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Too much finance is bad for the economy

economist.com

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Re: Too much finance is bad for the economy

#61

Post by esja »

crdoconnor wrote: post #33
temuze wrote: post #28

Earlier quoted context omitted.

Not always. Finance is a pretty big industry and its hard to make a sweeping generalization like this. For example, let's look at your checking account. A banker's not a middleman here - they're providing a service that allows you to keep you money safe for free while they invest it and assume the risk. Seems like a good service to me.

>For example, let's look at your checking account. A banker's not a middleman here Yes, he is. He takes your money and lends it out to others, whom he charges for the privilege. That's how fractional reserve banking works. Of course, these days since interest rates are zero, that's not really a profitable line of business. It's mostly used to upsell the more profitable products like mortgages or credit cards.

The banker actually creates brand new money to give to whoever is approved for a loan - he/she doesn't use your money for that purpose.

Re: Too much finance is bad for the economy

#62

Post by jeffreyrogers »

Animats wrote: post #54

The US finance industry uses self-generated work which generates commissions. One of the drivers behind this is the tax preference for debt over dividends. There's been a trillion dollars worth of stock buybacks since 2008, an action taken mostly to reduce taxes. That generates work for Wall Street, and wealth for those "near the money", working on various deals. Then there are "hedge funds". Hedge funds, as a class,…

I think you're taking an overly pessimistic view on a number of things. Both volatility and bid-ask spreads are down considerably since the growth of high-frequency trading.

Buybacks in general are bad for everyone involved because they're often done when valuations are high, however, they can be beneficial to shareholders when valuations are low.

Shorting helps facilitate price discovery and options are used to protect against large downside risks.

> Hedge funds, as a class, underperform the market, partly because of their excessive fees.

You're thinking of mutual funds. Hedge funds as a class do outperform the market, even after fees.

Re: Too much finance is bad for the economy

#63

Post by kmkemp »

nightski wrote: post #52
eldavido wrote: post #49

I'm an engineer. I could go into a high-risk career trying to cure cancer, or I could flip houses. By my (admittedly rough and speculative) math, I'd make more money doing the second. This has nothing to do with finance and everything to do with how capitalism privileges owners. Just because I can do something (e.g. cure cancer) doesn't mean I should do it out of some regard for the "public good", requiring great sac…

In a way this is partly a good thing. If everyone focused on going to space or curing cancer and were unsuccessful for quite some time we'd be in trouble. While there is a place for these endeavors and they are very important we have to be careful not to allocate too much focus to them.

I disagree. Decisions are made based on risk/reward. Just because the reward is raised doesn't necessarily mean that its ratio is higher than another endeavor's. Economic incentives lining up with the public good is the ultimate goal that produces the best outcomes for everyone.

Re: Too much finance is bad for the economy

#64

Post by jeffreyrogers »

eyphka wrote: post #43

Would love to see the numbers on brain drain from the technical fields to finance. Any takers?

I'd be interested in this as well. My impression is that it isn't as severe as many believe and the phenomena is equally prevalent in tech as well (i.e. people doing startups who would otherwise do something more productive).

From what I've observed the people going into finance are a separate class of people from those who want to be doing research.

A further issue is that the quality of life for PhDs is low. Something like 1% of PhDs end up with tenure track positions and many are stuck doing years of postdoc work. It's easy to blame finance, but there are problems with other parts of our society that are driving peoples actions as well.

Re: Too much finance is bad for the economy

#65

Post by jeffreyrogers »

esja wrote: post #59
temuze wrote: post #28

Earlier quoted context omitted.

Not always. Finance is a pretty big industry and its hard to make a sweeping generalization like this. For example, let's look at your checking account. A banker's not a middleman here - they're providing a service that allows you to keep you money safe for free while they invest it and assume the risk. Seems like a good service to me.

The bank doesn't invest your money. You lend it to them and receive very little interest in return. They separately create brand new money to provide loans to other people, mainly for purchase of existing assets. At no point is your money given to anyone else. Update: Having been down-voted below zero... I would encourage everyone to visit the Fed, BoE, ECB, BIS etc. websites and discover how money is created. We wou…

> The bank doesn't invest your money.

Yes they do. That's why runs on banks are a problem. Only the central bank (at least in the US) creates money. And you can't invest your money in the central bank.

Re: Too much finance is bad for the economy

#66

Post by glesica »

this_user wrote: post #57
nickbauman wrote: post #32

Earlier quoted context omitted.

Totally agree. When the finance sector grows, demands for return interest on capital investment intensifies, acting as a gravity-well for capital away from development. Firms like Goldman make every investment require higher and higher returns at a greater and greater scale. Money chasing money. Casino economy. Instead of opening a new line of business, your profits must be funneled into paying back on that loan at h…

The finance sector does more than lend/invest capital themselves. Large investment banks provide a wide range of services for companies (e.g. bond issues, IPOs, secondary offerings, working out M&A deals, brokerage services, ...). The biggest problem with the finance sector is that it is extremely opaque and almost no one outside the industry understands what financial institutions actually do. Yet, everyone seems to…

The economy wasn't blown up because an M&A or bond issue went bad. I don't think anyone seriously believes that "banks are bad", I think they (myself included) tend to think that "the banks we have are bad". It's a subtle, but important difference and totally consistent with the article.

Re: Too much finance is bad for the economy

#67

Post by astazangasta »

hawleyal wrote: post #22
gumby wrote: post #7

Basically bankers are like lawyers, gardeners, cooks, doctors, pool cleaners etc: service jobs to help other people get things done. When you elevate the sector to have implicit value you get a terrible distortion.

Not sure I agree with putting doctors and cooks on that list. Providing services basic to life is not the same as supporting recreation, wealth, or luxury. To put a finer point on it, doctors and cooks, along with farmers, builders, teachers, daycare workers, et al. existed ever since everyone started specializing. They directly support life needs.

There have been gardeners for at least as long as there has been civilization. Entertainers have probably always been around. Your idea of "life needs" doesn't seem to coincide with history's.

Re: Too much finance is bad for the economy

#69

Post by eli_gottlieb »

golemotron wrote: post #26

> In short, the finance sector lures away high-skilled workers from other industries. The finance sector then lends the money to businesses, but tends to favour those firms that have collateral they can pledge against the loan. This usually means builders and property developers. Businessmen are lured into this sector rather than into riskier projects that require high R&D spending and have less collateral to pledge.…

>Or, are they just saying that whenever finance becomes prominent it attempts to drive out risk ruthlessly?

That's how I interpreted it. Finance would rather invest with high collateral or even rent-seek than accept the actual risks inherent in productive investment.

Re: Too much finance is bad for the economy

#70

Post by pkaye »

bhouston wrote: post #3

Summary: > In short, the finance sector lures away high-skilled workers from other industries. The finance sector then lends the money to businesses, but tends to favour those firms that have collateral they can pledge against the loan. This usually means builders and property developers. Businessmen are lured into this sector rather than into riskier projects that require high R&D spending and have less collateral t…

I thought that the finance sector taking on too much risk is what led to the 2007 financial crisis? They would invest in things with less or no collateral to pledge.
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