As the US has deindustrialized in recent decades, our media and political betters have often told us something to the effect that “It’s OK — don’t worry — because we are still the go-to place for our efficient capital markets.”

Oh, to be the “go-to” place. And at the same time, we were the “leave-from” place.

No matter how many millions of factory jobs went away (to China, often as not) — and how many billions of dollars of capital (no kidding, entire steel mills) got packed aboard container ships bound to the Far East — at the end of the day the US was somehow supposed to be evolving into a viable, post-industrial economic model.

Our “service industries” would — so they said, again & again — see us through for the next couple of generations. Well, that was fast.

Now we realize that our service economy will do no such thing. What about the next couple of generations? Whoops.

With the recent mortgage meltdown, we can all see that our allegedly “efficient capital markets” are not so good after all. In the best of times, the markets were “efficient” at aggregating large amounts of other peoples’ money into overly-risky securities, selling them off to suckers, and then paying out large salaries and bonuses to the insiders who toiled their lives away in over-priced rental digs on the island of Manhattan.

As we can all see with crystal clarity, when things fall apart… they fall apart with a vengeance.

One technical criticism of the whole financial edifice is that the capital requirements were not high enough. Indeed, the capital requirements ought to have been significantly higher during the good times, so that there would be room to manuever downwards during the cyclical downswings.

I suppose we can expect to see something like this going forward. The regulators will riaise the capital requirements… and that miscreant horse will never leave the barn again, right? As John Plender states in the Financial Times, “The safest forecast in banking today is that revisions to the Basel capital adequacy regime are going to make much bank business more expensive.”

Indeed, investment banks will require significantly more capital to support their trading activities. And continuing with Plender’s analysis, the investment model of most banks “will have to be re-thought from scratch.” From scratch? Sounds more like what the Russians call a “scorched earth” approach, similar to what Napoleon encountered on the road to Moscow.

Per Plinder, much of the existing investment bank business activity may become “unviable” in the new regulatory climate. (Gee, do ya think so?) That business base — what is left of it — will migrate to sovereign wealth funds and their hedge fund assistants.

Thus whether we are talking of investment banking or commercial banking, “returns will undoubtedly be lower in future. The only question is how much lower.” My best estimate is “a lot lower,” but what do I know?

It is quite possible that the banking system might revert to the role of a regulated utility, which is the way things were before the great deregulatory tide began in the 1970s.

If anyone bothers to think it through, we will see finance serving the investment needs of productive industry and not vice versa. It will be what I like to think of as the “Andrew Carnegie” approach (eg, US Steel legacy), as opposed to the “Sandy Weill” approach (eg, Citigroup legacy).

And in the insolvent, illiquid nation of the future, “productive” industry will be all that we can afford to build. The sun is setting on the sea-to-sea empire of frivolous investment in suburban tracts, luxuriant hotels and related “destinations,” and silly faux-amusements like theme parks.

Really, so much for the breezy dismissals of de-industrialization over the past three decades. We now praise hard industries. At least, those of us who “get it” (as the saying goes). And as the well-known theologian Rev. Jeremiah Wright says (sort of), “America’s chickens are coming home to roost.”

Look around. In the US, we no longer have the factories. The industrial workforce is aging and shrinking. The education system has missed the boat, and is now geared to train people in most of the wrong fields for the future. (Eg, there are more college graduates receiving degrees in “sports medicine” or its equivalent, than in some field of engineering. South Korea — pop. 49M — graduates more engineers every year than the entire US — pop. 305M — educational establishment, including the foreign students at US schools.)

And we in the US no longer offer those “efficient capital markets” to serve a return-hungry, globalized investment community.

What does the US economy have to offer the world at this point? Indeed, what do we have to offer to ourselves?

Byron King
Energy and Oil