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I long ago developed the opinion that most "innovations" in money and finance are scams whether intentional or not. Money and finance are like power and water.

by api 6y ago

I long ago developed the opinion that most "innovations" in money and finance are scams whether intentional or not. Money and finance are like power and water. They belong to a class of things that should be unbelievably boring, things you forget exist when they are working properly. A related idea I developed from watching the cryptocurrency world is that it is really hard to have a financial system that is anything but gambling, Ponzis, and fraud. These are the paths of least resistance in finance, the things money seems to "want" to do. The vast maze of regulations in conventional finance are the outcome of a multi hundred year evolutionary battle to maintain at least some level of actual productive activity in the financial world. The reason money "wants" to gamble and play Ponzi games is likely related to how human dopamine reward loops work. We get dopamine hits from gambling and are very prone to it, while productive investment is often too slow to deliver regularly spaced Skinner box rewards.

tuckerp 6y ago
Financial instruments are always created to benefit one side more than the other. That in itself is fine. The problem becomes when the side that disproportionately benefits also has an imbalance of power to pull the rug out from the other side. They are incentivized to be less than transparent. It's almost always due to a misrepresentation of risk, which people seem to be keen on if they can pass that risk downstream, and the least informed end up holding the bag.
FabHK 6y ago
Paul Volcker (Fed chairman before Alan Greenspan, just died Dec 2019) famously quipped in the aftermath of the financial crisis that "the most important financial innovation that I have seen the past 20 years is the automatic teller machine"... https://nypost.com/2009/12/13/the-only-thing-useful-banks-have-invented-in-20-years-is-the-atm/ https://nypost.com/2009/12/13/the-only-thing-useful-banks-ha...
Paperweight 6y ago
Finance is always gambling, ponzis, and fraud. But hey, that's not a bad thing. Gamblers add liquidity, which is better for society than them hiding in a basement playing cards. Stocks are essentially ponzi scheme financing. They have all the hallmarks. Then often literally use the cash from sales of stock to pay dividends. Most companies will never pay dividends, though, so the idea for a purchaser is to hold on and cash out while it's big before everyone else does. Fraud is the worst when people have an expectation of trust, assuming they're protected by regulators. They never are. Madoff. Bre-X. Enron. Even highly regulated markets are always riddled with fraud. People should expect the market to be riddled with fraud and act accordingly - it keeps the populace wise. Regulations are an attempt to get something for nothing which always just ends up with a bunch of friction, corruption, barriers to entry, and lawyers.
- imtringued 6y ago
  Your characterization of stocks is just wrong. The definition of a ponzi scheme is that the returns are paid by new investors but when a company is buying back shares it is earning that money by providing a service or selling a product. That product or service is purchased by a customer, not an investor. Money is coming from outside the company. What you are misunderstanding is that the difference between paying dividends and a stock buyback isn't that great. Both mechanism distribute money owned by the company to shareholders. With dividends you simply receive a payment. With stock buybacks you get the ability to sell the stock back to the original company instead of selling the stock to another investor. Think about it this way. The company has a valuation of 50 billion dollar. It is buying 1 billion dollar worth of stock back every year. After 50 years the company owns itself and every investor has been paid back. Of course this is an oversimplification but it shows that even if you hold onto your stock after everyone else has "cashed out" you can still earn your money back by selling the shares to the company.
  - Paperweight 6y ago
    Did you even read my comment?

by api 6y ago

tuckerp 6y ago

Financial instruments are always created to benefit one side more than the other. That in itself is fine. The problem becomes when the side that disproportionately benefits also has an imbalance of power to pull the rug out from the other side. They are incentivized to be less than transparent. It's almost always due to a misrepresentation of risk, which people seem to be keen on if they can pass that risk downstream, and the least informed end up holding the bag.

FabHK 6y ago

Paul Volcker (Fed chairman before Alan Greenspan, just died Dec 2019) famously quipped in the aftermath of the financial crisis that "the most important financial innovation that I have seen the past 20 years is the automatic teller machine"... https://nypost.com/2009/12/13/the-only-thing-useful-banks-have-invented-in-20-years-is-the-atm/ https://nypost.com/2009/12/13/the-only-thing-useful-banks-ha...

Paperweight 6y ago

Finance is always gambling, ponzis, and fraud. But hey, that's not a bad thing. Gamblers add liquidity, which is better for society than them hiding in a basement playing cards. Stocks are essentially ponzi scheme financing. They have all the hallmarks. Then often literally use the cash from sales of stock to pay dividends. Most companies will never pay dividends, though, so the idea for a purchaser is to hold on and cash out while it's big before everyone else does. Fraud is the worst when people have an expectation of trust, assuming they're protected by regulators. They never are. Madoff. Bre-X. Enron. Even highly regulated markets are always riddled with fraud. People should expect the market to be riddled with fraud and act accordingly - it keeps the populace wise. Regulations are an attempt to get something for nothing which always just ends up with a bunch of friction, corruption, barriers to entry, and lawyers.

imtringued 6y ago
Your characterization of stocks is just wrong. The definition of a ponzi scheme is that the returns are paid by new investors but when a company is buying back shares it is earning that money by providing a service or selling a product. That product or service is purchased by a customer, not an investor. Money is coming from outside the company. What you are misunderstanding is that the difference between paying dividends and a stock buyback isn't that great. Both mechanism distribute money owned by the company to shareholders. With dividends you simply receive a payment. With stock buybacks you get the ability to sell the stock back to the original company instead of selling the stock to another investor. Think about it this way. The company has a valuation of 50 billion dollar. It is buying 1 billion dollar worth of stock back every year. After 50 years the company owns itself and every investor has been paid back. Of course this is an oversimplification but it shows that even if you hold onto your stock after everyone else has "cashed out" you can still earn your money back by selling the shares to the company.
- Paperweight 6y ago
  Did you even read my comment?