Why do investment bankers earn so much money? The answer to this question exposes as false much that economists deeply believe about credit.
Investment bankers are paid well because they do the crucial work of matching producers, creative thinkers and outsiders with capital. It would be a cruel world without finance. Brutally so.
That investment bankers are paid so well firstly rejects the popular narrative among academics about “easy money.” There’s no such thing. The pay of investment bankers once again shows us why there’s no such thing.
Producers, creative thinkers and outsiders crave access to money not because it’s easy, but precisely because it’s so hard to access. So many ideas, so little capital in a relative sense to vivify those ideas. Investment bankers rush a much better future into the present by liquefying the ideas of the productive, creative, and frequently dismissed.
That investment bankers move proverbial mountains rates routine mention on its own, but the previous truth is doubly useful right now in consideration of Treasury Secretary Janet Yellen’s allegedly ill-timed truth telling last week. In an economics gathering put on by The Atlantic, Yellen talked about government spending’s presumed impact on the economy, and suggested that interest rates may “have to rise somewhat to make sure that our economy doesn’t overheat, even though the additional spending is relatively small relative to the size of the economy.” Rarely has so much fallacy fit so comfortably into so few words.
In other words, Yellen uttered no “truths” to anyone with a modest understanding of economics. In reality, Yellen’s alleged truths are yet another reminder of how very bankrupt the economics profession is.
The pay of investment bankers shows us why. Think about it. Yellen believes the Fed may have to step in to supposedly shrink access to credit in order to slow down the economy. Assuming the Fed could actually shrink lending by banks through a reduction of its bond portfolio, its actions would be of no consequence.
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We know this because investment bankers are yet again paid big fees by virtue of their ability to match ideas with capital. What the Fed allegedly taketh away, investment bankers give back. Better yet, they compete ferociously with one another to make capital abundant for producers.
Yellen believes in the impossibility of too much capital being connected with too many ideas on the way to overheating. Her analysis is flawed in so many ways. There can never be too much capital. To believe otherwise, is to believe that the creative have reached a frontier beyond which there will be nothing to achieve. By that logic, global poverty has been licked, every healthcare advance meant to deter killer diseases has already been created, and every technological innovation already exists. Hazlitt once said he was stunned even the ignorant could believe in the absurd notion of too much capital. Oh well, Yellen believes it. So do most economists. They think the Fed must centrally plan credit access given their belief in the impossibility that is too much credit. They also believe growth causes inflation.
Indeed, Yellen’s analysis implies that the economy is an engine of sorts that could overheat from too much speed. No, not really. An economy is just people. People can’t grow too much. To put it bluntly, Yellen’s analysis is backwards.
More important, economic growth is the surest sign of falling prices. We know this because as the Treasury Secretary alludes, she thinks it necessary for credit to be artificially shrunk, for the Fed to intervene, so that the economy slows down. Lots of luck there. See above. See investment bankers.
Still, productivity is the source of economic growth whereby more market goods are produced with fewer inputs. Yes, economic growth is the surest sign of falling prices when it’s remembered that productivity is economic growth.
Investment bankers are yet again instructive here. They generally connect capital with creative types intent on producing more for exponentially less. Investment bankers once again compete ferociously to connect the productivity focused with capital.
Investors want a return on their investment, which means they believe their capital commitments will result in the creation of quite a bit more wealth than the wealth they commit. You see? Falling prices. Investment renders the individuals who comprise any economy more productive; meaning they produce more market goods. Basically, Yellen’s presumed “cure” for falling prices is the biggest barrier to it. Thank goodness that investment bankers are constantly undoing the fallacious assumptions of an economics profession married to the belief that inflation is caused by too much investment.
To which some will reply that Yellen isn’t so narrow in her beliefs. While she thinks too much investment causes inflation, she also thinks government spending is an economic accelerant. As the quotation indicates, Yellen believes politicized allocation of private wealth (“private wealth” a redundancy of the first order) boosts economic output because it puts more money in the pockets of consumers. By Yellen’s reasoning, theft should be made legal during slow economic periods.
Back to reality, government spending can’t create economic growth simply because economic growth is what enables government spending in the first place. Government spending is a consequence of economic output, not an instigator. Silly Yellen. Governments have no resources. The resources they have is what they take from the private economy. There’s no growth there!
It’s all a reminder of how fallacy-stalked and confused modern economics has become. In a more rational world away from academic theory, investment bankers will continue to run roughshod over central planning overseen by economists. In truth, their rather posh existence mocks the faux truths uttered by Yellen, and economists more broadly.