71–80 of 316 posts
This is an excellent resource and a great read, but DAMN do money markets seem stupid as all get out to me. Where is the productive output of all these arbitrage shell games? How is this more than an abysmal waste of time and resources simply to make a small handful of bankers richer?
Earlier quoted context omitted.
The arbitrage game keeps the prices consistent with each other. It serves to create liquidity so that participants can get their business done without either waiting too long or paying too much.
Maybe this is a dumb question, but who are the participants? What is the business they need to get done? What are they waiting on?
Most of the financial wizardry you read about in the linked article is related to that aim. It's not always obvious, because a lot of it is higher-order stuff: transactions between financial market participants where payouts are linked to other transactions (or aggregations of transactions) between financial market participants, etc. It can be hard to see the link to the participants I mentioned above. But a lot of it is a means to understanding, and spreading, the risks associated with financing those participants. It is a lot easier to lend people money to finance their wants and needs if you can (a) differentiate between people who will pay you back and people you won't; and (b) share the risk of not being paid back with others.
For simplicity it can be thought of as a proxy to interest rate adjustments but how it works is complex and can lead to strange side effects.
Earlier quoted context omitted.
Farmers use futures contracts to protect against price risks [0]. As do energy suppliers [1]. [0] https://www.ers.usda.gov/webdocs/publications/99518/eib-219.... [1] https://emp.lbl.gov/publications/primer-electricity-futures-...
I get why farmers do it but what's the societal benefit of letting a rando like me buy and sell (i.e. make bets on) such contracts? Do farmers really prefer that random people do this?
At a basic level, obviously thee needs to be someone assuming the price risk from the farmers, and those people will obviously need to be compensated.
Earlier quoted context omitted.
This isn't false but it feels reductive. A financial instrument that allows one to bet on the corn harvest is obviously valuable to the corn farmer, as it allows them to use profits from good seasons to hedge against bad seasons. They're also valuable to people whose business is affected by the corn harvest - cereal manufacturers, say. The problem is that they can also be used by people with no exposure at all who si…
> as it allows them to use profits from good seasons to hedge against bad seasons It allows corn farmers to grow wheat instead, because he is selling it right now and wheat is more profitable right now. The main reason why it doesn't go astray and make people hungry is because people that isn't involved in any way can go, study the factors that make wheat more profitable to corn, do their predictions of what will be…
I'm not sure why I'm being downvoted, as I didn't think this is all that controversial. Historically, finance was a much more boring and less lucrative field than it is now, and consequently much smaller. "I'm a super smart 18 year old and I want to get rich, so obviously I should go into banking" is a relatively recent phenomenon. I agree with everyone else here that the industry has value, so presumably its recent explosion in size has brought some additional value, but it's very hard to believe that value is large enough to offset the opportunity cost of a generation of ambitious geniuses not going in to science or industry or becoming entrepreneurs.
Earlier quoted context omitted.
Farmers use futures contracts to protect against price risks [0]. As do energy suppliers [1]. [0] https://www.ers.usda.gov/webdocs/publications/99518/eib-219.... [1] https://emp.lbl.gov/publications/primer-electricity-futures-...
Why is it that every time someone mentions futures trading someone comes along to drop the farmer's crops example, do y'all really have no other examples? What percentage of futures trading is on farmers crops? What about the crops they destroy because they would be less profitable? Does the protection against monetary risk outweigh starving people to death? How well will it work if we create unsustainable land that…
Because it was created by them, for that very purpose? Futures Contracts. Chicago Mercantile Exchange. Up until 1971 future contracts were ONLY for agricultural goods.
[0] https://www.youtube.com/playlist?list=PLUl4u3cNGP63B2lDhyKOs...
[1] https://ocw.mit.edu/courses/15-401-finance-theory-i-fall-200...
This is an excellent resource and a great read, but DAMN do money markets seem stupid as all get out to me. Where is the productive output of all these arbitrage shell games? How is this more than an abysmal waste of time and resources simply to make a small handful of bankers richer?
> Where is the productive output of all these arbitrage shell games? How is this more than an abysmal waste of time and resources simply to make a small handful of bankers richer? If shares of companies are valued at fair prices it means that the finance departments for that companies can raise more capital. So companies that bring value to society should be able to expand their business. At the same time, regular pe…
This only true of companies that were underpriced. Overpriced companies, either because of hype (Pets.com), fraud (Enron) or other reasons (maybe Jim Cramer issued a buy) do not benefit from a fairer price.
Earlier quoted context omitted.
Farmers use futures contracts to protect against price risks [0]. As do energy suppliers [1]. [0] https://www.ers.usda.gov/webdocs/publications/99518/eib-219.... [1] https://emp.lbl.gov/publications/primer-electricity-futures-...
Why is it that every time someone mentions futures trading someone comes along to drop the farmer's crops example, do y'all really have no other examples? What percentage of futures trading is on farmers crops? What about the crops they destroy because they would be less profitable? Does the protection against monetary risk outweigh starving people to death? How well will it work if we create unsustainable land that…
Other examples are _all_ commodities markets like mining, logging, etc.
Of course public company share futures are inherently abstract, but they serve similar purposes, just not to a particularly similar party, depending on your perspective (of ownership, operation).
Earlier quoted context omitted.
Great questions, but no reply will be coming at you. Except an apologetic nonsense-logic-it-is-obvious-it-works trope. Only product is the profit.
Quite. The general response I get from questions like this to financial folks is that these markets and vehicles and products are important "for liquidity", but they can never quite tell me who liquidity benefits other than the system itself.
It benefits people who have cash that they want to invest, because they have more opportunities to do it and more visibility over which investments are safe and which ones are risky.
Therefore it benefits society by transferring cash from people who have it now but need it later, to people who will have it later but need it now. Enabling and facilitating actual socially good activity, like manufacturing goods, providing services, etc.
So there are definitely benefits to people outside the finance industry. However, in order to accept any of that you do ultimately need to believe, to some extent, in the market as a means of allocating resources. You don't need to think it's perfect, or that it shouldn't be regulated, or even that it is the fairest system, but you need to accept that it is the system we use. In a totally state-planned economy, finance wouldn't work or even make sense.