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Why is finance so complex? (2011)

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Re: Why is finance so complex? (2011)

#61

Post by bagels »

kazagistar wrote: post #53
obrero wrote: post #19

Earlier quoted context omitted.

> Like a software system, it's extremely naive to think that complexity is a sign that a system is rotten. The reality is, the derivatives market is larger than the actual market. More capital is invested in calls guessing if Google is going up than is actually invested in Google. This is a sign something is rotten. This article from 2008 has a lot of interesting data from after the subprime crash ( http://monthlyrev…

Out of curiosity, where does the capital sit when it is "invested in derivatives"?

With whoever sold the derivative.

Re: Why is finance so complex? (2011)

#62

Post by innguest »

coderzach wrote: post #52
denim_chicken wrote: post #45

Earlier quoted context omitted.

> You need a mortgage because you don't have $400,000 in cash sitting around. And a large part of why housing costs $400,000 in the first place is due to the availability of mortgages. Mortgages gave themselves a reason to exist.

Not really. Land, Materials, and a team of carpenters/electricians/roofers/hvac/painters for 3-6 months ends up at around 400k. It's not really that crazy. If you paid them all programmer salaries, you'd never get a house for under 1mm.

A monolithic concrete dome that is energy-efficient, fire-proof, tornado-proof and earthquake-proof costs around $30k. But it's not your money so you don't care that the banks are subsidizing incredibly complex, unreliable, weak, stucco-wall houses that due to their unnecessary complexity, naturally end up costing several times more than a better, simpler house.

Re: Why is finance so complex? (2011)

#63

Post by techbio »

pessimizer wrote: post #11
slg wrote: post #8

>The core purpose of status quo finance is to coax people into accepting risks that they would not, if fully informed, consent to bear. 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 e…

But it's actually true. I've personally had the experience (as a freelancer) of watching people that I had just recently met be laid off because of what I was being generously paid to do. I did not like it. I could at least comfort myself by the fact that what I was doing was actually useful (and creating efficiencies that destroyed jobs), whereas concealing risk is actively deceitful and destructive.

Efficiency is therefore deliberately harmful, except when in the form of a paycheck, QED.

Well done, good luck.

Re: Why is finance so complex? (2011)

#64

Post by innguest »

ghiculescu wrote: post #50
denim_chicken wrote: post #45

Earlier quoted context omitted.

> You need a mortgage because you don't have $400,000 in cash sitting around. And a large part of why housing costs $400,000 in the first place is due to the availability of mortgages. Mortgages gave themselves a reason to exist.

No, it's because a house is 400,000 times more valuable than a can of coke.

The banks really succeeded in convincing you that that's the price of a house, but that only says something about you, not about the real price of a house.

A 500 sq ft monolithic dome house costs around $30k. It fulfills all the roles of a normal house, but better, safer, and cheaper.

Now tell me how I'm wrong because "furniture doesn't fit in curved walls" and how that justifies the $370k discretionary increase in how much you want to help banks prey on homeowners and earn more interest.

Re: Why is finance so complex? (2011)

#65

Post by hderms »

britknight wrote: post #32
civilian wrote: post #15

Earlier quoted context omitted.

Exactly. I think he's assuming he'll never have to pay back the principle.

(In response to above as well as parent) > 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 l…

I guess that assumes infinite access to credit? Otherwise there would be an opportunity cost associated with bulldozing the rocky mountains in favor of some other activity with higher marginal utility, right?

Re: Why is finance so complex? (2011)

#66

Post by dragonwriter »

innguest wrote: post #64
ghiculescu wrote: post #50

Earlier quoted context omitted.

No, it's because a house is 400,000 times more valuable than a can of coke.

The banks really succeeded in convincing you that that's the price of a house, but that only says something about you, not about the real price of a house. A 500 sq ft monolithic dome house costs around $30k. It fulfills all the roles of a normal house, but better, safer, and cheaper. Now tell me how I'm wrong because "furniture doesn't fit in curved walls" and how that justifies the $370k discretionary increase in h…

> Now tell me how I'm wrong because "furniture doesn't fit in curved walls"

Well, yeah, if you are going to have a house that small -- 500 sq. ft. -- optimal shape is a pretty big concern.

> and how that justifies the $370k discretionary increase

Well, much of the increase is going to be land price. Even a 500 sq. ft. dome home anywhere more typical home prices for reasonably moderately sized homes are around $400,000 is going to be a lot more than $30k just of the land it sits on.

Re: Why is finance so complex? (2011)

#67

Post by innguest »

kazagistar wrote: post #53
obrero wrote: post #19

Earlier quoted context omitted.

> Like a software system, it's extremely naive to think that complexity is a sign that a system is rotten. The reality is, the derivatives market is larger than the actual market. More capital is invested in calls guessing if Google is going up than is actually invested in Google. This is a sign something is rotten. This article from 2008 has a lot of interesting data from after the subprime crash ( http://monthlyrev…

Out of curiosity, where does the capital sit when it is "invested in derivatives"?

The size of the global derivatives market is 1.5 quadrillion dollars. Global GDP is not even $90 trillion.

     90,000,000,000,000 GWP
  1,500,000,000,000,000 global derivatives
Do you think it got that far by "sitting"? It gets reinvested ad infinitum.

Re: Why is finance so complex? (2011)

#68

Post by pimlottc »

forrestthewoods wrote: post #60
nisa wrote: post #22

Earlier quoted context omitted.

*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…

"Complexity that can't be coped with is rotten!" I respectfully disagree. https://en.m.wikisource.org/wiki/I,_Pencil

Isn't that an example of complexity that is being successfully coped with, thanks to the abstractions provided by the various industries and institutions that provide raw materials, processing, shipping, etc?

Re: Why is finance so complex? (2011)

#69

Post by Spivak »

coderzach wrote: post #52
denim_chicken wrote: post #45

Earlier quoted context omitted.

> You need a mortgage because you don't have $400,000 in cash sitting around. And a large part of why housing costs $400,000 in the first place is due to the availability of mortgages. Mortgages gave themselves a reason to exist.

Not really. Land, Materials, and a team of carpenters/electricians/roofers/hvac/painters for 3-6 months ends up at around 400k. It's not really that crazy. If you paid them all programmer salaries, you'd never get a house for under 1mm.

The problem is that you have to take into account that those values are biased because mortgages exist. The value of a home is exactly what a person is willing and able to pay for it.

If mortgages never existed then people would value housing much less because it's no longer $x monthly, it's the whole thing up front.

You're right that a portion comes from material cost but the cost inflates to fit the budget of the expected buyer. Without mortgages the typical suburban house would be built so that a middle-class person could afford it.

From this you can argue that mortgages are a good thing because they allow a person with less wealth to get more/better houses by leveraging future income, but the trade-off is that buyer takes on more risk, there are no low cost homes in good neighborhoods which could be reasonably bought outright, and people are more dependent on their credit rating.

Re: Why is finance so complex? (2011)

#70

Post by kristjansson »

obrero wrote: post #19
h8trswana8 wrote: post #14

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…

> Like a software system, it's extremely naive to think that complexity is a sign that a system is rotten. The reality is, the derivatives market is larger than the actual market. More capital is invested in calls guessing if Google is going up than is actually invested in Google. This is a sign something is rotten. This article from 2008 has a lot of interesting data from after the subprime crash ( http://monthlyrev…

The nominal value of the notes in the derivatives market is extremely large. However, we can't equate $500B notional of e.g. CDS written against Apple debt with $500B of Google stock. The CDS represents (1) to the seller, an small initial premium and a large, extremely low-probability liability requiring some collateral, and (2) a stream of future payments from or to the buyer, depending on the cost of insuring the debt. Up until a credit event, the only money exchanged is the premium, and perhaps some collateral, both of which are (for highly rated debt) orders of magnitude smaller than the notional value of the contract.
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