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Too much finance is bad for the economy

economist.com

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Re: Too much finance is bad for the economy

#161

Post by throwawaykf05 »

AnthonyMouse wrote: post #134
magic_beans wrote: post #35

Earlier quoted context omitted.

Business is much more lucrative than science. Not surprising.

It is kind of surprising actually. Scientists create more wealth than managers. If they aren't better compensated it indicates an economic inefficiency that someone could profit by eliminating. There are obviously structural reasons why this hasn't happened or it would have already, but given the amount of money on the table, someone who figured out how to do it would stand to profit immensely.

>Scientists create more wealth than managers

[Citation needed.] While I completely agree that progress in science creates much more value than efficient management, a very small fraction of research efforts actually yields any useful results (as you mention downthread). Abstract value is different from wealth.

Even assuming that value translates proportionally into wealth (a huge assumption, considering that commercialization itself of scientific advances is risky and often far into the future), how can you even try to consistently determine the wealth an average scientist creates?

This is why science is like the startup game that VCs play. Invest a pittance into people who see promising and hope one of them turns out to be the next Google. Of course, despite the immense wealth a Google creates, all the non-Googles get nothing.

Re: Too much finance is bad for the economy

#162

Post by mietek »

chongli wrote: post #110
Chinjut wrote: post #99

Earlier quoted context omitted.

The complaints are not necessarily directed at individual people who rationally choose careers in finance over other vocations, given the system they live in. The complaints are to a large extent over the fact that our society has been set up this way, with the goal of perhaps trying to change that so that people would feel less incentive/need to abandon science, mathematics, etc., for finance (in multiple senses!).

It hasn't really been set up this way. It didn't even evolve to be this way. It's ultimately a law of nature: ownership of capital yields exponential growth. The more you start with, the faster you grow. Most other sorts of vocations yield linear growth.

A law of nature? Are you joking?

It absolutely has been set up this way, after having been set up in the opposite way for quite a while.

> Historically, some cultures (e.g., Christianity in much of Medieval Europe, and Islam in many parts of the world today) have regarded charging any interest for loans as sinful.

> The pivotal change in the English-speaking world seems to have come with lawful rights to charge interest on lent money,particularly the 1545 Act, "An Act Against Usurie" (37 H. viii 9) of King Henry VIII of England.

http://en.wikipedia.org/wiki/Usury

Re: Too much finance is bad for the economy

#163

Post by throwawaykf05 »

Gimpei wrote: post #90

The economist article makes it seem like there's a lot of rigorous empirical evidence behind this result, but it is a fundamentally theoretical result. Basically, the authors come up with a toy model that, given a long list of assumptions, produces the reported result. They then test these results by running a simple cross-country regression with no time dimension and a sample size of around 300. I don't place much s…

I have only looked at a specific field, but I have noticed similar issues with all the model-based studies I've seen. I don't even bother considering papers that don't involve empirical data and analysis, because at least then they have some solid tie to reality. (Assuming their data, assumptions and hypotheses are reasonable, of course.)

Re: Too much finance is bad for the economy

#164

Post by sweetmarine »

lordnacho wrote: post #109

True story coming up. I did my undergrad/master's at Oxford. The course title was "Engineering, Economics, and Management". Supposedly it was roughly 2/3rds of the Engineering course, and 2/3 of the "Economics and Management" course, but when you put it all together it seemed like 3/4 Engineering. In the last year, there was a 6-month placement, which you were to use as experience to write a thesis. You could choose…

Interesting you mention the squid, things aren't what they used to be. Don't get me wrong, it's a good place if you are rich and well-connected already, and if you join the front office, you will probably fit right in. But if you are a programmer, well, they are building the biggest single office in India of any American company with space for 9,000 people. Your job will probably be next.

Re: Too much finance is bad for the economy

#165

Post by bsder »

JackFr wrote: post #157
MaysonL wrote: post #95

Earlier quoted context omitted.

The banks and mortgage brokers making all those "liars loans" knew that the loans weren't going to be repaid, but they didn't give an effing eff. They knew that they would be able to sell the mortgages in RMBSs and pay their loan officers and executives handsome bonuses for all those massive phony profits. They would blacklist appraiser who wouldn't give them appraisals to fit the loan they wanted to make.

I'm sure you can find enough anecdata of predatory lenders to get your dudgeon up, but the reality is that they were a cause of the crisis only at the far margins. Th bulk of the crisis was caused by banks and borrowers making foolish decisions in good faith. The crisis, like virtually all financial crises, was caused by leverage. Home buyers want it (they'd rather put 3% down than 20%); home lenders should be averse…

> People (and bankers) did not somehow become more greedy, more evil and more shortsighted in the lead up to the crisis.

Actually, by most accounts, they did.

The problem was that when 90+% of your financial colleagues are betting that the market will go a certain way, it doesn't pay to fight that. That self-reinforces and things get worse and worse.

Look at the game theory:

1) I'm right about the economy going bust and the economy is about to collapse. Well, I can protect myself (a bit), but my company is going to collapse if the economy goes off a cliff and I'm out a job.

2) I'm wrong about the economy going bust and the economy is not about to collapse. Well, I'm still out a job.

3) I'm wrong about the economy going gangbusters and it goes haywire, I'm laid off along with everybody else.

4) I'm right about the economy going gangbusters and it goes gangbusters, "Yay! We're all rich. Where's the hookers and blow?"

I only have one good outcome--drink the Kool-Aid and pray I can get out before it all goes bust.

Re: Too much finance is bad for the economy

#166

Post by danjayh »

mahyarm wrote: post #130
Animats wrote: post #54

The US finance industry uses self-generated work which generates commissions. One of the drivers behind this is the tax preference for debt over dividends. There's been a trillion dollars worth of stock buybacks since 2008, an action taken mostly to reduce taxes. That generates work for Wall Street, and wealth for those "near the money", working on various deals. Then there are "hedge funds". Hedge funds, as a class,…

I buy schwab and vanguard ETF equivalents of their mutual funds, and I get charged no commission when buying and selling them directly from them. So where do they generate commissions as a company, compared to a person buying & selling their ETFs with a 3rd party exchange?

ETFs, like mutual funds, have an 'expense ratio'. Basically they skim a certain amount of the fund's assets off the top to cover expenses & profit.

Re: Too much finance is bad for the economy

#167

Post by Animats »

dllthomas wrote: post #128
dm3 wrote: post #87

Earlier quoted context omitted.

Minor remark: one major selling point of (some) hedge funds is low correlation with other investments, not huge returns.

Right. The name comes from precisely that.

That's dated. "Hedge funds" once did that, but now they're just unregulated funds for "sophisticated investors", which includes pension funds.

Re: Too much finance is bad for the economy

#168

Post by wycx »

dredmorbius wrote: post #132
bhouston wrote: post #3

Summary: > In short, the finance sector lures away high-skilled workers from other industries. The finance sector then lends the money to businesses, but tends to favour those firms that have collateral they can pledge against the loan. This usually means builders and property developers. Businessmen are lured into this sector rather than into riskier projects that require high R&D spending and have less collateral t…

See also: Dutch Disease http://en.wikipedia.org/wiki/Dutch_disease (Also from The Economist initially)

see also: the present Australian economy.

Our future is not bright...

Re: Too much finance is bad for the economy

#169

Post by TheSpiceIsLife »

chroem- wrote: post #71
this_user wrote: post #57

Earlier quoted context omitted.

The finance sector does more than lend/invest capital themselves. Large investment banks provide a wide range of services for companies (e.g. bond issues, IPOs, secondary offerings, working out M&A deals, brokerage services, ...). The biggest problem with the finance sector is that it is extremely opaque and almost no one outside the industry understands what financial institutions actually do. Yet, everyone seems to…

>Which is better: a bright graduate working on making a large web company's advertising algorithms slightly more efficient or the same person working for an investment bank on a bond deal that helps a biotech company raise more money for future R&D? That's the very definition of a false choice. We should be pouring more resources into developing new technology itself, not just trying to advertise or fund it more effi…

IBM, Apple, Google, Telsa, Microsoft, SpaceX, Intel, BAE Systems, Raytheon, Lockheed Martin, Governments (a la ITER) and others, are pouring money in to R&D.

The lack of capital for small hardware innovators (if this concept even is true) is rational because there's little profit to be made there. The age of small hardware innovators has come and gone. To bring non-trivial innovative hardware to market is a huge undertaking and requires a lot of capital.

There's nothing unfair about this.

Re: Too much finance is bad for the economy

#170

Post by wycx »

jeffreyrogers wrote: post #156
bubbleRefuge wrote: post #91

Earlier quoted context omitted.

You are correct. Fractional reserve banking is a myth . Banks do not lend out deposits. Deposits come from loans. Reserve requirements do exist but they do no limit bank lending. Lending is only limited by demand for loans and capital requirements. Here is a pretty good site which explains how the banking system actually operates in detail. http://wfhummel.cnchost.com/ Its a disgrace you are being downvoted.

I didn't downvote, but the parent is conflating money with credit. Banks and other lenders create credit. Only the Fed creates money. When credit starts to contract and economic growth isn't strong enough to sustain increased creation of money you get a deleveraging, as we recently experienced. So yes, in one sense banks do create "money", but what you're calling money is actually credit.

Furnish us with your definitions of money and credit
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