> In Fitch's version, the problem lies in the use of the phrase "surplus
> capital hoards." What does he mean by "capital"? Obviously he does not mean
> fixed capital - plant, equipment, software, inventory. That type of capital
> can't be "moved into financial channels." (You can't buy a mortgage-backed
> security with a stamping press.) He's talking about *money*. It was money
> that "sought to preserve itself by moving into financial channels." But
> moving money into financial channels does *not* prevent money from being
> moved into real productive investment. A surge of money into "financial
> channels" in no way entails that money is being diverted away from
> productive investment. _That is because money is not a scarce commodity._ It
> is not a "rivalrous good." Money used for one purpose does not prevent money
> from being used for another purpose. Money can be created costlessly by
> banks, including central banks. Its supply can zoom upward. And even if the
> money supply doesn't increase, greater financial transaction volumes can be
> accommodated simply by increasing the velocity of the existing money supply.
I agree with your frustration about a lot of the bullshit around 'finance', and agree with most of what you write. But there are legitimate distinctions between money and financial wealth. The quantity of money and the quantity of financial assets are different quantities, with the latter much larger and including the former. There is no firm line between them, they shade into each other - though anything which circulates as means-of-payment is definitely money, there are a whole lot of liquid financial assets that are not means-of-payment but still considered money because of the ease with which they can be converted into means-of-payment. As Keynes says, where you draw the line between money and debt will depend on what you're looking at.
But nevertheless there is a distinction to be made. People store value in financial assets that are not money - bonds, shares, etc.. So Fitch's concept of 'surplus capital hoards' is not meaningless. It is possible for savings to flow into financial assets (with only temporary stops as 'money') and inflate their value without necessarily having an equal impact on the market for real investment goods. Of course someone is always selling the asset, and they get the money, but if they plough it straight back into another financial asset it continues to circulate around the financial sphere. Inflating financial asset values lowers interest rates in that class (or cost of equity capital, or raises the value of real estate) - and the effects ripple out into the markets for substitute assets - so that it is likely to have some effect on real investment so long as capital sees profitable opportunities for employing new capital assets. This is why, as you say, bubbles are usually associated with bursts of real investment too. But if we accept that there are diminishing returns to real capital investment, at least in the short-medium term, that effect is going to be limited.
You are totally right that "a surge of money into 'financial channels' in no way entails that money is being diverted away from productive investment" and that money is not scarce in the way real goods are (although banks face capital and liquidity limits to expansion of their liabilities, and individual states face limits to how much they can expand their currency base). But states and banks have much less control at the long (less liquid) end of the financial asset spectrum than they do at the liquid (monetary) end. Non-monetary financial assets are always connected to prospective future income flows and can't be created, destroyed or manipulated as unproblematically.
So while I agree that this whole discourse about declining profitability feeding financial bubbles is wrongheaded, there is something to be said for 'savings glut' arguments (at a global level of course). Although a savings glut is not a necessary precondition for a bubble.
On the whole FIRE sector stuff, totally agreed.
Cheers, Mike Beggs