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Friends don't let friends get into finance

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Re: Friends don't let friends get into finance

#131

Post by chopsueyar »

Dilpil wrote: post #51

If investment banking is so needless, why did the economy falter when lehmen brothers went bankrupt? If high frequency trading is so needless, why does the entire market go into shock when the traders panicked and left on may 6th 2010? Most importantly- if these products are useless and harmful, why do people keep buying them?

Most importantly- if these products are useless and harmful, why do people keep buying them?

I could not tell if you were talking about finance or cigarettes.

Re: Friends don't let friends get into finance

#132

Post by mattdeboard »

fleitz wrote: post #65

Perhaps it's not a problem with finance but a problem with other industries that don't pay their people well. Who is to say that a CDO isn't a valuable economic activity? If creating a CDO creates more value to the economy than designing an automobile why shouldn't engineers focus on building those? People forget that prices and money are essentially information about the supply and demand of a good. As we progress i…

Your argument falls apart at the predicate. CDOs (and other exotic financial instruments) do not provide real value, not in the long term, anyway. This argument is exactly how Wall Street bankers & traders justify their crappy activities.

"CDOs provide value! We're making people rich!"

> People forget that prices and money are ... information

No, prices and money are imaginary measurements of imaginary things that do not exist except in our collective consciousness[1]. Cars, computers, buildings, aircraft... these things are not imaginary and provide real value.

[1]http://en.wikipedia.org/wiki/Unidade_real_de_valor

Re: Friends don't let friends get into finance

#133

Post by mattdeboard »

hammock wrote: post #110
Jd wrote: post #29

I'm of the opinion this understates the problem. First, it is an ethical problem. The idea of producing things is not taught in elite colleges, nor is the idea that it is possible to make a positive contribution to society (e.g. rms) without becoming superrich (no offense to those for whom this is their primary motivation). Second, a lot of the products of which the GDP percentage is based upon simply involve repacka…

Repackaging debt is not an "accounting trick," it's creating liquidity. Which in turn allows more more "real" transactions to take place, more trade, more production, more manufacturing, more jobs, etc.

It's an accounting trick that artificially stimulates the economy by tricking people into thinking their imaginary dollars are worth more real goods than they actually are.

Re: Friends don't let friends get into finance

#134

Post by mattdeboard »

fabjan wrote: post #26
med555 wrote: post #24

Earlier quoted context omitted.

...and economists will tell you something completely different. His points are awful and rely on no empirical evidence.

The difference being historians have facts to go by, and economists have dreams.

I think you meant that bankers have dreams. They are the ones who invented the CDOs and other financial abstractions.

Re: Friends don't let friends get into finance

#135

Post by yummyfajitas »

mattdeboard wrote: post #132
fleitz wrote: post #65

Perhaps it's not a problem with finance but a problem with other industries that don't pay their people well. Who is to say that a CDO isn't a valuable economic activity? If creating a CDO creates more value to the economy than designing an automobile why shouldn't engineers focus on building those? People forget that prices and money are essentially information about the supply and demand of a good. As we progress i…

Your argument falls apart at the predicate. CDOs (and other exotic financial instruments) do not provide real value, not in the long term, anyway. This argument is exactly how Wall Street bankers & traders justify their crappy activities. "CDOs provide value! We're making people rich!" > People forget that prices and money are ... information No, prices and money are imaginary measurements of imaginary things that do…

Many of the uses of computers provide only "imaginary value" (to borrow your phrase).

Google and Facebook, for example, merely provide a convenient way of getting information quickly. Markets and price discovery do the exact same thing.

Re: Friends don't let friends get into finance

#136

Post by yummyfajitas »

mynameishere wrote: post #113
MrMan wrote: post #98

Earlier quoted context omitted.

I think you are referring to an ETF?

SPY is the largest ETF, and follows the S&P 500, which is why I mentioned it. I trade lots of ETFs. Short term, they allow individuals to use hedge fund-style strategies. Long-term, they are essentially the same as mutual funds. Very-short-term, they allow quants to make money on arbitrage. There is no good reason for their existence, honestly.

If you don't derive value from them, why do you trade them?

You are absolutely right. ETFs are basically mutual funds, but with greater liquidity and lower fees. That's the reason for their existence - mutual funds, but better.

Re: Friends don't let friends get into finance

#137

Post by mattdeboard »

yummyfajitas wrote: post #135
mattdeboard wrote: post #132

Earlier quoted context omitted.

Your argument falls apart at the predicate. CDOs (and other exotic financial instruments) do not provide real value, not in the long term, anyway. This argument is exactly how Wall Street bankers & traders justify their crappy activities. "CDOs provide value! We're making people rich!" > People forget that prices and money are ... information No, prices and money are imaginary measurements of imaginary things that do…

Many of the uses of computers provide only "imaginary value" (to borrow your phrase). Google and Facebook, for example, merely provide a convenient way of getting information quickly. Markets and price discovery do the exact same thing.

No, they provide a service.

To understand what I mean by "imaginary" you have to understand (and accept) that a dollar, or a pound, or a real, or whatever, represents our agreement that we'll all play the same game. It doesn't represent a real thing. Google and Facebook provide information about actual things, like people, places and events.

Money provides information about itself. Which, hey, I like having an agreed-upon exchange rate so I can trade my labor for stuff (RIP Carlin). The problem is that exotic derivatives create an insane level of abstraction to the terms of our social agreement. Once you take away the ability of people to understand what money is for (I mean, seriously, buying insurance against the failure of a company you don't own? slices of a house's future value?) that agreement starts to corrode.

And yeah the short-term profits of these abstractions does create PROFIT, but it's an unsustainable cash flow. It didn't arise from producing a better quality product.

To say that Google's search service and CDOs are essentially the same thing shows a pretty poor understanding of both concepts.

Re: Friends don't let friends get into finance

#138

Post by achompas »

chopsueyar wrote: post #130
achompas wrote: post #116

Earlier quoted context omitted.

You guys are hilarious with your chests puffed out screaming about death to the financial players who were in trouble. Have you considered the massive negative shock to liquidity that would have resulted? Goldman Sachs, JPMorgan Chase etc. deal with an inordinate amount of the world's liquid assets. If they had failed, the problems wouldn't have been a few quarters of negative GDP growth--we could have seen the colla…

Speculation.

Let's speculate a bit more. There are two possible outcomes to letting a large bank/financial institution fail:

1. Financial institutions cannot transfer funds between each other as usual and they cannot accurately predict who might fail next, so they pull back credit access. Spreads blow up as money supply decreases, causing a sharp decline in equipment investment and a big rise in consumer interest rates. Shit gets worse from there.

2. Banks die and, in conflict with everything we know about liquidity, money continues to flow perfectly. Banks are not afraid of failure so credit flows freely.

What do you see as more likely? Can you sum it up in a one-word answer?

Re: Friends don't let friends get into finance

#139

Post by vecter »

mynameishere wrote: post #113
MrMan wrote: post #98

Earlier quoted context omitted.

I think you are referring to an ETF?

SPY is the largest ETF, and follows the S&P 500, which is why I mentioned it. I trade lots of ETFs. Short term, they allow individuals to use hedge fund-style strategies. Long-term, they are essentially the same as mutual funds. Very-short-term, they allow quants to make money on arbitrage. There is no good reason for their existence, honestly.

When you say things like "Very-short-term, they allow quants to make money on arbitrage.", it makes me think you really don't understand the role of market makers, proprietary traders, or quants.

Let me ask you a very basic question: why do market makers (the people you trade against when you buy or sell SPY) make money? They aren't stealing from you. They are providing you the service of liquidity. Market makers connect people who want to buy/sell now with people who want to buy/sell in the future. In the interim, they take on the risk of holding that position that you didn't want. On average, they are compensated for that risk.

The way you say "they allow quants to make money on arbitrage" implies that the quants are just "extracting money" from the markets without doing any good at all. This is the complete opposite of the truth, and more people need to understand this.

Re: Friends don't let friends get into finance

#140

Post by rbarooah »

asanwal wrote: post #109
rbarooah wrote: post #93

Earlier quoted context omitted.

Right - but the finance sector wasn't chosen at random to receive a bailout because of 'craziness'. It was bailed out because it's dysfunctional. And now, people in the financial industry expect it to get bailed out when it screws up, since that's what's happened time after time. Whereas people joining startups have no such expectation. If you don't seriously expect Facebook to get bailed out it's not a particularly…

I am guessing (and apologies if I'm wrong) that you've not worked in finance else I don't think you wouldn't paint the entire industry with such a broad brush. I don't disagree with you that a lot of stupid, ignorant and misguided things happen in the industry, but in general, I find that the "Wall St is bad" rhetoric is easy to get wrapped up into because it is fashionable and easy to do. But nevertheless, I'll go b…

On the topic of straw men, I don't think you'll find me saying anywhere that the financial industry is "stupid, ignorant, or misguided", nor did I say that "wall street is bad". I'm not painting the people in the industry with any kind of brush at all. You make it sound like I'm kicking a puppy.

I believe that there's a systemic problem with the industry and its role in society and that it is damaging our future prosperity.

Yes, any sufficiently powerful institution could, in principle pose such a problem, but why distract ourselves with imaginary problems when we have a real one sitting in front of us?

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