Friends don't let friends get into finance • Hacker News Board

Re: Friends don't let friends get into finance

#141

Post by rbarooah » Sun, Mar 27, 2011, 7:28 PM UTC

achompas wrote: post #138

chopsueyar wrote: post #130

Earlier quoted context omitted.

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…

You're probably right - if they'd just been allowed to collapse we'd be in serious trouble.

However we're still in serious trouble because of the moral hazard created. Banks have been given the greenlight to take similar risks again because they know they'll be bailed out in future.

Frankly, without also taking steps to force banks back into smaller entities that we can afford to let fail, all we've done is compound the problem and delay it until later when it will be worse.

Re: Friends don't let friends get into finance

#142

Post by lotharbot » Sun, Mar 27, 2011, 7:52 PM UTC

billjings wrote: post #122

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…

It all comes down to allocation of capital, though. It's all economic overhead. How much are we spending to efficiently allocate capital? About nine percent of the whole economy, apparently. That's assuming that all that work does end up effectively and appropriately distributing capital at the end of the day. If you read up on the recent financial bust, you'll quickly realize that all is not well in the world of fin…

> How much are we spending to efficiently allocate capital? About nine percent of the whole economy, apparently.

What is the optimal amount we should spend to efficiently allocate capital? I don't have a principled reason to be able to pick a number; all I have is a gut feeling, which isn't worth anything.

Re: Friends don't let friends get into finance

#143

Post by triviatise » Mon, Mar 28, 2011, 2:07 AM UTC

Dove wrote: post #54

rbarooah wrote: post #13

Earlier quoted context omitted.

It's a problem because unlike other activities finance produces benefits to society only when it well, finances people doing things other than finance. Other activities are valuable in themselves.

I still find it hard to parse that as a problem. I mean, power generation only provides a benefit to society when someone uses the electricity to do something. So what? Infrastructure isn't inherently parasitic. Lots and lots of infrastructure isn't even necessarily bad. I view finance as infrastructure. The machinery that hooks investors up with investees is fundamentally useful. The machinery that lets people and b…

The issue with finance is that people are using huge amounts of leverage to place bets. If they werent allowed the level of leverage that they are using (i.e. 1:30) there would be a whole lot less "money" in the system. The financial system is allowing people to assign value to intangible assets 3-4 times removed from an actual physical asset. The main issue with that is that it has the capability to take us all down.

Re: Friends don't let friends get into finance

#144

Post by Genmai » Mon, Mar 28, 2011, 5:15 AM UTC

The real challenge underlying Wadhwa's article is how to incentivise traditional engineering careers to counter the lemming run to investment banks and hedge funds that the best technical minds make these days. Because high finance careers offer lucrative compensation according to market demand for talent, perhaps the demand itself needs to be adjusted.

Another roundabout approach to counter this phenomenon is greater regulation to curb non-transparent / overly risky / exploitative instruments. Arguably, better regulation will help flatten the casino-eque boom (and bust) fortunes that we've been seeing in recent years. In turn, this may eventually translate to more moderate compensations in financial careers and may eventually reduce the outsized finance field demand for engineering talent. The rub is that government regulators are simply no match for the sharp pointy minds and enormous resources high finance firms can muster - the financial regulations of today will be easily be circumvented by the clever finance and accounting tricks of tomorrow.

Were it implementable (fantasy), the people who create and subsequently sell these fancy financial products should be paid with their own products and be required to hold them until maturity.

f.

Re: Friends don't let friends get into finance

#145

Post by billybob » Mon, Mar 28, 2011, 1:47 PM UTC

achompas wrote: post #116

billybob wrote: post #63

Earlier quoted context omitted.

On the contrary, it encourages disfunction. "Let us remove the consequences of your failures." Gee, I wonder if that memory will make them so grateful that they'll be more careful next time? Sure. It's not like their whole industry is about predicting risks and rewards based on past experience. Bah. The mistakes will be repeated and the bailout question will arise again. And it will be worse next time. We should have…

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…

OK. What reason do the bailed-out institutions now have to avoid such irresponsible behavior in the future? Previously, they had "it might ruin us." Now?

If we've merely postponed this problem and are waiting for Round II, then yes, we should have had the guts to have a depression resulting from irresponsible investments rather than a depression resulting from irresponsible investments AND governments up to their nostrils in debt.

Re: Friends don't let friends get into finance

#146

Post by billybob » Mon, Mar 28, 2011, 3:14 PM UTC

rbarooah wrote: post #141

achompas wrote: post #138

Earlier quoted context omitted.

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…

You're probably right - if they'd just been allowed to collapse we'd be in serious trouble. However we're still in serious trouble because of the moral hazard created. Banks have been given the greenlight to take similar risks again because they know they'll be bailed out in future. Frankly, without also taking steps to force banks back into smaller entities that we can afford to let fail, all we've done is compound…

Is it better to force banks into smaller entities, exerting government control over the marketplace, or let their investors lose their pants when the banks take stupid risks, allowing the marketplace to correct itself?

Re: Friends don't let friends get into finance

#147

Post by rbarooah » Tue, Mar 29, 2011, 6:26 AM UTC

billybob wrote: post #146

rbarooah wrote: post #141

Earlier quoted context omitted.

You're probably right - if they'd just been allowed to collapse we'd be in serious trouble. However we're still in serious trouble because of the moral hazard created. Banks have been given the greenlight to take similar risks again because they know they'll be bailed out in future. Frankly, without also taking steps to force banks back into smaller entities that we can afford to let fail, all we've done is compound…

Is it better to force banks into smaller entities, exerting government control over the marketplace, or let their investors lose their pants when the banks take stupid risks, allowing the marketplace to correct itself?

Well personally, I'd prefer the latter, but if it really was going to crash the economy completely, then the former might be necessary. But the only point in forcing them into smaller entities would be so that in future they would be allowed to fail.