idea that it doesn't matter how the money is spent for the economy to grow. While World War Two did pull us out of the depression and war is pure consumption, this economic notion of Keynes needs testing in other settings. The recent global mal-investment in real estate is a drag that would not be reversed by additional spending in housing. Japan's inability to pull out of it's lost decades comes in spite of huge infrastructure expenditures tried in the 90's. Nor should we expect the forthcoming clean up spend on nuclear waste and plant dismantling will help out, especially if every nuclear facility lays dormant as another of the country's mal-investments.

 

An example of what an investment Bank could do

Europeanutilities have on occasion had to pay a penalty for excess power put on the grid. This penalty phase comes about when wind and solar power is filling the grid and the less desirable nuclear and carbon based power can not be shut off.  Hydrogen powered automobiles that are about two years away from commercial deployment and where the problem is distribution of hydrogen gas to filling stations. What could an investment bank do with sort of information?

First, secure a long position in depressed European utilities, then sell the idea of making the electric grid the means of conveying hydrogen gas to the various filling stations for automobile use. Filling stations would convert electricity into hydrogen thru electrolysis on the spot. The electrolysis would happen when sensors on the grid inform the various stations that excess capacity needs to be sopped up. Usually post midnight to 6 am and of course anytime high wind and good solar collecting is filling the grid. Such a system would tolerate waste in electric transmission and conversion to hydrogen as it would be preferable to paying a fine. Since the utility wires are already in place, infrastructure costs are minimized. Safety is enhanced because of the small volumes of hydrogen gas of this scheme versus any other.

The scheme solves the utility battery problem as well as promoting a clean energy solution that is safe and distributed for auto and truck transport. Utilities will price their power more optimally and improve their valuations in stock and bond portfolios. This is an example of a long term win win type of proposition that investment banks were made for, versus Goldman Sach's scandalous rent seeking intrusion in the aluminum trade exposed early in 2013.

Volcker rule is irrelevant

The Volcker rule of the Dodd Frank Act, named after former Federal Reserve Chairman Paul Volcker, is an attempt to re-instate in some form or another the Glass Steagall act of 1933 where commercial banks and investment banks were separated. The separation allowed government regulation of commercial banks using a self funded FDIC insurance program to guarantee deposits. Investment banks on the other hand were allowed to act freely and practice unprotected capitalism. The Volcker Rule is a modern yet muddled attempt to micro manage between commercial and investment banking. Well paid lobbyist are eviscerating it, but the market's current aversion to dicey financial instruments will keep abuse to a minimum in the near term. The why of this observation requires a short history.

Investment banks used to raise capital for factories, transport and the public infrastructure required to promote and maintain useful activities to generate an economic good. As more debt was sold, these banks developed trading desks to keep a liquid market for the bonds that were issued. This market activity was a low level low pay operation that was understood to be operating in a zero sum environment. Traders began to assert their importance when the crumbs falling their way were millions of dollars. Harvey Golub's rise at Lehman Brothers in the late 70's is a well documented example of this change in banking.

As systems improved among competitors and customers the trading desks developed artificial products, derivatives, to hedge various positions. These instruments were hard to figure out and price so that firms issuing them found extra profit. An egregious example of bad faith with these derivatives was in 1993 when Bankers Trust sold their customer, Proctor and Gamble, a particularly one sided deal. Years later in a hard fought suit it was revealed in audio tapes that the traders were high fiving themselves for having made a huge windfall by duping their customer. Bankers' reputation did not long survive that revelation, but the casino mentality of milking the customer completely took over Wall Street in that decade so that the raising of capital became secondary. A current sickening example of a worthless manipulation is Goldman Sach's aluminum trading operation exposed recently. The scheme moved inventory from warehouse to warehouse to justify price increases. To reap the fullest price the stock of aluminum ingots had to be inventoried and moved around for eighteen months, solely for the purpose of taking advantage of customers such as Boeing, a large user of aluminum in the manufacture of aircraft.

The investment community has taken notice of Wall Street shenanigans by pricing the stocks of too big to fail banks with low valuations, low price earnings ratios in finance parlance. The lowest PE ratios are with those with the most opaque business model. Bernie Madoff, for example, had an opaque business model. Ironically some firms are spending big money for legal talent in Washington for the right to write opaque money losing contracts. That banks are currently minting money hand over fist is in spite of their trading desks, not because of it. With the current Federal Reserve Bank policy of lending at practically zero and banks lending back to the government at a few points higher does not require exceptional bonus generating talent.

That Goldman Sachs just was added to the Dow Jones Industrial Index is an indication of how far it has coasted on it's reputation for excellence. The aluminum scheme described previously not only shows that Goldman currently is an impediment to industry but it also shows a business model bereft of purpose. For it to be honored as an “Industrial” is an Orwellian use of language that real investors see through. Currently GS is valued with a PE of 10, a C-. Imagine that, GS is the dummy in the room,

 The Volcker Rule will not be abused in the near term because no financial officer wants to over pay for a tax fiddle that will blow up on them. Considering the legal and structured investment fees required, many companies select more transparent schemes, such as not repatriating foreign income. It will take generations for the financial idiocy perpetrated by too big to fail banks in the first decade of the millennium to be forgotten. When it is, then the rule will be trampled over by a herd of credulous bulls which will bring forth another financial crisis.