Why is finance so complex? (2011)

1. If a transaction is complex, it's easy to sucker people into buying. Why would anyone buy a structured product?

2. If a transaction is complex, both sides can claim an immediate profit based on their idea of how it should be valued.

3. A lot of complexity in finance is driven by the fact that big banks can borrow at 0% while true inflation is higher. Via various derivatives, this government interest rate subsidy is packaged and sold. For example, I can't borrow at 0% to buy stock, but if I buy a call option, the bank can borrow at 0% to finance their hedge.

4. Because different people have different interest rates (banks borrow at 0%, large corporations borrow at 5%), banks can price a derivative at 3%, and both sides can LEGITIMATELY claim an immediate profit on the trade. (Bank borrows at 0% and lends at 3% to finance the derivative hedge. The corporation is borrowing at 3% instead of the 5% they normally would pay.)

To call finance intentionally opaque is a perhaps true, but it shouldn't be vilified much more than other goods and services, the providers which all maintain some level of "opacity" towards their customers. In a sense, it's a fundamental part of any capitalistic transaction. A farmer sells an apple for more than it costs for her to make it, but you're willing to pay her for it because you aren't that good at growing apples. To her, it might be worth what it cost her to grow it, but to you, it is clearly worth what you are willing to pay for it, because you have the added benefit (or requirement) of being able to eat it and survive. So it is worth more to you, less to her, and she profits.

One could see similarities in insurance (much closer to finance than apple-growing, if not finance itself). An insurer charges you (or maybe an aggregated group of "yous") more than it costs to provide a certain protection (or hedge against a certain risk). You are willing to pay the premium because clearly the risk protection matters more than getting some "theoretically optimal" price.

With increased availability in technology and information, certain kinds of finance are becoming easy to do "on your own" - the most salient example is perhaps index investing. Many people are realizing that financiers cannot add value and they need less of a middleman.

I thought I'd share my contrasting thoughts, but I very much enjoyed the read.

Of course, real interest rates have gotten close to zero, but in general real interest rates of 0% are nonsensical in stable, developed economies. Economically speaking, if rates were 0%, it would in the long run make sense to bulldoze the rocky mountains to save money on gas, because there is no marginal cost to consider.

That is a pretty loaded statement. That would be like saying the core purpose of the software industry is to destroy jobs and in turn collect part of the salary that those jobs previously paid. It might technically be true, but it is twisting things to make them sound intentionally evil.