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Why is finance so complex? (2011)

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Re: Why is finance so complex? (2011)

#101

Post by _nedR »

Seanambers wrote: post #98
_nedR wrote: post #72

Earlier quoted context omitted.

>Financial innovation make our lives more predictable and less sensitive to chance. lol.

Go live in a world where theres no securitization of debt, no interest on debt, no mitigation of risk, no insurance against risk, hell even no banks. No banks means no jobs, bad housing, no tools, no pc's, no security, no stores - but that dosnt matter, cause you dont have any money either, bad food, no mass production++ Most people commenting in this tread has no concept about what finance is and does, so it must be…

The key word here is innovation. Lot of the stuff you described (except perhaps debt securitization) is old and tested. To an outsider like me, it looks like a lot of financial innovation today (the kind that Wall Street does by hiring Physics and Math Phds)is primarily aimed at making a few rich people even richer at the expense of everybody else and provide zero or negative value to society. Why should we encourage that behaviour? Then there is the good kind of innovation like Micro-financing that is done in places like Bangladesh, and that you know, actually is designed to help the common man. Even crowd-funding (is that financial innovation?) could be considered good (although caution and regulatory oversight should be built in). This is kind of innovation seems to be the exception rather than the rule though.

I say financial innovation should treated by govt. with greater caution and suspicion especially when the effects of such innovation has consequences on the wider economy or when it involve other people's money.(Who's bright idea was it anyway, to allow banks and funds to gamble with people's pensions and deposits?)

If you can provide a counter-example to this, that would be much welcome.

edit: And no, I don't think a world without debt securitization would be such a bad thing.

Re: Why is finance so complex? (2011)

#102

Post by dabeeeenster »

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…

All these things were available 50 years ago.

Re: Why is finance so complex? (2011)

#103

Post by kriro »

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.

That's only true for a marginal can of coke. If you have nothing else to drink and are about to die a lone can of coke becomes much more valuable than the house.

Diamond/water paradox

Re: Why is finance so complex? (2011)

#104

Post by tempodox »

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…

Financial innovation make our lives more predictable...

Not necessarily. It may also make our lives a game of chance or a house of cards. You didn't say what kind of innovation.

Re: Why is finance so complex? (2011)

#105

Post by [deleted] »

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…

[deleted]

Re: Why is finance so complex? (2011)

#106

Post by thelamest »

slowmotiony wrote: post #83
coderzach wrote: post #52

Earlier quoted context omitted.

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.

That's ridiculous. Here in Poland, ever since our beloved government started funding a percentage of new developer-sold apartment mortgages to young couples, the prices magically rose about 15-20%. Are you saying that the roofers and painters suddenly started demanding more money?

But debt (and banking in general) just increases your available funds from x to, say, ax+b. How the funds are then spent - wastefully or wisely - and how the markets are regulated and react, are another questions. I mean, at least in theory, mortgages could be seen as equivalent to consumers simply having a little more money.

Re: Why is finance so complex? (2011)

#107

Post by Ntrails »

nisa wrote: post #22
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…

*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…

>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.

Well understood by experts, as is the appropriate section of the financial system. You chose to learn about the kernel, someone else chose to learn about asset backed securities. The guy who learned about Bach probably considers both to be very complex.

Re: Why is finance so complex? (2011)

#108

Post by Altay- »

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…

Banking allows us to get mortgages.

"Finance" gives us 2% down payment mortgages which are than packaged and sold to Japanese pension funds with currency and interest rate hedges mixed in... which then go on to screw everyone involved since NO ONE reads or understands the terms of the investment vehicle besides the financial engineers who wrote & sold them.

The same holds true for all the points you listed.

Fortunately, Capitalism has a fail safe. All this financial nonsense would have been fixed if the banks were allowed to fail in 2008. The US federal government is largely to blame for the continued parasitical rent seeking of the high finance class.

Re: Why is finance so complex? (2011)

#109

Post by collyw »

Spivak wrote: post #69
coderzach wrote: post #52

Earlier quoted context omitted.

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 e…

Exactly. That is why the UK has had to keep "emergency" low interest rates for the last 7 years or so. If they were to rise, people wouldn't be able to afford their houses and the prices would drop. The banks assets would loose value and we would have another crisis.

Re: Why is finance so complex? (2011)

#110

Post by vasilipupkin »

retube wrote: post #87
innguest wrote: post #67

Earlier quoted context omitted.

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.

> The size of the global derivatives market is 1.5 quadrillion dollars No. No it is not. No 1,000,000,000 times. NOTIONAL DOES NOT EQUAL MARKET VALUE. It's also completely meaningless as most trades offset. Trades are rarely torn up, you just do a new one to offset your risk. E.g GS vs JPM: they probably have 100bn of notional with each other. Actual risk? very little as the vast majority of trades just offset. Curre…

Yeah. It's a little bit amusing when people equate "I don't understand anything whatsoever about finance and have no desire to understand it" with "it is extremely complex". There is nothing complex about notional value of a derivative vs its market value. 2008 happened not because finance is complex, but because financial bets always incur a degree of risk and that risk sometimes materializes. Anyone who ever extended a loan to anyone else takes a risk that the loan will not be paid back. Sometimes, it isn't paid back
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