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The intelligent don't have an obligation to create maximal value. But if you're making money without creating value for society, then what you're doing is rent
by albertsun 17y ago
The intelligent don't have an obligation to create maximal value. But if you're making money without creating value for society, then what you're doing is rent seeking and "cheating" people who do create value. http://en.wikipedia.org/wiki/Rent_seeking http://en.wikipedia.org/wiki/Rent_seeking
I definitely agree that finance is an exciting field where a lot of interesting topics converge. However, the examples you give are way exaggerated. The full complexity of the modern financial system isn't really needed to facilitate trade/provide insurance/provide financing/whatever else. Those things don't go away if fewer people are trading inside spreads.
Yes, liquidity is important for a market. But it's not an end in and of itself. There is no value in liquidity. There's only value in what liquidity enables. It's like what Paul Graham always talks about, you have to make something people want. Liquidity is kind of like ball bearings. No one really wants ball bearings, but they're useful because of what they enable. Liquidity is the same way.
Edit: I'm also not suggesting that there's no value in making ball bearings or intermediate products, just that they are not the ultimate goal.
- lrm242 17y agoYou're wrong about liquidity. By providing liquidity to a market you are providing immediacy to someone else. Market participants seeking immediacy place a specific value on it and are willing to pay someone for the privilege. As a market participant, if you want to buy or sell at the market, you're directly benefiting from the liquidity being provided by other participants.
- cwp 17y agoYeah liquidity is great, but only up to a point. If it takes me six months to sell my house at "market price" that really sucks. I'd welcome a little real estate speculation, and the liquidity it brings. But if bond traders shave 600 milliseconds off the time it takes to sell my bond holdings, so what? People may be willing to pay for that, but society doesn't benefit.
- lrm242 17y agoBecause while they shaved 600ms of your execution time they also lowered your spread by 50 basis points, making it cheaper for you to unload your bond holdings on the market.
- cwp 17y agoSo? That's that's a tiny benefit, even to me, let alone society at large. Our society already has very efficient allocation of resources. Devoting significant resources to increasing that efficiency by tiny amounts is just a waste. I'd prefer Carter devoted his intellect to making it cheaper to put cargo into low-earth orbit, than to making it cheaper to sell bonds.
- xxzz 17y agoA tiny benefit multiplied by a billion people and several trillion dollars per day suddenly isn't so tiny anymore.
- cwp 17y agoThe difference in benefit I'm talking about is qualitative, not quantitative. I'd rather have a cure for cancer than a thousand years of narrower bond spreads. And when I'm on my death bed, I hope I can look back on my life and say that I contributed to something more meaningful than the bond market.
- losvedir 17y agoMaking it cheaper for WHO to unload their bond holdings? The person who buys and holds for some time wouldn't notice the fractionally smaller spread. The majority of trading today is done automatically, and it's all this trading that sees the benefit. But, again, how useful is this sort of trading? Surely at some point it must move from "efficiently pricing securities" to gambling with the froth. How would trading change if the goal weren't to flip your security to someone else a bit down the road, but to hold it for its intrinsic value, as higher transaction costs would encourage?
- albertsun 17y agoYes, but still no. By providing liquidity you can be directly benefiting someone else but you're still not directly creating value. Liquidity, immediacy or anything else in the financial markets don't have any intrinsic value. The only reason the financial system exists at all is to facilitate the efficient allocation of resources towards the production of things that have real value.
- shrughes 17y agoFarm equipment doesn't have any intrinsic value. The only reason farm equipment exists at all is to facilitate the allocation of natural resources towards the production of things that have real value.
- albertsun 17y agoYep. And the people creating farm equipment fully realize that. When they create new equipment they do so in order to help farmers create food more easily. In finance, there is a whole lot of effort and innovation, but it's hard to say how much of it is helping people create real value.
- lrm242 17y agoPlease define "things that have real value".
- albertsun 17y agoThings people want that aren't a means to get something else. Burrito? Yes. Clothes? Yes. Art? Yes. Money? No. Liquidity? No.
- lionhearted 17y agoLiquidity provides mobility - there's been a couple times in my life that I'd have converted to any religion on the planet if their chief deity promised me a buyer at even half the market value of the asset I wanted to sell. People don't want liquidity the same way they don't want a tune-up in their car. Nobody wants "a tune up", but people want a working auto that doesn't break down. No one wants liquidity, but a heck of a lot of people want to sell something they have so that they can get on with their life, move somewhere else, buy a new home, invest in something exciting, and so on. If you think freedom and mobility are valuable, then liquidity is valuable too - because liquidity can be very important in letting you do go where you want and do what you want when you have something important you need to sell or relinquish before moving on.