Too much finance is bad for the economy • Hacker News Board

Re: Too much finance is bad for the economy

#181

Post by PythonicAlpha » Sat, Feb 21, 2015, 4:16 PM UTC

The result can be seen in Great Britain:

Former British prime minister Thatcher ("Iron Lady") decided, that the future is in the service sector. Also the most lucrative service sector was the finance sector. So it was fostered to a big extend and the finance sector of London is one of if not the biggest industries of GB.

In fact, it is all that is left of the former Empire. All other industries of GB are not competitive any more. Car industry is not and many of the well known car brands are already sold to other car corporations. Mini belongs to BMW, so does the renowned "Rolls-Royce" brand, Rover was sold and sold again, now belonging to Tata.

The concentration to the finance sector did the other industries of the British isle not well. All what is left, is finance and so Britain is struggling and fighting every time, when the EU wants to regulate the finance sector.

They are captives of their own system.

Re: Too much finance is bad for the economy

#182

Post by jschwartzi » Sat, Feb 21, 2015, 4:17 PM UTC

pgwhalen wrote: post #127

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,…

This reads like you read one click-bait article about each subject mentioned and declared yourself an expert on all of the above. It really is woefully un-informed.

So how is he un-informed?

Re: Too much finance is bad for the economy

#183

Post by collyw » Sat, Feb 21, 2015, 4:26 PM UTC

randyrand wrote: post #56

tbrownaw wrote: post #20

No, a large financial sector is an indicator of inefficiencies elsewhere. Else, there wouldn't be a reason to pay middlemen to solve said inefficiencies.

The financial sector does a lot more than play middle man (in fact arbitrage is so quickly found these days its a hard to make much money doing this anymore) Primarily, they invest. Putting money into places that need capital and will likely grow.

like a housing bubble?

Re: Too much finance is bad for the economy

#184

Post by maxerickson » Sat, Feb 21, 2015, 4:29 PM UTC

zo1 wrote: post #176

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…

I've often held the opinion (and someone argue/correct me if I'm wrong here), that a lot of this artificial demand for growth is a problem due to inflation. I.e. Government keeps devaluing the currency and lowering natural interest rates, causing individuals (and banks) to seek riskier returns. This effect is pervasive in the economy. I can't even begin to comprehend what our economy/world would look like if interest…

The bond market is larger than the stock market (by 2x or more). There's also quite a few people whose primary asset (most of their money) is their house.

I think you are also using a different definition of natural interest rates than is typical in economics jargon, in the jargon, the natural interest rate is approximately the rate at which the economy is growing (it isn't particularly likely that easy money is restraining economic growth, so low central bank rates shouldn't lower it; if anything, they would tend to push them higher).

Poorly structured regulations are probably a bigger problem for the economy than easy money. An example would be regulation that appears to approve of the activities of a company that is giving derivatives high ratings when they know it is bullshit. That regulation either needs to be effective or to not exist.

Another example would be the tax incentives surrounding mortgage interest, combined with pseudo-governmental programs to lower the interest rates on mortgages. It turns out that people don't buy a house based on some carefully estimated value of the house, they buy the house based on the payments they think they can afford to make. Given that psychology, the tax incentives lead people to pay a higher price for a house, and the lower interest rates lead them to pay a higher price for a house. What do you get? Skyrocketing housing prices that don't particularly benefit anybody.

Re: Too much finance is bad for the economy

#185

Post by collyw » Sat, Feb 21, 2015, 4:37 PM UTC

mikeash wrote: post #42

danbruc wrote: post #40

Earlier quoted context omitted.

Why do we need growth for that? Wouldn't redirecting wasted resources do just fine?

That will get you some. Growth will get you more, faster.

Not really. If everyone worked one day a week less, and used that day to exercise, we would have lower productivity and better health.

Re: Too much finance is bad for the economy

#186

Post by bubbleRefuge » Sat, Feb 21, 2015, 4:40 PM UTC

jeffreyrogers wrote: post #156

bubbleRefuge wrote: post #91

Earlier quoted context omitted.

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.

Banks create deposits. Deposits are denominated in the unit of account, the dollar.

Re: Too much finance is bad for the economy

#187

Post by eli_gottlieb » Sat, Feb 21, 2015, 4:45 PM UTC

chongli wrote: post #110

Chinjut wrote: post #99

Earlier quoted context omitted.

The complaints are not necessarily directed at individual people who rationally choose careers in finance over other vocations, given the system they live in. The complaints are to a large extent over the fact that our society has been set up this way, with the goal of perhaps trying to change that so that people would feel less incentive/need to abandon science, mathematics, etc., for finance (in multiple senses!).

It hasn't really been set up this way. It didn't even evolve to be this way. It's ultimately a law of nature: ownership of capital yields exponential growth. The more you start with, the faster you grow. Most other sorts of vocations yield linear growth.

There's a slight problem there: real wealth rarely grows exponentially, and capital owners can only be paid via real wealth. So everyone else actually has a bargaining position.

Re: Too much finance is bad for the economy

#188

Post by bubbleRefuge » Sat, Feb 21, 2015, 4:48 PM UTC

tomp wrote: post #143

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…

That's not "creating" money - you have "money" in your account, but that's just a number. In reality, that money is on the bank's balance sheet, and it can lend it to others (or a part of it, depending on the regulations). It can also lend money that was actually created by the central bank and loaned to the commercial bank. But regardless of the number on your account, if the bank runs out of money (is insolvent), y…

You are confused. There is no such thing as a loanable funds market. The guy at the bank making the loan does not call the other guy at the bank to look in the safe and see if the funds exist to loan out. Doesn't work that way. Banks have to have appropriate capital ratios in order to stay in business and be considered solvent. Those ratios are entirely determined by regulation. By and large, the only thing stopping a bank from 'creating money' or making a loan is the willing and able consumers.

Re: Too much finance is bad for the economy

#189

Post by eli_gottlieb » Sat, Feb 21, 2015, 5:07 PM UTC

throwawaykf05 wrote: post #159

AnthonyMouse wrote: post #145

Earlier quoted context omitted.

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…

I think this problem could be solved with relative simplicity: partially nationalize all patents based on publicly-funded research. The state becomes entitled to a percentage of royalties from the commercial fruits of all such research, and in return, it offers uniform percentage-based licensing terms to all comers.

In one sweep, we capture some of the value of publicly-funded science for publicly-funded science, and we get rid of patent trolls, and we strongly reduce the intellectual-property risk of building a product based on others' research.

Re: Too much finance is bad for the economy

#190

Post by eli_gottlieb » Sat, Feb 21, 2015, 5:10 PM UTC

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…

This should worry us all! Someone halfway intelligent has to do something other than finance, or standards of living will stagnate and fall even for the financiers.