11 Feb 2011

Decline and Fall

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Giovanni Battista Piranesi, View of Paestum from L’ancienne Ville de Pesto, 1778

The Wall Street Journal reported that the end of the era of New York City and the United States as the world’s leading center of finance is not just imminent, it is here right now.

After 219 years as the citadel of American capitalism, the New York Stock Exchange was near an agreement to be acquired by Deutsche Börse AG in a deal that would create the world’s largest financial exchange.

With the parent of the New York Stock Exchange and Germany’s Deutsche Borse in advanced talks to merge, Aaron Lucchetti and Dennis Berman look at the likely impact on Wall Street as the financial capital of the world.

If a deal is reached and regulators approve, the combined company would trade more stocks and futures than any rival in the world and more options than any U.S. exchange. The takeover would culminate a decade of tie-ups by exchanges around the world eager to find new sources of growth and catch up with smaller rivals that have been quicker to embrace new and lucrative kinds of trading.

For New York, the move is symbolic of the city’s fading dominance on the world stage as other countries are drawing investors directly to their markets. The move also is a recognition that securities trading today goes on at all hours and in all time zones, making the actual bricks and mortar of Wall Street far less important than before.

“New York is going to be important, but it’s not the financial center. Capital markets are everywhere now,” said Michael LaBranche, CEO of LaBranche & Co, the family-run firm that traded on the floor of the New York Stock Exchange for 87 years before it sold that part of its business to Britain’s Barclays Capital in 2010. …

The exchanges, which are presenting the deal as a merger of equals, said the combination would leave 60% of the company in the hands of Deutsche Börse shareholders, with NYSE Euronext shareholders holding the remaining 40%. The combined company, with a putative market capitalization of some $25 billion as of Wednesday, would be incorporated in the Netherlands and split its headquarters between Frankfurt and New York.


To put all this into perspective, take this little news item into account.

Dow Jones:

The U.S. budget deficit grew in January, heading for an expected record in 2011 amid warnings about the nation’s burgeoning debt and wrangling over government spending.

The Treasury Department’s regular monthly statement, released Thursday, showed the U.S. spent $49.80 billion more than it collected last month.

That’s right. In one single month, your government spent an amount of money in excess of its actual income totaling twice what it would cost to buy the combination of the New York Stock Exchange and the German Deutsche Börse, the largest merged securities trading entity in the world.

Liberal policies are not only tremendously economically destructive. Their impact is far more rapid than is commonly recognized. New York City’s financial industry has been been propping up not only New York’s tremendously misgoverned city and state for decades, but the entire region. Picture the financial district of New York before long coming to resemble the manufacturing districts of the Northeast. Then picture the US in the position of post-WWII Britain, obliged to dismantle its military and retreat from its traditional role of world leadership permanently, because it just cannot afford military power or a major international role.

3 Feedbacks on "Decline and Fall"

Kimball Corson

The comparative visualization suggested at the end is compelling but not determinative of much. Too, New York has been sharing the lime light as the world’s financial center with London for quite some time now, indeed, as capital markets globalize, reducing the importance of each. America’s problem is not really the deficit either, which is more symptomatic than causal. Our core problems are 1) the world woke up and foreign labor became more price and qualitatively competitive than we are in too many areas, causing much economic activity to move abroad, 2) we have had to transfer vast wealth to the world´s oil producing nations, through oligopolistic markets, to get the fuels and oils we need and 3) income and wealth in America are so strongly skewed to the top end that aggregate demand and national income in America are permanently reduced. These three factors account for our compromised economy and declining average standard of living more than anything and everything else.

Ben David

So now the capitalists will have THEIR jobs outsourced.

Oh Goody!

Kimball Corson

Raghu Raja argues in his new book, Fault Lines, by Princeton University Press, selected as the Best Business Book of the year for 2010, that the basic and fundamental cause of the housing and Wall Street crashes were stagnant wages and the rising income inequality between the rich and the middle class in America.

Raja explains that as the purchasing power of many middle-class households lagged behind the cost of living, there was an urgent demand for credit to try to keep up. The financial industry and investors abroad, with encouragement from the government, responded by supplying home-equity and other loans in great volume. The result of this unrestrained and lucrative credit growth turned out to be a disaster.

The inequality created the stagnant wages because all the income gains went to the rich, along with a bit of middle income’s share of the pie. This gap, I argue, also now permanently lowers aggregate demand and national income, compounding the situation of the middle class which still faces the original problem, but is now much worse in debt.

By the way, the full title of the book is tellingly: Fault Lines: How Hidden Fractures Still Threaten the World Economy.

The situation is not over.


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