6 ms·

Bankers are slightly more sophisticated estate agents and they have similar incentives. The basic business model is to do a lot of free work upfront in exchange

by vostok 10y ago

Bankers are slightly more sophisticated estate agents and they have similar incentives. The basic business model is to do a lot of free work upfront in exchange for a shot at being massively overpaid for relatively simple work. I think the main problem is a classic principal/agent situation. The person who hires the bankers is often paying with someone else's money. This is really no different to other forms of enterprise sales. I think both are massively corrupt, but there seems to be a disproportionate amount of breath wasted on bankers as compared to other salesmen.

mannykannot 10y ago
> There seems to be a disproportionate amount of breath wasted on bankers as compared to other salesmen. Putting aside the question of how valid the analogy is, banking deserves the focus because of its importance to society, and the degree of harm it could cause.
- vostok 10y ago
  How does banking cause more harm to society than, say, construction or databases or cars?
  - arcanus 10y ago
    Neither databases nor the construction industry are leveraged 10x+. Neither provides fundamental utility to other sections of the economy through lending activity, which can result in liquidity events at otherwise perfectly solvent firms. Neither can drive prices in other sectors through speculation in financial instruments or through financial reporting and reporting downgrades.
    - vostok 10y ago
      > Neither databases nor the construction industry are leveraged 10x+. Leverage is not the sole determinant of risk. Wildcatters are far riskier than someone who is 10x leveraged and holds 2 year notes. > Neither provides fundamental utility to other sections of the economy through lending activity, which can result in liquidity events at otherwise perfectly solvent firms. You picked the method of harm that is unique to finance. I could just easily claim that bankers will not build faulty levees or cause untold harm to the planet. > Neither can drive prices in other sectors through speculation in financial instruments or through financial reporting and reporting downgrades. It's not obvious to me that this is a method of harm. If oil is underpriced in the US and overpriced in Europe then buying one and selling the other will cause a shift in prices. Arguably this is a benefit because now everyone is paying/receiving fairer prices. Regardless, bankers are neither traders nor research analysts so I'm not sure how relevant this is.
      - mannykannot 10y ago
        Wildcatters' risk does not extend beyond their own immediate circumstances. I seriously doubt that car salespersons' incentives are a noticeable factor in global warming. It is not unreasonable for the category to be extended to include financial-industry incentive risk in general. How about if you put up an argument for your position? Just one, to start with.
        vostok 10y ago
        Well, first of all let's go back to what my argument was. > I think both are massively corrupt, but there seems to be a disproportionate amount of breath wasted on bankers as compared to other salesmen. I'm not sure what you want to see. Do you want me to link to articles about corruption outside of finance? I'm not sure that I'm aware of a study on the amount of corruption in banking as compared to database sales for example.
        mannykannot 10y ago
        Let's see an argument for the disproportionality; that sales incentives in 'construction, databases and cars' are comparably as potentially harmful as are the incentives in banking. These are the issues that you have been demanding arguments for, so let's see your side.
    - al_chemist 10y ago
      > Neither databases nor the construction industry are leveraged 10x+. Maybe banking shouldn't be either?
      - thedufer 10y ago
        How much leverage is the right amount? Regulators seem to think it is somewhere around 10x.
        mjevans 10y ago
        It's probably context dependent; which is why it's //critical// to never lie about, cover up, or over-simplify that context. In my opinion, doing that is quite nearly as bad as murder. At the very least doing such things should bar someone guilty from working in the industry for many decades. "The right amount" then is when expected losses are less than expected profits; with some safety factor. This is complicated by allowance for both rare really bad sets of loss all at once and absorbing losses over a longer time. I think the solution for both is insurance. In fact, I really hope that the US FDIC (mandatory insurance for deposits, though it hasn't kept up with inflation) represents the basic insurance for the 10% figure you quote.
    - ycombobreaker 10y ago
      I actually spoke with my homebuilder about leverage. His company took out a loan to purchase the (now my) property with a downpayment of I think 10% of the undeveloped value. It was common for him to do that, and interest payments could drain his profit margin if it took too long to sell a new home. So at least he was levered 10x. But even if all builders did that, it would still carry less risk than the too-big-to-fail banks by virtue of being distributed across many small independent organizations. No single collapse eould trigger a cascade.
  - mannykannot 10y ago
    Firstly, I am writing about the potential to do harm. Secondly, banking is arguably at least as ubiquitous in global society as the other categories combined. Thirdly, the issue of incentives is more central to the risks banking poses than in the other fields. Fourthly, banking risk is more correlated, globally, than in the other cases. The recent housing debacle was fundamentally a banking issue: irresponsible real-estate dealing could not have happened, to any extent, without irresponsible banking.
  - br_smartass 10y ago
    Sorry but imho this question shows a lack of knowledge of how much banking is tied to the economic system. They are entities that hold unfathomable ammounts of power. The most explicit evidence is that governments in general put their interests and needs above the people's will. This is not just because government really like the guys, they do have more leverage than most about anything and they can make people/companies/countries hostage.
  - branchless 10y ago
    Because construction creates value, banking does not. It appropriates value through their monopoly on money creation.
    - jnordwick 10y ago
      Get rid of all the banks and see how well things work then.
      - branchless 10y ago
        I'd keep the banks but as intermediaries so they have to actually create value. Saying "get rid of X" is not smart as a riposte.
  - stickfigure 10y ago
    If a construction company goes bankrupt, it just dies. Shareholders and anyone with business dealings with that company may suffer losses. Bank losses are socialized through deposit insurance. When a bank goes bankrupt, taxpayers make depositors whole.
    - MR4D 10y ago
      That's incorrect. The FDIC is funded by banks, and receives no appropriations from Congress [1]. Further, this article, and hence the whole thread, does not distinguish between banking and investments (like Glass Stegall did). Depositors are never affected by a bank going under (up to FDIC limits). Rather, securities holders are affected. Huge difference. Even in 2008, banks did not get bailed out by taxpayers, they got bailed out by the Federal Reserve, which again, is not funded by taxpayers. [2] [1] https://www.fdic.gov/about/learn/symbol/ https://www.fdic.gov/about/learn/symbol/ [2] https://www.richmondfed.org/faqs/frs https://www.richmondfed.org/faqs/frs
      - stickfigure 10y ago
        You are being disingenuous. In terms of social cost there is little practical difference between taking value through taxation and taking it through currency inflation. The Fed, FDIC, FNMA, FHLMC, and pretty much every other acronym that starts with F is backed by the full faith and credit of the US government. No, not officially, but the market has absolutely no doubt that this is fact.
        MR4D 10y ago
        Although we do (mostly) agree, I don't think it's disengenuous. Here's why - other businesses/industries have been bailed out, including the following. Reasonable failures are tolerated, but systemic ones are not - regardless of the industry: - Steel Mills (in 1952) - Railroads (most notably Penn Central in 1970) - Car companies (all three in the last 40 years) - Manufacturers (various) - Utilities (mostly nuclear plants/companies) - Airlines (post 9/11) My impression is that most people believe the government will step in before any industry is ruined (assuming a quick decline, not necessarily a slow one over many years).

by vostok 10y ago

mannykannot 10y ago

> There seems to be a disproportionate amount of breath wasted on bankers as compared to other salesmen. Putting aside the question of how valid the analogy is, banking deserves the focus because of its importance to society, and the degree of harm it could cause.

vostok 10y ago
How does banking cause more harm to society than, say, construction or databases or cars?
- arcanus 10y ago
  Neither databases nor the construction industry are leveraged 10x+. Neither provides fundamental utility to other sections of the economy through lending activity, which can result in liquidity events at otherwise perfectly solvent firms. Neither can drive prices in other sectors through speculation in financial instruments or through financial reporting and reporting downgrades.
  - vostok 10y ago
    > Neither databases nor the construction industry are leveraged 10x+. Leverage is not the sole determinant of risk. Wildcatters are far riskier than someone who is 10x leveraged and holds 2 year notes. > Neither provides fundamental utility to other sections of the economy through lending activity, which can result in liquidity events at otherwise perfectly solvent firms. You picked the method of harm that is unique to finance. I could just easily claim that bankers will not build faulty levees or cause untold harm to the planet. > Neither can drive prices in other sectors through speculation in financial instruments or through financial reporting and reporting downgrades. It's not obvious to me that this is a method of harm. If oil is underpriced in the US and overpriced in Europe then buying one and selling the other will cause a shift in prices. Arguably this is a benefit because now everyone is paying/receiving fairer prices. Regardless, bankers are neither traders nor research analysts so I'm not sure how relevant this is.
    - mannykannot 10y ago
      Wildcatters' risk does not extend beyond their own immediate circumstances. I seriously doubt that car salespersons' incentives are a noticeable factor in global warming. It is not unreasonable for the category to be extended to include financial-industry incentive risk in general. How about if you put up an argument for your position? Just one, to start with.
      - vostok 10y ago
        Well, first of all let's go back to what my argument was. > I think both are massively corrupt, but there seems to be a disproportionate amount of breath wasted on bankers as compared to other salesmen. I'm not sure what you want to see. Do you want me to link to articles about corruption outside of finance? I'm not sure that I'm aware of a study on the amount of corruption in banking as compared to database sales for example.
        mannykannot 10y ago
        Let's see an argument for the disproportionality; that sales incentives in 'construction, databases and cars' are comparably as potentially harmful as are the incentives in banking. These are the issues that you have been demanding arguments for, so let's see your side.
  - al_chemist 10y ago
    > Neither databases nor the construction industry are leveraged 10x+. Maybe banking shouldn't be either?
    - thedufer 10y ago
      How much leverage is the right amount? Regulators seem to think it is somewhere around 10x.
      - mjevans 10y ago
        It's probably context dependent; which is why it's //critical// to never lie about, cover up, or over-simplify that context. In my opinion, doing that is quite nearly as bad as murder. At the very least doing such things should bar someone guilty from working in the industry for many decades. "The right amount" then is when expected losses are less than expected profits; with some safety factor. This is complicated by allowance for both rare really bad sets of loss all at once and absorbing losses over a longer time. I think the solution for both is insurance. In fact, I really hope that the US FDIC (mandatory insurance for deposits, though it hasn't kept up with inflation) represents the basic insurance for the 10% figure you quote.
  - ycombobreaker 10y ago
    I actually spoke with my homebuilder about leverage. His company took out a loan to purchase the (now my) property with a downpayment of I think 10% of the undeveloped value. It was common for him to do that, and interest payments could drain his profit margin if it took too long to sell a new home. So at least he was levered 10x. But even if all builders did that, it would still carry less risk than the too-big-to-fail banks by virtue of being distributed across many small independent organizations. No single collapse eould trigger a cascade.
- mannykannot 10y ago
  Firstly, I am writing about the potential to do harm. Secondly, banking is arguably at least as ubiquitous in global society as the other categories combined. Thirdly, the issue of incentives is more central to the risks banking poses than in the other fields. Fourthly, banking risk is more correlated, globally, than in the other cases. The recent housing debacle was fundamentally a banking issue: irresponsible real-estate dealing could not have happened, to any extent, without irresponsible banking.
- br_smartass 10y ago
  Sorry but imho this question shows a lack of knowledge of how much banking is tied to the economic system. They are entities that hold unfathomable ammounts of power. The most explicit evidence is that governments in general put their interests and needs above the people's will. This is not just because government really like the guys, they do have more leverage than most about anything and they can make people/companies/countries hostage.
- branchless 10y ago
  Because construction creates value, banking does not. It appropriates value through their monopoly on money creation.
  - jnordwick 10y ago
    Get rid of all the banks and see how well things work then.
    - branchless 10y ago
      I'd keep the banks but as intermediaries so they have to actually create value. Saying "get rid of X" is not smart as a riposte.
- stickfigure 10y ago
  If a construction company goes bankrupt, it just dies. Shareholders and anyone with business dealings with that company may suffer losses. Bank losses are socialized through deposit insurance. When a bank goes bankrupt, taxpayers make depositors whole.
  - MR4D 10y ago
    That's incorrect. The FDIC is funded by banks, and receives no appropriations from Congress [1]. Further, this article, and hence the whole thread, does not distinguish between banking and investments (like Glass Stegall did). Depositors are never affected by a bank going under (up to FDIC limits). Rather, securities holders are affected. Huge difference. Even in 2008, banks did not get bailed out by taxpayers, they got bailed out by the Federal Reserve, which again, is not funded by taxpayers. [2] [1] https://www.fdic.gov/about/learn/symbol/ https://www.fdic.gov/about/learn/symbol/ [2] https://www.richmondfed.org/faqs/frs https://www.richmondfed.org/faqs/frs
    - stickfigure 10y ago
      You are being disingenuous. In terms of social cost there is little practical difference between taking value through taxation and taking it through currency inflation. The Fed, FDIC, FNMA, FHLMC, and pretty much every other acronym that starts with F is backed by the full faith and credit of the US government. No, not officially, but the market has absolutely no doubt that this is fact.
      - MR4D 10y ago
        Although we do (mostly) agree, I don't think it's disengenuous. Here's why - other businesses/industries have been bailed out, including the following. Reasonable failures are tolerated, but systemic ones are not - regardless of the industry: - Steel Mills (in 1952) - Railroads (most notably Penn Central in 1970) - Car companies (all three in the last 40 years) - Manufacturers (various) - Utilities (mostly nuclear plants/companies) - Airlines (post 9/11) My impression is that most people believe the government will step in before any industry is ruined (assuming a quick decline, not necessarily a slow one over many years).