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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

#151

Post by dmfdmf »

skylan_q wrote: post #47
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…

Sounds like the ABCT to me. http://en.wikipedia.org/wiki/Austrian_business_cycle_theory Sounds to me like printing money and pumping it into finance leads to an unsustainible economy.

That's what it sounds like to me too. Unfortunately, most people don't want to hear the truth so they downvote you. Big news for the ostriches; we never paid for the 2008/9 mortgage bust and those chickens are coming home to roost -- fattened up by the Feds ZIRP, TARP and continued credit creation. The mortgage bust was papered over by the Fed printing $4B+ and that is what they admit. It wouldn't surprise me if they printed double that to secretly loan to US and foreign banks and governments. Actions have consequences and soon we will see what von Mises meant by the crack up boom.

Re: Too much finance is bad for the economy

#152

Post by crdb »

Bjartr wrote: post #119
gaius wrote: post #105

Earlier quoted context omitted.

In short, the finance sector lures away high-skilled workers from other industries LOL. When other industries aren't run by chinless public schoolboys where engineers are second class citizens, call me.

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

Although the other comments covered the gist of it, you might be wondering why Britain's best private schools are called "public": http://en.wikipedia.org/wiki/Public_Schools_Act_1868

FWIW all the schools have relatively extensive scholarship programs whose breadth and funding is cyclical and dependent on the views of the Headmaster and Board.

Amusing anecdote: I attended Westminster (on a scholarship) under Tristram Jones-Parry who was known for both keeping the school at the top of the UK ranking for the duration of his tenure, and for expanding the scholarship programs. He was the quintessential "close to the troops" manager, he chatted with all pupils regularly, cornering them in the yard or the street to ask them their thoughts, and occasionally barging into a maths class and teaching it (incredibly well). When he retired and wanted to spend a bit of time teaching disadvantaged kids in state-run schools, his application was rejected by the government because he did not hold the appropriate teaching qualification. See: http://en.wikipedia.org/wiki/Tristram_Jones-Parry

Re: Too much finance is bad for the economy

#153

Post by LiweiZ »

skylan_q wrote: post #47
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…

Sounds like the ABCT to me. http://en.wikipedia.org/wiki/Austrian_business_cycle_theory Sounds to me like printing money and pumping it into finance leads to an unsustainible economy.

Austrian school economics seems unheard for many. After skimming books by Mises, I believe Austrian school is on the right track. But the tool for it has not ready at that time. When I learned about complexity systems. I think it can supply the right tool. And just this week, I'm reading papers by W. Brian Arthur. (http://en.wikipedia.org/wiki/W._Brian_Arthur) Quite fascinating experience.

Another issue with economics is it has very tight connection with financial and political systems. Until some players could take advantage with those more advanced theories, a new wave of mind-sets would not emerge and widely accepted by the public. Money, power, information, control, it sounds like crazy words. When things become closer to those, you have to think harder to get closer to the reality, if you do care about it.

Re: Too much finance is bad for the economy

#154

Post by sokoloff »

AnthonyMouse wrote: post #150
refurb wrote: post #146

Earlier quoted context omitted.

It is kind of surprising actually. Scientists create more wealth than managers. Creation of wealth only plays a role in salaries in the sense that you can't pay someone more than the value created overall. Supply and demand is really what drives salary.

Supply and demand sets the price of everything. You're just restating the fact that scientists don't make a lot of money. The interesting question is why there isn't more demand for scientific research when the returns are so high. Clearly it isn't that the market and society have no desire for additional scientific progress.

The returns for genuine basic scientific breakthrough can be very high.

They also are very rare, and tend to create financial payoff only after a decade or more.

Re: Too much finance is bad for the economy

#155

Post by jeffreyrogers »

pinky1417 wrote: post #88
jeffreyrogers wrote: post #62

Earlier quoted context omitted.

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…

Hedge funds do indeed underperform the market: http://www.zerohedge.com/news/2013-12-13/hedge-funds-underpe... Same with mutual funds. With both mutual funds and hedge funds, investors are paying a ton of money for nonexistent skill.

You chose a five year period of underperformance when the markets are doing extraordinarily well. On the whole HF returns are higher than the market by about 6%. And in particular during the financial crisis hedge funds did better than the market as a whole.

Re: Too much finance is bad for the economy

#156

Post by jeffreyrogers »

bubbleRefuge wrote: post #91
esja wrote: post #73

Earlier quoted context omitted.

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 h…

You are correct. Fractional reserve banking is a myth . Banks do not lend out deposits. Deposits come from loans. Reserve requirements do exist but they do no limit bank lending. Lending is only limited by demand for loans and capital requirements. Here is a pretty good site which explains how the banking system actually operates in detail. http://wfhummel.cnchost.com/ Its a disgrace you are being downvoted.

I didn't downvote, but the parent is conflating money with credit. Banks and other lenders create credit. Only the Fed creates money. When credit starts to contract and economic growth isn't strong enough to sustain increased creation of money you get a deleveraging, as we recently experienced.

So yes, in one sense banks do create "money", but what you're calling money is actually credit.

Re: Too much finance is bad for the economy

#157

Post by JackFr »

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.

I'm sure you can find enough anecdata of predatory lenders to get your dudgeon up, but the reality is that they were a cause of the crisis only at the far margins. Th bulk of the crisis was caused by banks and borrowers making foolish decisions in good faith.

The crisis, like virtually all financial crises, was caused by leverage. Home buyers want it (they'd rather put 3% down than 20%); home lenders should be averse to it. The combination of the originate-to-sell model along with asset-backed security structures which were intended to de-lever the loans to make them palatable to investors had consequences which should have been foreseeable, but which were not.

People (and bankers) did not somehow become more greedy, more evil and more shortsighted in the lead up to the crisis.

Re: Too much finance is bad for the economy

#159

Post by throwawaykf05 »

AnthonyMouse wrote: post #145
lifeisstillgood wrote: post #139

Earlier quoted context omitted.

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, re…

The patent system is actually highly problematic because it a) provides no reward for research leading to negative results (which is extremely important to scientific progress) and b) provides the money after the fact rather than while the research is being conducted, requiring scientists to solicit investors up front (and possibly not be able to find any) and then gives the fruits to investors who may or may not rei…

>The patent system is actually highly problematic because it a) provides no reward for research leading to negative results (which is extremely important to scientific progress)...

And how is that different from absolutely any known system for managing science? You don't get publications for failed results either. FWIW I dedicated a whole quarter of my Master's thesis to a failed approach, just because I also thought it was important for progress, even though it provided little value from a thesis defense perspective

>and b) provides the money after the fact rather than while the research is being conducted, requiring scientists to solicit investors up front (and possibly not be able to find any)

Again, sounds like how the current proposal-for-grant system we have now.

> and then gives the fruits to investors who may or may not reinvest it into future R&D.

There really is no way to differentiate this from the alternatives. The government decides to invest based on a budget that is subject to way more conflicting forces than a profit-driven private entity.

> Then on top of that the patent monopoly makes the new invention more expensive ...

That is a commonly postulated hypothesis, but if one looks at empirical evidence, one finds a great deal of positive impetus to innovation provided by patents... in some industries. As always, the data is messy, the situations are complex, and the hypotheses are simplistic, but a large number of studies show that the patent system has significant benefits as well as costs. However it is impossible to tell from the data which one outweighs the other, mainly because it is like comparing apples and oranges. In general, though, risky, capital intensive fields are benefited more than harmed by patents.

>* massive direct public funding of scientific research.*

I don't know what you mean by "public", but to me it sounds like "government", in which case, see point above regarding budgets.

Re: Too much finance is bad for the economy

#160

Post by JackFr »

branchless wrote: post #129
MaysonL wrote: post #95

Earlier quoted context omitted.

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.

Spot on. Other responses are naive. They speak of "the banks". There are two entities here: 1. companies 2. individuals working for companies who get commission for selling loans whether they get paid or not Plus there are many many other problems with banking other than sub-prime which boil down to the above. That's why we need to start putting individuals in jail.

This is ludicrous and ill informed.

To put someone in jail, typically they need to commit a crime. If someone lies about their income, and borrows money based on that information, the borrower has committed fraud, not the lender.

I'll grant that it is immoral to steer someone into a loan which they probably won't be able to repay. However, unless the lender's agent materially misrepresented the loan, it is not illegal.

The originate-to-sell model does introduce perverse incentives on the part of the lender's agent -- prudence takes a back seat when you don't hold the note. But if a borrower lies, and the lender's agent willfully ignores the lie and then sells the loan, both the agent and the borrower have defrauded the buyer of the loan, and it is that investor who is the victim of the fraud.

No one was making borrowers take out loans. The reason why no one is going to jail, is because no one is wants to talk about 1) the culpability of the borrowers; and 2) the trillions of dollars of lost wealth did not flow into Wall Street bonuses, rather it went into loans to the public which were not repaid.

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