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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

#131

Post by AnthonyMouse »

MaysonL wrote: post #95
notahacker wrote: post #75

Earlier quoted context omitted.

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, Unfortunat…

The banks and mortgage brokers making all those "liars loans" knew that the loans weren't going to be repaid, but they didn't give an effing eff. They knew that they would be able to sell the mortgages in RMBSs and pay their loan officers and executives handsome bonuses for all those massive phony profits. They would blacklist appraiser who wouldn't give them appraisals to fit the loan they wanted to make.

> The banks and mortgage brokers making all those "liars loans" knew that the loans weren't going to be repaid, but they didn't give an effing eff. They knew that they would be able to sell the mortgages in RMBSs and pay their loan officers and executives handsome bonuses for all those massive phony profits. They would blacklist appraiser who wouldn't give them appraisals to fit the loan they wanted to make.

The problem that created the problem was still that people were investing in mortgages rather than companies doing R&D. You can't sell bad mortgages to investors who don't buy mortgages.

Re: Too much finance is bad for the economy

#132

Post by dredmorbius »

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…

See also: Dutch Disease

http://en.wikipedia.org/wiki/Dutch_disease

(Also from The Economist initially)

Re: Too much finance is bad for the economy

#133

Post by joshjkim »

Here's an alternative theory: Lower productivity in an economy causes a larger finance industry, not the other way around.

The financial industry is the “marketplace” where people (supposedly) figure out the best places to deploy capital when the decision is not otherwise clear, or access to such investments is difficult, or the capital holder does not have expertise or want to learn to expertise to deploy the total amount successfully. If that’s true (and I’m not sure it is but that’s the sales pitch anyways), the finance sector grows as productivity in other industries decreases, because then (a) the decision to put capital into other industries becomes less and less clear and (b) the financial services therefore become more valuable.

(If you want to change this, you need to modify the incentives to either (a) make the finance sector less appealing, (b) make other industries more appealing or (c) both - but that's another issue altogether)

(The biggest problem with the theory above is of course that prices and returns are often a function of things other than actual productivity and instead rely on future potential productivity, which is another word for speculation, and so there’s a huge opportunity to manipulate the markets which happens all that time, resulting in people making $$ without actually being more productive)

For the HN audience, the good/interesting thing is that we are currently in a market where tech is one of the industries with (relatively) high productivity (for extreme example, see WhatsApp, Instagram, etc., where very few individuals created very much value), and therefore you see interesting trends: more institutional money is pouring into the market which leads to more money competing for fewer start-ups which leads to higher valuations.

See: http://www.wsj.com/articles/venture-capital-fundraising-jump...

On a human capital level, talent is also moving (relative to historical trends) from finance to tech, and on an anecdotal level, the number of former bankers turned MBAs turned Product Managers has been pretty astounding to me - fair amount of press addressing the issue as well:

http://finance.yahoo.com/news/mbas-abandon-wall-street-for-s... http://money.cnn.com/2014/08/22/investing/wall-street-silico...

Re: Too much finance is bad for the economy

#134

Post by AnthonyMouse »

magic_beans wrote: post #35
guardiangod wrote: post #17

Reminds me of a story. One of my local universities (top 3 in the country) had a chemistry lab competition and invited high schools from local cities to participate. My younger sister was selected to be part of her school's team. So she went and won the competition. The deen of science was so impressed by her performance that after the reward ceremony he invited her to enrol in the science program. She replied no and…

Business is much more lucrative than science. Not surprising.

It is kind of surprising actually. Scientists create more wealth than managers. If they aren't better compensated it indicates an economic inefficiency that someone could profit by eliminating.

There are obviously structural reasons why this hasn't happened or it would have already, but given the amount of money on the table, someone who figured out how to do it would stand to profit immensely.

Re: Too much finance is bad for the economy

#135

Post by joshjkim »

joshjkim wrote: post #133

Here's an alternative theory: Lower productivity in an economy causes a larger finance industry, not the other way around. The financial industry is the “marketplace” where people (supposedly) figure out the best places to deploy capital when the decision is not otherwise clear, or access to such investments is difficult, or the capital holder does not have expertise or want to learn to expertise to deploy the total…

(Another theory as to why financial services become larger as economies develop: as markets advance and become more and more sophisticated and fluid, capital gets rapidly deployed in industries where productivity is high such that the prices in such industries get driven up quickly and the ROI lowers, rendering the productivity less financially rewarding, UNLESS you are the first one there, which is another selling point of the finance industry (aka. finance will find the deal and get their first) - really another topic though)

Re: Too much finance is bad for the economy

#137

Post by angersock »

rayiner wrote: post #93
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…

I hate it when people complain about bright kids going into finance instead of STEM. My brother went to an Ivy and majored in physics. He asked me sometime junior year what he should do with his life. He'd already worked in research labs on nanotech, and was seriously considering getting a PhD. I told him to apply for finance and consulting jobs instead. He's glad he went into finance. He gets a ton of responsibility…

Well put.

As much as people bemoan the state of things, the fact is that that's the deal one makes to get ahead. If we treated the sources of intellectual capital better than those who manage them, things might be different.

Re: Too much finance is bad for the economy

#138

Post by lifeisstillgood »

bhayden wrote: post #121
Bjartr wrote: post #119

Earlier quoted context omitted.

What is meant by "public schoolboys" exactly? I'm struggling to grok the intended message.

I believe he is saying it's run by people of weak moral fiber and character.

In England Public School is where the "upper class" send their children for a private education. Chinless wonders is a derogatory term for less than intelligent children from those schools (in-breeding amounget limited aristocratic gene pool lead UK to have royalty with unusually small jaw lines for a while) And jobs in finance were considered till mid century to be available only to those people who knew each other, went to the same schools and used same networks.

In short - an industry run by in-bred, unintelligent, privately educated with a small and elite job network.

Re: Too much finance is bad for the economy

#139

Post by lifeisstillgood »

AnthonyMouse wrote: post #134
magic_beans wrote: post #35

Earlier quoted context omitted.

Business is much more lucrative than science. Not surprising.

It is kind of surprising actually. Scientists create more wealth than managers. If they aren't better compensated it indicates an economic inefficiency that someone could profit by eliminating. There are obviously structural reasons why this hasn't happened or it would have already, but given the amount of money on the table, someone who figured out how to do it would stand to profit immensely.

That's a great thought.

I am assuming that the structural issue is that science in order to create the wealth must "open source" it's knowledge and this be unable to capture private profit, whereas corporations can maintain proprietary control and create less wealth but more profit.

If we do solve it however, perhaps through some patent system, we will incur another problem - Albert Einstein for instance (photons, relativity and atomic structure) would be owed about 20% of the entire world GDP ...

But yeah, I like the idea.

Re: Too much finance is bad for the economy

#140

Post by AnthonyMouse »

jeffreyrogers wrote: post #62
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 prot…

> 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.

The company paying you a dividend is mathematically equivalent to everyone tendering the company that percentage of their shares for cash and then having a stock split so that everyone ends up with the same number of shares they had originally. The only practical difference is the tax treatment.

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