Why is finance so complex? (2011)

There were fourteen of these domes, run as a cooperative, on three acres of land. The loans on building them were paid off in full by the early eighties, and I believe there was about a decade where no one paid rent. But eventually it was decided that a nest egg should be built up for upkeep and so on; by the time I was there, it was running about a third of market rent, and these days (due to some additional pressure to modernize) the rents are up to about 2/3 market.

Cooperative ownership is fantastic, and a great cure for the ails of capitalism. But they tend to not get a lot of investment for exactly the same reason: capital isn't interested in investing in non-capitalist spaces.

But it's certainly possible to band together with some friends to get an initial down-payment+loan. Then you incorporate the cooperative, and essentially 'sell' the house to the new cooperative, so that the 'rent' you pay to your new co-op pays off the bank loans. Once the loans are paid off, the cooperative becomes an autonomous creature, self-sustaining as long as there are people happy to live with other people and decide how the place will be run, rather than dealing with a landlord...

In that way bankers are just like lawyers and accountants. You pay someone to do things you don't have the time to do (or even learn how to do) so you can focus on your job. Its division of labour at the macroeconomic level and everyone benefits from specialisation.

Now, I agree that contemporary finance is bloated with opacity and that banks do benefit from this via corruption (tax code and compliance reform are needed ASAP). But its disingenuous to say that the value of finance is entirely "placebo".

If you want to see what life is like without access to modern financial tools, got visit an Indian Reserve in Canada. Housing is cheap there.

Lack of access to modern financial instruments--municipal bonds in particular--is a major block in the way of First Nation's prosperity. Last year a new kind of "aboriginal bond" was floated for the first time to get around this, and hopefully more will come.

So you have an example of what life looks like in your dream world. It isn't pretty. And like everyone else who is pro-finance here, I'm not saying there aren't issues with what we've got. We can fix them. What we can't fix is the massive poverty that comes without access to financial tools, however morally repugnant those tools seem to naive outsiders.

I don't think the 2008 crisis was caused by complexity. Most actors on these structured credit markets understood well the products. It was rather caused by over leverage and complacency toward credit risk.

And it will happen again. Hopefully the banking system is much stronger now, and the legal mechanisms are in place to limit the cost of a failing bank to tax payers. But the excess of liquidity as a result of money printing has starved investors for yield, and I believe that they are investing in places where they would rather not, like in 2005. Then it was subprime and commercial real estate. Now most likely emerging markets.

His system still used circular orbits and epicycles. The only real difference was that he put the sun in the middle instead of the Earth. In fact, it required more epicycles / gave more imprecise results.

The real improvement came when circles were replaced with ellipses by Kepler.

That wasn't entirely accurate, either, but replacing the ideal circles with the law of Gravitation (Newton) fixed that.

Economists have many more than just two cures -- which is why some of them keep harping on regulations and overly protective labour laws in Greece (and the rest of the Mediterranean swamp), their very expensive pension system, and the huge size of their public sector. Krugman doesn't, which is why I have absolutely no respect for him.