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I'm surprised that the obvious isn't mentioned even by the "opponents" of the current banking system. What increases the risk is that banks create investments w

by erikb 8y ago

I'm surprised that the obvious isn't mentioned even by the "opponents" of the current banking system. What increases the risk is that banks create investments without safety backups and what destroys economic growth is the huge bonuses they take out of these investments. Maybe it's because I played poker in the past that I can intuitively see it? In poker usually players play against each other in a zero sum game. The best takes the biggest piece of the cake. But when you play in a Casino it will take a "rake", meaning a tax from big payouts. Usually on higher stake games that doesn't matter much, but on lower level stakes the average percentage of rakes is so high, that even the best players can't make a profit. Everybody will lose, no matter his skill. And since the banking system got more and more deregulated they paid themselves higher and higher bonuses. That means even if you are the best investor today, as long as you pay banking fees it's likely you are paying all your profit plus some more, considering a normal 5-digit yearly income. Sometimes I wonder if in fact in this system the best approach is to borrow a lot of money that you know you can't pay back and hope that for some lucky coincidence you are not put into private bankruptcy, maybe keeping yourself afloat by borrowing more money to pay off fees/interest on old debt.

a008t 8y ago
That last paragraph sounds suspiciously close to what most governments with a sovereign currency are doing.
- osrec 8y ago
  Yes, the last paragraph is pretty much the system every country uses. Look at the UK, for example, where the national debt continues to rise - there is no real plan to pay it off - the system is designed in such a way that overall debt issuance must rise in order to service older debt. It's a horribly unstable system, but unfortunately we seem to have embraced it across the world.
  - EGreg 8y ago
    Suppose all the sovereign debt defaults and is restructured to be 5% of the original. Who loses? Mostly the holders of treasuries. Holders of other assets would seem to be fine! So it seems to me to be like any other default, except on a larger scale. Price the sovereign debt risk into the calculation and diversify into real assets.
    - throwawayjava 8y ago
      > Who loses? Mostly the holders of treasuries. In the United States, defaulting on Sovereign Debt would basically guarantee the death of social security. If you're in the USA, by far the best way you can insulate yourself against sovereign debt is by: 1) organizing your life's expenses so that you can retire (or at least continue to live) with $0.00 from social security. 2) Ensuring that you don't rely on any federal pension (including military retirement). Of course, that isn't possible for most people. So in the USA, the answer to "who loses?" is "old people". 3) Ensuring you will have be able to afford healthcare in old age without medicare.
      - EGreg 8y ago
        Why can’t these funds including the social security funds diversify into real assets ahead of a default?
        throwawayjava 8y ago
        ...by selling them to who? SS and other entitlement/retirement programs hold a monstrous amount of the total federal debt. I doubt the federal gov't could divest even a small fraction of those securities without destroying market for them.
        JackFr 8y ago
        So lets the the economy has $X trillion (nominal) of real assets. You privatize social securities $Y trillion assets with the stroke of a pen. You now have $(X+Y) trillion chasing the same real assets. The rate of return on those assets will decline in proportion to the new money chasing them. On the margin, (and more so over time) new productive opportunities will occur as the cost of capital to business declines, but in the short run all you are doing is inflating a bubble.
  - mkirklions 8y ago
    I'm not a fan of central banks, but I understand why this exists constantly in the world. Government seems to be the group that controls the military. In desperate times, the government will print more money to pay for the military. If they lose the war/freedom, the new government will erase the value of the old money and write their own. Government printing money seems to be necessary for the own survival, good or bad.
- mkirklions 8y ago
  This is why I'm surprised government lets Bitcoin exist.
aaavl2821 8y ago
Bankers do not intend to increase risk without safety backups. In the financial crisis banks were incompetent just as much as unethical -- they had risk models that told them they had a safety net, but their models were wrong They also generally don't operate like a casino. They have customers, and sell products. The securitized RMBS products at least in theory offered social benefit: decreasing cost of housing without increasing risk. The idea was that by pooling mortgages you could reduce risk through diversification. Risk reduction through diversification is a very well established phenomenon. So buying mortgages, bundling them to reduce risk and selling them in theory (and in practice, til the bust) enabled more people to get mortgages and own homes The bad stuff happened 1) when realty diverged from their models and 2) the market evolved into a complex beast with a massive snowball of people doing unethical stuff (inside and outside of banks). So in theory and in reality before the bust, rmbs provided a benefit to investors who got products that provided them a good financial return and lowered the cost of owning a home. Greed played a role in popping the bubble but so did incompetence Not sure what your investing situation is but your second to last paragraph isn't true. The rise of ETFs has enabled average investors to invest with very low fees and many banks offer commission free trades. If you're the "best investor today" you probably have a lot of money and thus get decent deals from banks. If you are losing money it's bc too much competition from other investors due to easy money rather than banks squeezing you
- erikb 8y ago
  > Bankers do not intend to increase risk without safety backups. In the financial crisis banks were incompetent just as much as unethical -- they had risk models that told them they had a safety net, but their models were wrong I agree that what you describe covers most bankers. But you only need one person to come up with something like a CDO secured by credit default swaps. And you only need one person at the top of one of the biggest banks to promote this strategy. Then everybody else needs to follow suit, because profit is not just the source of their bonusses, it's also their protection against predatory competitors. So the number of people who need to start this is quite small, and I still claim that these few people knew exactly what they got us into, and they also knew that they could get away with it. > in theory offered social benefit: decreasing cost of housing without increasing risk. That is a foolish idea. The only way you can reduce your own risk is by putting the risk on other people's shoulders. You cannot make risk go away. > The rise of ETFs has enabled average investors to invest with very low fees Yes, but google what ETFs will mean at some point for the economy? Normal value creation becomes less and less fruitful. So in the end the whole market goes down and again the small time investors will lose while the big whales get bail outs and eat the smaller fish in the sea. Also just because the fees in passive management are lower doesn't mean they can't be higher compared to the provided value. McDonalds is cheaper than a really good burger with really good fries, but you also get machine produced blurb in exchange, and in the end McD probably makes a bigger profit than your average, family owned burger shop.

by erikb 8y ago

a008t 8y ago

That last paragraph sounds suspiciously close to what most governments with a sovereign currency are doing.

osrec 8y ago
Yes, the last paragraph is pretty much the system every country uses. Look at the UK, for example, where the national debt continues to rise - there is no real plan to pay it off - the system is designed in such a way that overall debt issuance must rise in order to service older debt. It's a horribly unstable system, but unfortunately we seem to have embraced it across the world.
- EGreg 8y ago
  Suppose all the sovereign debt defaults and is restructured to be 5% of the original. Who loses? Mostly the holders of treasuries. Holders of other assets would seem to be fine! So it seems to me to be like any other default, except on a larger scale. Price the sovereign debt risk into the calculation and diversify into real assets.
  - throwawayjava 8y ago
    > Who loses? Mostly the holders of treasuries. In the United States, defaulting on Sovereign Debt would basically guarantee the death of social security. If you're in the USA, by far the best way you can insulate yourself against sovereign debt is by: 1) organizing your life's expenses so that you can retire (or at least continue to live) with $0.00 from social security. 2) Ensuring that you don't rely on any federal pension (including military retirement). Of course, that isn't possible for most people. So in the USA, the answer to "who loses?" is "old people". 3) Ensuring you will have be able to afford healthcare in old age without medicare.
    - EGreg 8y ago
      Why can’t these funds including the social security funds diversify into real assets ahead of a default?
      - throwawayjava 8y ago
        ...by selling them to who? SS and other entitlement/retirement programs hold a monstrous amount of the total federal debt. I doubt the federal gov't could divest even a small fraction of those securities without destroying market for them.
      - JackFr 8y ago
        So lets the the economy has $X trillion (nominal) of real assets. You privatize social securities $Y trillion assets with the stroke of a pen. You now have $(X+Y) trillion chasing the same real assets. The rate of return on those assets will decline in proportion to the new money chasing them. On the margin, (and more so over time) new productive opportunities will occur as the cost of capital to business declines, but in the short run all you are doing is inflating a bubble.
- mkirklions 8y ago
  I'm not a fan of central banks, but I understand why this exists constantly in the world. Government seems to be the group that controls the military. In desperate times, the government will print more money to pay for the military. If they lose the war/freedom, the new government will erase the value of the old money and write their own. Government printing money seems to be necessary for the own survival, good or bad.
mkirklions 8y ago
This is why I'm surprised government lets Bitcoin exist.

aaavl2821 8y ago

Bankers do not intend to increase risk without safety backups. In the financial crisis banks were incompetent just as much as unethical -- they had risk models that told them they had a safety net, but their models were wrong They also generally don't operate like a casino. They have customers, and sell products. The securitized RMBS products at least in theory offered social benefit: decreasing cost of housing without increasing risk. The idea was that by pooling mortgages you could reduce risk through diversification. Risk reduction through diversification is a very well established phenomenon. So buying mortgages, bundling them to reduce risk and selling them in theory (and in practice, til the bust) enabled more people to get mortgages and own homes The bad stuff happened 1) when realty diverged from their models and 2) the market evolved into a complex beast with a massive snowball of people doing unethical stuff (inside and outside of banks). So in theory and in reality before the bust, rmbs provided a benefit to investors who got products that provided them a good financial return and lowered the cost of owning a home. Greed played a role in popping the bubble but so did incompetence Not sure what your investing situation is but your second to last paragraph isn't true. The rise of ETFs has enabled average investors to invest with very low fees and many banks offer commission free trades. If you're the "best investor today" you probably have a lot of money and thus get decent deals from banks. If you are losing money it's bc too much competition from other investors due to easy money rather than banks squeezing you

erikb 8y ago
> Bankers do not intend to increase risk without safety backups. In the financial crisis banks were incompetent just as much as unethical -- they had risk models that told them they had a safety net, but their models were wrong I agree that what you describe covers most bankers. But you only need one person to come up with something like a CDO secured by credit default swaps. And you only need one person at the top of one of the biggest banks to promote this strategy. Then everybody else needs to follow suit, because profit is not just the source of their bonusses, it's also their protection against predatory competitors. So the number of people who need to start this is quite small, and I still claim that these few people knew exactly what they got us into, and they also knew that they could get away with it. > in theory offered social benefit: decreasing cost of housing without increasing risk. That is a foolish idea. The only way you can reduce your own risk is by putting the risk on other people's shoulders. You cannot make risk go away. > The rise of ETFs has enabled average investors to invest with very low fees Yes, but google what ETFs will mean at some point for the economy? Normal value creation becomes less and less fruitful. So in the end the whole market goes down and again the small time investors will lose while the big whales get bail outs and eat the smaller fish in the sea. Also just because the fees in passive management are lower doesn't mean they can't be higher compared to the provided value. McDonalds is cheaper than a really good burger with really good fries, but you also get machine produced blurb in exchange, and in the end McD probably makes a bigger profit than your average, family owned burger shop.