So, why did/do the quants hold sway, and play only in fiduciary instruments? Why financialize (conversely, de-industrialize) an economy? Is there a Maslow's pyramid of economic development? No, I think not. What's happened since Reagan is a shift of power, aided and abetted by Washington's Right Wing tilt, to the easy, fast buck. Dr. Smith used the phrase of "the quick buck versus the slow deuce". While something of a Right Wingnut (he considered himself an entrepreneur stuck in a small New England college; his signature idea was a concrete Sunfish. I'm not joking.), he had no use for the quick buck artists. Yet, we've allowed them to take over the economy. Why?
The answer, by my lights, is obvious: fiduciary capital is easier; there's no messy physics (in all of its manifestations) to muck up the plan. That which exists only as bytes in computers can be controlled (or so the thinking goes) by programs in computers. The Merry Quants, and their handlers, ignore the truth; at some point a fiduciary attaches to a real object. In the case of The Great Recession, that object was a McMansion in Boca. It was attached to a subprime, fixed reset, ARM sold to a minimum wage janitor. And so the dominoes fell.
Last Sunday's NY Times "Sunday Business" has a long piece describing the impetus for the flight to fiduciaries. When one makes direct investment in physical capital, one is tied to the market for the widgets involved. To earn that return, it's not merely a matter of scarfing some of the money flow between saver and borrower, as the vampire squid do their voodoo so well. When you build it, you're betting they will come. And buy your widgets. Which widgets you've made for cheaper due to your investment. And, if you've been really clever, they buy more widgets, to boot.
This endeavor has oft quoted Your Good Mother: "what would the world be like if everybody behaved like you?", in the context of opprobrium for bad behaviour. Turns out, if everybody tries to make and sell the same widget at the same time, nobody makes any return on the invested capital. Thus Warren Buffett's observation about moats.
In the shale gas case, a gold rush meme doesn't work out. Gold is craved for no good reason, so having it, when and where others not so much, is always profitable (aside: it was the merchants who served the miners that made out selling eggs and the like for obscene prices), while natural gas is only valuable in use. Explode the supply, and well, you get it.
But while the gas rush has benefited most Americans, it's been a money loser so far for many of the gas exploration companies and their tens of thousands of investors.
Not that the Banksters didn't try for a nice slice of the pie.
Like the recent credit bubble, the boom and bust in gas were driven in large part by tens of billions of dollars in creative financing engineered by investment banks like Goldman Sachs, Barclays and Jefferies & Company.
After the financial crisis, the natural gas rush was one of the few major profit centers for Wall Street deal makers, who found willing takers among energy companies and foreign financial investors.
Not all were convinced.
"He is like the bartender serving drinks for people who can't handle it," said Fadel Gheit, a managing director at Oppenheimer & Company, about Mr. Eads [one of the money men profiled]. "And the whole gas industry has gotten a rude awakening, a hangover, with gas prices plummeting. The investment bankers were happy to help with a smile and get their cut."
To the predictable conclusion.
In hindsight, it should have been clear to everyone that a bust was likely to occur, with so many new wells being drilled and so much money financing them.
But, there is a silver lining; well for those of us with an eye-for-an-eye streak.
Some local landowners, having spent their initial lease bonuses, are now deeply in debt. Local restaurants and other businesses are suffering steep losses now that so many drillers have left town.
From the point of view of our Merry Quants, they flew just a bit too close to the sun. Best to stick with fiduciaries. How about re-insurance in Bermuda?
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