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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

#71

Post by chroem- »

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…

>Which is better: a bright graduate working on making a large web company's advertising algorithms slightly more efficient or the same person working for an investment bank on a bond deal that helps a biotech company raise more money for future R&D?

That's the very definition of a false choice. We should be pouring more resources into developing new technology itself, not just trying to advertise or fund it more efficiently. Right now small technical innovators are being absolutely starved of capital, and it's going to have some pretty dire consequences for the US economy in the coming decades. When is the last time that you saw a successful hardware startup that did something nontrivial (a la Intel)? The only reason software businesses are doing so well is because they require very little capital.

All of the shifting money between hands on Wall Street is sucking the air out of our industries.

Re: Too much finance is bad for the economy

#72

Post by [deleted] »

pkaye wrote: post #70
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.

[deleted]

Re: Too much finance is bad for the economy

#73

Post by esja »

jeffreyrogers wrote: post #65
esja wrote: post #59

Earlier quoted context omitted.

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.

That's no longer correct: all banks create money.

When a US bank approves you for a loan, it simply credits your account with new money. This money does not come from other accounts, i.e. this "investment" in you is made entirely with new money, created by the bank. When you repay the loan, the money disappears from the system.

There are limits to how much money can be created in this way, but those aren't relevant here.

http://www.positivemoney.org/how-money-works/how-banks-creat...

Re: Too much finance is bad for the economy

#74

Post by copsarebastards »

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.

> 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.

Implicit in this claim is the idea that somehow we need someone to own things. Why is that exactly? In fact, employee-owned cooperatives demonstrate that when the doers own what they're doing, it can have some benefits for all involved.

Re: Too much finance is bad for the economy

#75

Post by notahacker »

pkaye wrote: post #70
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.

The problem with the finance sector was actually largely the opposite: financiers were so confident the collateral would hold its value that they were happy holding loans made to people with little or no skin-in-the-game or ability to make regular payments. They assumption was that even if significant numbers of loans in a portfolio failed, the repossessed houses could be sold on, perhaps even at a profit,

Unfortunately the value of that collateral didn't hold up when a glut of repossessed houses appeared on the market and many prospective housebuyers suddenly found they couldn't borrow quite so easily any more.

Re: Too much finance is bad for the economy

#76

Post by kokey »

> ONE of the biggest political issues in recent years has been that Wall Street has done better than Main Street. That is not just a populist slogan.

The economist behind a paywall is like an irony overload for me lately. This time using a populist title and introduction paragraph is all I see.

Re: Too much finance is bad for the economy

#78

Post by spott »

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.

Yes, but the service that he provides is a secure place to store your money. You pay for it by giving the bank money that it can use as "collateral" (in the fractional reserve banking sense) for the loans it gives out, instead of paying with fees.

Re: Too much finance is bad for the economy

#79

Post by rtkwe »

CalRobert wrote: post #18
danbruc wrote: post #12

Meh. What do we need economic growth for anyway? Producing and throwing away another hundred million tons of food every year? New phones every six months or once a quarter? A third car? More shoes? We have enough of everything and much more, there is absolutely no need to grow western economies any further.

I generally agree with the sentiment you express, but I think you're not really addressing the issue at hand. People moving in to finance does not seem likely to reduce our environmental impact. Even so, you are right that western economies don't really have a shortage of goods, per se. The idea that low birth rates are a bad thing or that houses should go up in price, etc. are lunacy. Why do we want it to be hard to…

To choose one, low birth rates leads an aging population which is an issue because it generally means a contracting labor force and more burden on the younger group of the population to support things like Social Security as the ratio of 'young' productive workers to supported older non-workers increases. It also means a shrinking labor pool which drives wages up causing prices to generally rise as well.

Re: Too much finance is bad for the economy

#80

Post by sebastianconcpt »

nawitus wrote: post #31
danbruc wrote: post #12

Meh. What do we need economic growth for anyway? Producing and throwing away another hundred million tons of food every year? New phones every six months or once a quarter? A third car? More shoes? We have enough of everything and much more, there is absolutely no need to grow western economies any further.

Why is the current standard of living the ideal? Why not 10 years ago, or 10 years into the future? How about 20? 30?

As long as there is violence, we will not be able to say we actually achieved Civilisation.

So, no. We are quite far from the ideal standard of living.

We are more in a semi-spherical ball of water and continental psychiatric hospitals

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