Why is finance so complex? (2011) • Hacker News Board

Re: Why is finance so complex? (2011)

#131

Post by jsprogrammer » Wed, Jul 08, 2015, 3:19 PM UTC

rorykoehler wrote: post #124

coderzach wrote: post #51

Earlier quoted context omitted.

So you want to collect enough taxes to have the government provide zero interest mortgages. Does that mean everyone gets a mortgage, regardless of creditworthiness? You want me to pay for other people's mortgages, when they won't even give me one?

That's essentially how buy to let works. As a renter I am paying for someone else's mortgage. If I could get a zero interest (or even normal interest) mortgage guaranteed by the government I wouldn't have to rent and I could retain that value that I have generated for myself. As it stands I work my ass off and make someone else rich in exchange for keeping my chin just above the water line. Housing is a necessity and…

How would banks collect profit then?

Re: Why is finance so complex? (2011)

#132

Post by Bostonian » Wed, Jul 08, 2015, 3:21 PM UTC

alextgordon wrote: post #44

bluedevil2k wrote: post #42

Earlier quoted context omitted.

You need a mortgage because you don't have $400,000 in cash sitting around. You need insurance because you don't have the personal finances to adequately cover the risk of "life"

If we live in a democracy, and money is backed by the state, why do we have to pay interest to profit-making banks and insurance companies? Giving out mortgages is not difficult. You just have to be a bank. Not only that but 2007 showed that profit-making banks are even worse than a reasonable person, or precocious five year old, would be at deciding who should be given a mortgage. Mortgages are a necessary part of s…

"Giving out mortgages is not difficult."

That is true only if you are not concerned about being repaid at a reasonable rate of interest. Lenders need to assess credit and interest rate risk.

Re: Why is finance so complex? (2011)

#133

Post by random_6hm9v » Wed, Jul 08, 2015, 3:21 PM UTC

jameshart wrote: post #112

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.

People who can afford 400k mortgages expect to earn, over their lifetime, more than 400k. They just haven't earned it /yet/. The willingness of people to pay them over 400k for a lifetime of labor is what makes houses worth that much, not the willingness of banks to lend them that money today.

Actually, when I hire people I don't recommend them mortgaging their life, regardless of what I might think about affording or not to pay for their services either now or in an immediate future. In a surrounding changing world, instead of gaining leverage to better cope with its changing nature, people instead take mortgages! And guess what - they don't do it in their most clear minds. They always do this life-changing decision dreaming. That is what makes things overpriced and unaffordable without a mortgage.

Re: Why is finance so complex? (2011)

#134

Post by jsprogrammer » Wed, Jul 08, 2015, 3:23 PM UTC

kriro wrote: post #103

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.

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

Until you drink the coke and a blizzard comes.

Also, there's no paradox.

Also, high diamond costs are due to marketing.

Re: Why is finance so complex? (2011)

#135

Post by rorykoehler » Wed, Jul 08, 2015, 3:29 PM UTC

jsprogrammer wrote: post #131

rorykoehler wrote: post #124

Earlier quoted context omitted.

That's essentially how buy to let works. As a renter I am paying for someone else's mortgage. If I could get a zero interest (or even normal interest) mortgage guaranteed by the government I wouldn't have to rent and I could retain that value that I have generated for myself. As it stands I work my ass off and make someone else rich in exchange for keeping my chin just above the water line. Housing is a necessity and…

How would banks collect profit then?

I didn't rule out being charged a nominal fee for the service. They could also focus on non-essentials? Banks have many products other than mortgages.

Re: Why is finance so complex? (2011)

#136

Post by fiatmoney » Wed, Jul 08, 2015, 3:31 PM UTC

There was a nice result a while back that the efficient market hypothesis is true IFF P=NP.

http://arxiv.org/pdf/1002.2284.pdf

Re: Why is finance so complex? (2011)

#137

Post by alextgordon » Wed, Jul 08, 2015, 3:38 PM UTC

bmelton wrote: post #54

alextgordon wrote: post #44

Earlier quoted context omitted.

If we live in a democracy, and money is backed by the state, why do we have to pay interest to profit-making banks and insurance companies? Giving out mortgages is not difficult. You just have to be a bank. Not only that but 2007 showed that profit-making banks are even worse than a reasonable person, or precocious five year old, would be at deciding who should be given a mortgage. Mortgages are a necessary part of s…

Even if the banks weren't trying to make a profit, you'd still have to pay interest as loan-making is inherently risky enough that at some point, somebody has to cover the costs of those who default.

Absolutely. But if retail banking were run predominantly by non-profits, we'd pay a lot less of it.

Mortgages are secured loans, so an individual default is no problem. The primary risk is of mass default (a housing crash).

If you agree with the pseudo-MMT view of the world, then the mortgage is created out of thin air in the first place, so if everybody defaults all that happens is that the money supply increases permanently instead of temporarily.

Re: Why is finance so complex? (2011)

#138

Post by random_6hm9v » Wed, Jul 08, 2015, 3:40 PM UTC

tjradcliffe wrote: post #86

jsprogrammer wrote: post #30

Earlier quoted context omitted.

>* Allows you to get a mortgage Simply the base artifact of modern finance. Why do I need a mortgage? (hint: to supply interest payments to banks AKA the institutors of the world of modern finance) >* Allows you to protect yourself with health/car/life/home/title/etc insurance See above. >* Pays for your highways/stadiums/schools and other public works "Pays". A meaningless word. >* Protects your deposits Only throug…

> Why do I need a mortgage? 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 w…

> 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.

So the wealth which flows in resource-abundant places is due to banking, and subsequently the lack of wealth in some desolated lands is due to the lack of credit availability, and both have nothing to do with the natural conditions of those regions?

Re: Why is finance so complex? (2011)

#139

Post by ryeguy_24 » Wed, Jul 08, 2015, 4:28 PM UTC

I disagree with the main thesis here. The author states that complexity is due to opacity. This may be true in some cases but there are a number of complexities in finance that are not opaque. For example, look at all the optionality and contingent payouts in an 'Power Reverse Dual Currency' derivative. It's a really complex thing. However, the term sheets tell you everything about the transaction and the ultimate payout of the derivative (it may be 50 pages long, but it's all there).

To say that all things in finance are complex because they are opaque is pretty wrong. Maybe the author is talking about a different dimension of finance (e.g. the unpredictability of human behavior, I mean sure, that's opaque, but that's not finance).

Re: Why is finance so complex? (2011)

#140

Post by jsprogrammer » Wed, Jul 08, 2015, 5:26 PM UTC

zo1 wrote: post #100

jsprogrammer wrote: post #58

Earlier quoted context omitted.

Defaults exist because it is a loan-backed currency.

Defaults have nothing to do with "loan-backed currency", as if that statement means anything. You could have a default on a loan if you were paying for your house with NukaCola bottle-caps, or engraved-crab-shells.

If your legal tender currency is created primarily through loans, then it is loan-backed.

As you noted, the concept of a "loan" entails the possibility of default.

If most currency is created through loans and loans must be repaid in that currency, the system-wide probability of defaults is significant. The likelihood of defaults increases as loans require payors to also include tribute payments (interest), for which no currency was ever created (necessitating that the payor obtain the requisite currency from someone else before the default day occurs).