The Origin Story of Modern Finance

I’m reading this fascinating piece at Spiegel about the fall of Deutsche Bank and I really liked this passage about how modern finance became what it is today.

What makes the below particularly interesting is that today’s elections and referendums can essentially be boiled down to a repudiation of this world, now that its consequences are so well known and documented.

The term “globalization” only began to emerge in the 1990s, a time of economic euphoria in the wake of the fall of the Berlin Wall, after the perceived victory of capitalism over the historical dead end of communism.

In the wake of 1980s “Reaganomics” — named for the US President Ronald Reagan — and the anti-socialist doctrine of British Prime Minister Margaret Thatcher, neoliberalism flourished. For its adherents, neoliberalism was considered a well-founded theory. But its opponents saw it as an erroneous belief in the self-regulating powers of the markets. Nevertheless, neoliberalism entered the mainstream and in Germany too, politicians were eager to deregulate and weaken state oversight.

The Internet arrived, a game changer, and English was suddenly the language of choice. The “New Economy” was here and the “Old Economy”, the industrial economy of things, was considered passé. The virtual economy was the future and “shareholder value” became the driving force of all economic effort.

Things were changing in the banking world as well. Whereas money used to be earned with bonds, stocks and commodities, bets were increasingly placed on fluctuations in the values of bonds, stocks and commodities. A meta-market, one driven by new mathematical formulas, developed alongside the real market — one which took on increasingly madcap characteristics with ever more insane “financial products.” Risk was transformed into securities and those who weren’t part of the machinery hadn’t a clue what was going on.

Well-known US financial institutions such as J.P. Morgan, Goldman Sachs, Merrill Lynch and Shearson Lehman Brothers helped bring the best university graduates from all around the world to Wall Street, creating new role models and masculine sex symbols. In 1987, Tom Wolfe’s Wall Street novel “Bonfire of the Vanities,” about the precipitous fall of Sherman McCoy, described investment bankers on the hectic trading floor as “masters of the universe.” In Oliver Stone’s “Wall Street,” released the same year, Michael Douglas’ character Gordon Gekko became a kind of mascot of greed, with his wide suspenders, thick cigars and generously gelled hair.

When it was all dreamed up in the 80’s and 90’s, there wasn’t a lot of consideration given to what might happen to those on the wrong side of it all (blue collar workers, debtors, pensioners-turned-reluctant 401(k) investors, etc). “Those people” are now chanting at rallies and voting against their own self-interests even further in an effort to blow up the system.

The pendulum has swung so far from their grasp at this point that they don’t care if it’s snapped in half.

The story of Deutsche is yet another in the endless litany of the global elites, taking their self-serving ideals too far in the real world, with the tacit approval of easily bought-and-swayed governments looking on.

Source:

How a Pillar of German Banking Lost Its Way (Spiegel)