31–40 of 148 posts
Also, there's an inherent information asymmetry favoring the inventor.
Earlier quoted context omitted.
"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" Wait, run that by me again more slowly. In general, it does make sense to make large infrastructure investments in order to increase long term productivity, especially when interest rates are low, but in general, it's always the case. Hell, bits of the Rockies WER…
Exactly. I think he's assuming he'll never have to pay back the principle.
> What's the magic that happens at zero that causes otherwise nonsensical projects to make economic sense?
The bulldozing-mountains example is purposefully over-the-top (I believe I first heard it in an article by Bernanke[0]). The point that I am trying to illustrate is that at a 0% interest rate, the traditional marginal cost/marginal utility analysis breaks down, since as long as the marginal utility of the last investment dollar spent outweighs the marginal cost of spending that dollar (the interest rate), traditional economic thinking would have you spend that dollar.
> Exactly. I think he's assuming he'll never have to pay back the principle.
The rocky-mountain example does assume this, but it doesn't make a 0% interest rate any more ludicrous. Imagine that you could take out a loan for $x at 0%. Simply because of the fact that time gives assets the opportunity to grow, the future value of that loan when it is to be repaid is greater than the value when you received the loan [1]. Of course, the 0% rate would remove some traditional investment options (savings account, Treasury bonds, etc.), I think it is reasonable to assume that investments will still be able to appreciate to some degree.
However, this appreciation would be constrained in reality by inflation if the real interest rate is 0%. If, on the other hand, the nominal interest rate is 0%, then the loan effectively counteracts the headwind of inflation, and any return, no matter how small, winds up in your pocket.
[0 (7th paragraph)] http://www.brookings.edu/blogs/ben-bernanke/posts/2015/03/31... [1] https://en.wikipedia.org/wiki/Time_value_of_money
The world of finance makes these aspects of your life function: * Allows you to get a mortgage * Allows you to protect yourself with health/car/life/home/title/etc insurance * Pays for your highways/stadiums/schools and other public works * Protects your deposits * Pays for your retirement * Funds the college fund that paid for your school * ... Or the student loans that allowed you to attend school * Supports the gl…
*If you life in a first world country and come from at least a lower-middle class background You are talking about money. Not modern wall-street finance. > huge amount of human progress is owed to modern-day financial institutions. Like synthetic credit default swaps? > Like a software system, it's extremely naive to think that complexity is a sign that a system is rotten. Complexity that can't be coped with is rotte…
If you're against CDS, you should explain why.
Like any financial product, CDS is not perfect, but it's also intellectually dishonest to argue that it doesn't offer any benefit to society. For example, CDS is used widely by the insurers that the parent noted help individuals protect themselves and their property.
> Complexity that can't be coped with is rotten! The Linux kernel is quite complex but each part of it is well understood and there are a lot mechanisms in software to reduce complexity.
You apparently assume that the financial markets are too complex to be managed but poll people on a busy street in any major city and many will probably tell you they feel computer software is unmanageably complex too. Should we call software rotten because some people who used it have suffered some loss as a result?
> Tell that to Greece people that got into the Euro because of clever CDS from Goldman Sachs or the masses of people that are stuck in debt from their education or credit cards.
It takes two to tango. It would be unfair to pretend that some of the near countless individuals and companies active in providing financial services have not acted immorally or even illegally, but it's intellectually dishonest to pretend that every person who has taken on more debt than he or she can manage is a victim who was coerced into making financially imprudent decisions.
This applies to countries too.
> However recent financial crises have shown that banks offering these products for the most part understand them... the persons buying them don't.
Save for Lehman, which was allowed to fail, the large banks were bailed out. If they were as savvy as you seem to think, why did they need bailouts?
The world of finance makes these aspects of your life function: * Allows you to get a mortgage * Allows you to protect yourself with health/car/life/home/title/etc insurance * Pays for your highways/stadiums/schools and other public works * Protects your deposits * Pays for your retirement * Funds the college fund that paid for your school * ... Or the student loans that allowed you to attend school * Supports the gl…
Well, there could be some counterarguments. > Allows you to get a mortgage Wonder if that was always so? Didn't people manage somehow to have a house without something which name suggests it will be paid for the whole life? > Allows you to protect yourself with health/car/life/home/title/etc insurance A casino, right? On average you lose, but for a price you buy a hedge against unforeseen? At least unforeseen for you…
>Didn't people manage somehow to have a house without something which name suggests it will be paid for the whole life?
Well, for a while people were indentured farmers, then you got people renting tenements and apartments in cities, with some land-grant family farms/homsteads being passed down through inheritance. Mass suburban home ownership is mostly a post-WWII phenomenon, and mostly funded through credit. Though for a time, most people got their mortgages from community credit unions (or similar), those were still financial institutions, just in decentralized cooperative form. Big banks ended up being able to provide better rates through sheer scale.
>A casino, right? On average you lose, but for a price you buy a hedge against unforeseen?
My mother had a brain hemorrhage last week, we paid about $1000 for $500k+ of medical care. The insurance industry works only because insurance companies can invest their giant pool of money and see large enough gains to both cover all their costs and make it worth their while. Insurance premiums aren't sitting around as cash.
Your point?
>that's those same deposits
Nope, it's the interest on those deposits, the core service of the financial services industry. Retirement is entirely predicated on compound interest.
> Same thing. Banks don't "fund" - they "serve". Money aren't theirs, but theirs', banks', depositors.
It's hard to imagine how you could possibly be more wrong. We're not talking about business checking accounts here, we're talking about banks investing in businesses. Banks absolutely do fund businesses, and own (shares in) those businesses in return.
An investment bank owns a business and, in turn, its checking accounts in retail banks.
I don't think you understand banks' roles in philanthropy and education - successful nonprofit institutions like universities draw their operating budgets from interest on their endowments. Were it not possible to park $x billion in account and draw $y million a year in interest for literally forever, many such institutions could not exist.
Finance is complex because: 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 govern…
Banks don't necessarily borrow at 0%. Granted, they are able to borrow at a much lower rate than you or me (closer to the Federal Funds Rate managed by the U.S. Federal Reserve), but they still pay interest on their loans. 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…
The world of finance makes these aspects of your life function: * Allows you to get a mortgage * Allows you to protect yourself with health/car/life/home/title/etc insurance * Pays for your highways/stadiums/schools and other public works * Protects your deposits * Pays for your retirement * Funds the college fund that paid for your school * ... Or the student loans that allowed you to attend school * Supports the gl…
Well, there could be some counterarguments. > Allows you to get a mortgage Wonder if that was always so? Didn't people manage somehow to have a house without something which name suggests it will be paid for the whole life? > Allows you to protect yourself with health/car/life/home/title/etc insurance A casino, right? On average you lose, but for a price you buy a hedge against unforeseen? At least unforeseen for you…
You are correct in that the money used to build highways etc. does start as your tax dollars. However, I would imagine that it is then held (and allowed to appreciate) in the form of a reasonably liquid portfolio of cash, bonds, and equities. I suppose you could technically reduce finance to "moving money around", but that is such a gross simplification that it would be like saying programmers just type for a living.
> Nah, that's those same deposits. I largely pay myself for retirement, by saving the whole life.
If your entire retirement savings are in simple savings accounts (i.e. in a bank instead of a brokerage account), I am afraid you are losing out on quite a substantial return that could allow you to either retire earlier or enjoy a higher annual income during retirement (or both).
> > Funds the college fund that paid for your school > Again, it's either another example of "moving money", or an oddity - as people managed to get educated even without banks.
The statement that college funds, loan programs, and scholarship endowments (all powered by "finance") pay for the education of practically every student in the country is true, unless you save for college in a piggy bank.
> you ought to share risks and benefits
If you want to share the risks and benefits, there's an easy way to do that: get a brokerage account. If you have deposited your money, the basic assumption is that you are willing to accept a lower rate of return in exchange for a (practically) risk-free place to store your money.
depends on how much you want to rely on the FDIC
Consider that the Brownian model of financial markets was discovered by Bachelier in 1900, five years before Einstein, and the pace of financial innovation in the intervening century, and you have your answer for why finance is complex. [1]: https://en.wikipedia.org/wiki/Louis_Bachelier
The world of finance makes these aspects of your life function: * Allows you to get a mortgage * Allows you to protect yourself with health/car/life/home/title/etc insurance * Pays for your highways/stadiums/schools and other public works * Protects your deposits * Pays for your retirement * Funds the college fund that paid for your school * ... Or the student loans that allowed you to attend school * Supports the gl…
The fallacy here is assuming that because it does all of those positive things, it must therefore holistically be optimal. Like a software system, it's extremely naive to think that complexity is a sign that a system is rotten. Why would such an assumption be naive? It doesn't seem naive to me at all. I was reading a 1994 paper that I posted recently called "A Uniform Name Service for Spring's UNIX Environment" which…
While not hundred percent sure, it is highly possible that finance complexity will magically disappear once we get a proper model for money transactions. I certainly hope so, because a better model means more means to solve economic issues.
Right now economists are like the physicians in the time of Molière, they understand nothing and have only two cures: bloodletting and lavement (change interest rate and remove taxes)