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In Defense of Finance

67 points by apsec112 6y ago

GoodJokes 6y ago
His article was posted here to make those who frequent this website feel a little better about their weak sauce choice to work for x evil bank.
jacknews 6y ago
No doubt banks provide a valuable service by issuing loans etc. I think the main grievance is with 'investment' banks, hedge funds an so on. If you look at the rich list, a good percentage at the top are financiers. In the public mind, this is just like movie 'executives' making more than the directors and stars, hospital managers making more than doctors, and so on.
bradleyjg 6y ago
Tech companies have enough cash not to worry what bankers think of them, and yet it’s quite rare to hear a tech CEO criticize Wall Street. I’ve seen a bunch of criticism of the IPO process, which is where tech CEOs intersect with Wall Street most intensely.
- m00dy 6y ago
  I think you can bypass wall street to IPO
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  - bradleyjg 6y ago
    You can direct list or merge with a SPAC, but neither bypasses Wall Street entirely.
    - bpodgursky 6y ago
      These are both pretty new options as well (especially SPACs). Ten years ago it was basically IPO or nothing. When Google tried to avoid the IPO pop theft by banks during theirs, they got ganged up on / carteled, and still lost billions.
benrbray 6y ago
This seems more or less like a straw man of people who might loosely call themselves "anti-finance". I think most people support and understand the "idea" of finance but not the implementation. One weak point of this article is that it repeats the common pro-finance position that financiers deserve to be wealthy because they take on "risk". However, in this day and age we hardly ever let large companies suffer the consequences of a bad investment (or brazen illegal activity). So, if we think bailouts and the like are necessary to prevent society from collapsing, recognizing the finance industry as a crucial component of our economy, what's the reason for allowing financiers to keep skimming off the top when they're allowed to burden taxpayers with all the risk? Finance is important, and sure, moving money around is hard. But so is making things. I'd like to see people who make things and people who move money to earn income on about the same order of magnitude. I'd also like to see companies held accountable when they commit crimes. (also--dismissing viewpoints you disagree with for being too "meta-contrarian" is bad form imo. Anyone who has criticisms of the way things are is just doing it to be cool? I'm going to call this way of arguing "meta-meta-contrarian")
- kaymanb 6y ago
  I also found this to be one of these articles weak points. The author (rightfully) argues that what bankers do is difficult, and so it makes sense that they are compensated for it. But they also use this as an excuse for the finance industries short-comings: pricing mortgage backed securities is hard, coordinating bailouts is hard, so are bankers really to blame if they don't get it perfectly right? I don't think you can have it both ways.
- SpicyLemonZest 6y ago
  I think you're misunderstanding what "risk" means here. It's not that they have a moral right to be wealthy because their companies are at risk of catastrophic failure; it's that they perform the valuable service of making risky investments that other people can't. Mortgages are the canonical example; they allow lots of people to buy homes who wouldn't otherwise be able, and they could never work if some individual person had to take the risk that the borrower might default.
deleted 6y ago
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r0p3 6y ago
>“They’re all in the bankers’ pockets” lacks explanatory power. Rich and powerful people spend most of their energy fighting other rich and powerful people, not altruistically conspiring with them. And the finance industry isn’t even that rich. Johnson & Johnson is bigger than any bank in the world, why aren’t the rich and powerful in the pocket of Big Band-Aid? >I have an alternative explanation: Finance is the miracle glue that keeps our civilization intact. No one understands exactly how it works, so fucking with it in any way should be terrifying. People in power can see that. ... His simplistic description of the idea that people in power recognize that finance helps maintain the power structures that give them that authority is... Frustrating.
- throwaway667555 6y ago
  Your sentence is a bit of a mindf**, I appreciate it. It reduces the quoted text to near-gibberish.
- elcomet 6y ago
  > Johnson & Johnson is bigger than any bank in the world, why aren’t the rich and powerful in the pocket of Big Band-Aid? But they are. Look at the many scandals around Johnson & Johnson on corruption cases...
- AbrahamParangi 6y ago
  I think the point is that those power structures do more than just maintain the authority of a ruling class. They also keep the lights on and the wolf from the door. Is there a better system? Probably! But we know what happens when you break our existing system and it’s extremely ugly.
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andrepd 6y ago
Bunch of hogwash. - "Bankers and financeers deserve their pay because they take all the risk", the mind cringes at this one. Risk, what risk?? When was the last time any banker or financieer personally risked anything in their activity?? They get it right, they get paid millions. They get it wrong... they also get paid millions! After 2008 nobody went to jail, no person responsible responsible got homeless, or lost their yacht, never mind their house, or lost their life savings, etc. Simply put: any person with no savings that takes a low-paid unprotected job is risking infinitely more than any Wall Street-type. If they are in a position that if the company fails they lose their home, their kids go hungry, they can't afford healthcare, etc, then they are risking infinitely more than anyone who "invests" in that company. - Besides that, capital paid an average of ~5% risk free, staying remarkably constant in the past 2 century. This is empirical data that contradict the fact that rich investors get paid for their acumen. - Also, even if they did take on "risk", do they deserve to get paid 300x, 400x, 1000x more than the people actually making the things? It's ridiculous and indefensible. - Banks are fundamentally a scam. They "loan" out money that THEY DO NOT OWN! When issuing a loan, they credit themselves with assets, create a liability at the central bank, then when they get paid back they pocket the interest. Then why can't I, a person looking to buy a home, or to start a business, skip the middle-man then and create a liability myself with the central bank? Ah, no, because it can't be a free for all and there has to be someone regulating that and deciding who gets credit and how much. Okay! Then why is it a handful of rich people? Why is that decision not made democractically! Hell, even an "algorithm" (in the sense of a set of well-defined procedures that return ACCEPT or REJECT in a completely transparent way for any request for credit) would be better than what we have now. Essentially, we've privatised risk assessment and fucking credit, the most fundamental concept without which no economy can ever work! We are all slaves to the decisions of the people with the capital, there is no accountability, and if things go south it's all our money that goes into fixing things. Reminder that ~200 people control over 40t USD (that's $40,000,000,000,000) in assets. If that's not neofeudalism I don't know what is. - "But we can look at MBS as a solution to a coordination problem. There are 10,000 families who want to move into a house today and pay for it over a couple of decades. There are 10,000 construction workers who want to build a house today and get paid for it today." So finance institutions get paid billions for those 10,000 mortgages because they are "coordinating" 10,000 contractors. Right, are we supposed to be all stupid? Also, this is indeed a problem, but exacerbated precisely because capital and credit is privatised and not democratically or algorithmically controlled. So we have to beg Our Lords to dispense some money and let it flow in our economy (for an exorbitant fee, of course). - "The groupthink that gripped everyone else, from mortgage lenders to bank traders to rating agencies [about mortgage-backed securities], was too pervasive to be overcome by institutional incentives." Again, completely misrepresenting the causes of the problem. Perverse institutional incentives are precisely what caused this! They were making absolute bank peddling this crap assets. Why should they stop? I wouldn't. They had no incentive to do so. They knew that when the bubble burst it would not be their problem. People getting their homes foreclosed would suffer, yes, but not them. They would be far too rich to suffer any meaningful consequence (even if they took some personal financial loss). With some luck, since they had the political and regulatory system completely captured, they could avoid suffering any consequences at all, big or small (which is what ended up happening). Rating agencies again had all incentives to mark trash as AAA. What's the penalty if they failed again? EDIT: I welcome constructive dialog if you think I'm misrepresenting things.
Tycho 6y ago
Finance and the Good Society by Robert Shiller is a good book which outlines the vital functions the financial sector fulfils for a civilisation.
A12-B 6y ago
Did finance need defending?
- malka 6y ago
  It does need propaganda.
- knorker 6y ago
  I see a lot of people not understanding that finance adds any value at all. I recently saw the documentary "System Error" which aims to push Marxist propaganda (the movie is sprinkled with Marx quotes on full screen, so that's not an exaggeration), where common tropes are repeated not recognising that finance adds value. People (and documentaries) criticizing wall street for its bad parts often end up throwing the baby out with the bath water, lumping together terrible acts and trends with the whole idea of finance, and even of economics. E.g. there's plenty to criticize, but when you say things like "finance is built on debt", you know what people think, if you don't elaborate. They think of credit card debt, crippling medical bills, etc. But from a finance perspective debt is merely a way to cause your illiquid assets to be useful to you as liquid assets. Even your credit card does that. You have an illiquid asset that is "your next pay check", that a credit card allows you to spend. It doesn't matter that the pay check is in the future, it's still an asset. Of course what you can legitimately criticize is that "that's not how credit cards are actually used on encouraged to be used". Yes. That's bad. It's exploitative and bad in other ways. But it's not inherently bad. And of course many more other ways. Stocks are a way to finance a company realizing its potential. (as are loans, and other investments, for the company). Without finance these potentials will not be realized. And people who don't know better just simplify this as "our economy is run on debt", which is true, but still not honest… because of the implications. Does finance add value to the degree it extracts money as a middleman? Hard to say. Maybe it does. But that absolutely does not mean that the people involved deserve the spoils. It's just not that hard, not that qualified.
- 6510 6y ago
  The finite resource is trust. Just look what happened to those running shop on faith?
addicted 6y ago
I agree to the extent that the issues with the financial industry are less issues with the financial industry and the failure of society and government to appropriately regulate the finance industry. For all the nonsense about unconstrained free markets, the reality is a well functioning free market is fairly fragile and requires a lot of curation and guidelines to be something we would appreciate. In the absence of this governance, a free market devolves to might is right (where might can be earned by any of wealth, physical power, popularity, etc depending on time and place). The big problem was that a belief that laissez-Faire non interventionist capitalism would spontaneously lead to well functioning free markets has/had taken hold over society which has led to damage not just to the broader society but also to the financial industry specifically.
fractionalhare 6y ago
> And the finance industry isn’t even that rich. Johnson & Johnson is bigger than any bank in the world, why aren’t the rich and powerful in the pocket of Big Band-Aid? Well, no. Maybe by market cap, but that isn't the important metric here. Power consists of what is controlled and stewarded, not just what is owned. JnJ controls billions of dollars of capital. The largest banks control trillions of dollars of capital, each. JnJ is core infrastructure for healthcare; banks are core infrastructure for everything that exists in the capitalist fabric of society. Banks may not be that wealthy by ownership, but this isn't really the right lens for critically examining how much power they wield compared to other industries. EDIT: To whoever downvoted me: this comment isn't a defense of finance. It's a statement of fact refuting one of the author's points.
- twic 6y ago
  Maybe they downvoted you because they thought it wasn't a very convincing refutation.
  - fractionalhare 6y ago
    Maybe, but why wouldn't they find it convincing? Any one of the major banks literally controls at least an order of magnitude more money in the economy than Johnson and Johnson does. Market cap and valuation has nothing to do with capital that is controlled. The author doesn't do a good job of rebutting the idea that finance is incredibly powerful in society by focusing on what financial firms are technically worth if you discount their client liabilities.
    - twic 6y ago
      I think your argument would be stronger if you unpacked "controlled and stewarded" a bit. What capital are you talking about, and in what sense do banks control it? How can and do banks use that capital to exert power?
mvaliente2001 6y ago
This article is both interesting and frustrating. On one hand, it makes a good job justifying the existence of financial instruments. On the other hand, it seems to have a huge blind spot about how the actors (mis)use them, the consequences it carries and _who should pay for them_.
- wutbrodo 6y ago
  That was my impression too. For those with the medieval-peasant view that moving money around is "fake work", it's an interesting basic description of the value of finance. But the rest of the article isn't just useless, it's wrong-headed. There's never been any question in my mind that finance creates value. My best friend (and one of the smartest people I know) is a quant at Goldman. My complaint about the government-finance nexus is that it causes all kinds of screwed incentives (a problem any government system needs to contend with), and is constantly and transparently abused by actors within the financial system. It's incredibly weird to see the author seemingly lose 20 IQ points the minute he attempts to rebut common criticisms of finance. The author has a much worse problem with the blind spot he's describing than the hypothetical people he sneers at throughout the article.
A12-B 6y ago
The irony of using corn markets as an analogy when they are the most subsidised industry in America is lost on him. At the end of the day this has always been a question of who 'deserves' what, dismissed by people like the author saying the concept of 'deserving' isn't real, while staring squarely in the face an industry that someone decided deserves a subsidy. If the concept of deserving wasn't real and people were simply paid according what they bring to the table, we would live in a utopia.
mattmcknight 6y ago
"There is really just one glaring problem with government regulation of banks – it’s too nice to the government. The US government decreed that US treasuries have a risk-weight of 0%, that they’re considered a highly liquid asset on par with cash, that the government is exempt from single-counterparty limits, and so on and so forth." This gets to the heart of the network effects of the 2008 housing price crash. People were modeling mortgage risk as lower because of the implicit guarantee of the government sponsored enterprises which went into conservatorship. If we think about financial institutions trying to hold this kind of debt to meet their risk ratios, there is a lot of incentive to create and hold more of this "low risk" money. This ends up creating counterparty risk, when a sizable chunk of everyone's "low risk" assets drop in market value. It seems like there would be benefit in running the models with a number other than 0 in there for US Treasury risk.
borellvi 6y ago
Sometiems I wonder how much debt is the right amount of dept. Looks like we now live in a dept based society where getting into ultra leveraged dept (mortgage) is the most sentible thing to do for a family. Governaments do exactly the same with bond issuance. When did this become acceptable? Is it good? How much dept do we want to carry forward? Does dept matter anymore? Unfortunately the author doesn't talk about any of these points.
- kqr 6y ago
  Debt (or more generally, an economy based on promises) is what carries essentially all of modern civilization. Going back to silver and gold coins takes us back to Ancient Greece. It works, but it is very inefficient and very little gets done by comparison. And even so, metal coins aren't actually the goods they're traded for, so you're still relying on a promise of sorts. A gift economy would be the truly promise-free way of life. There's a reason we have very little knowledge of how those work: they don't produce much worth remembering for future generations.
twic 6y ago
A broad and fuzzy point is that most people don't actually know very much at all about the financial industry. Very many have strong opinions about it nonetheless. One particular point that i think gets lost is that the industry is highly heterogeneous. There are retail banks, commercial banks, investment banks (bulge bracket and boutique), building societies, savings and loans, insurance firms, reinsurance firms, hedge funds, open-ended investment companies, investment trusts, mutual funds, mutual fund managers, private equity firms, proprietary trading firms, exchanges, multilateral trading facilities, brokers, dealers, broker-dealers, payment networks, depositories, fintechs, service providers, and god knows what else. There are (usually) many of each. And every organisation has different interests and incentives. The organisations which get the most attention are usually the ones which have gone bust or done crime (or both). But most organisations have not gone bust or done crime. So most people's impressions are formed from an unrepresentative sample. For every hedge fund that has manipulated a market, or bank that has funded arms shipments to a sanction country, there are dozens more that are just doing their job and complying with the law. You never hear about them.
- mint2 6y ago
  While that may be, some of the largest banks that exist are helping give the industry a bad name: Wells Fargo, Deutsche bank, and hsbc for example all have made bad news. And then there’s the whole corporate raiding thing from hedge funds.
  - KMag 6y ago
    > And then there’s the whole corporate raiding thing from hedge funds. Only a small percentage of hedge funds participate in leveraged buyouts.
oa335 6y ago
This article sets up a straw man argument. The finance industry does provide value, but he we elides over the issue that most people have with the industry, which is that losses and risk of the systems are incurred (e.g. bailouts) by the broader public while the gains are realized by the select few who have been granted a government monopoly on creating money (fractional reserve banking). If banking does something good for the public, and if it should be government-backed, then shouldn’t bankers operate (and be compensated) like public servants? The entire piece just reads like motivated reasoning TBH.
- scooble 6y ago
  There seemed to be a sudden shift in the middle where we went from ‘it’s good for banks to lend people money to start taco stands’ to ‘it’s good for banks to take bets on how many people will default on their mortgage’. To my untrained eye these look like very different activities .
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  - kqr 6y ago
    Think of it this way: any economic activity that depends on future outcomes is effectively equivalent to a bet. Lending money is betting the debtor will not default. Making the bet about many people instead of one is, ostensibly, a way to lower the risk and thereby make the odds more palatable to a wider range of investors. Translation: more effectively move money from where it sits to where it will do good.
- lhh 6y ago
  These complaints don’t seem to align with reality from what I can tell. The TARP “bailout” was one of the biggest, which taxpayers profited on. The nationalization of Fannie and Freddie was hugely expensive, but I don’t see how that can be called a bailout, since equity holders were wiped out. As the article states, the vast majority of the benefits of such programs come from driving confidence in the functioning of the system so markets don’t freeze up. Moral hazard is a real thing, but it seems like the government walked the line pretty well during the crisis. What bailouts enriched private citizens at the expense of the public?
carapace 6y ago
The urge to signal my intelligence is irresistible, here's a meta-contrarian position for ya: High finance is a form of Numerology. Change my mind: Show the economic theory that predicts things. Physicists have the Standard Model, and it's really good, like Feynman says, "thickness of a human hair over the distance from NY to LA" good. I say that a proper scientific economics can be better understood as ecology + psychology.

67 points by apsec112 6y ago

His article was posted here to make those who frequent this website feel a little better about their weak sauce choice to work for x evil bank.

jacknews 6y ago

No doubt banks provide a valuable service by issuing loans etc. I think the main grievance is with 'investment' banks, hedge funds an so on. If you look at the rich list, a good percentage at the top are financiers. In the public mind, this is just like movie 'executives' making more than the directors and stars, hospital managers making more than doctors, and so on.

bradleyjg 6y ago

Tech companies have enough cash not to worry what bankers think of them, and yet it’s quite rare to hear a tech CEO criticize Wall Street. I’ve seen a bunch of criticism of the IPO process, which is where tech CEOs intersect with Wall Street most intensely.

m00dy 6y ago
I think you can bypass wall street to IPO
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- bradleyjg 6y ago
  You can direct list or merge with a SPAC, but neither bypasses Wall Street entirely.
  - bpodgursky 6y ago
    These are both pretty new options as well (especially SPACs). Ten years ago it was basically IPO or nothing. When Google tried to avoid the IPO pop theft by banks during theirs, they got ganged up on / carteled, and still lost billions.

benrbray 6y ago

This seems more or less like a straw man of people who might loosely call themselves "anti-finance". I think most people support and understand the "idea" of finance but not the implementation. One weak point of this article is that it repeats the common pro-finance position that financiers deserve to be wealthy because they take on "risk". However, in this day and age we hardly ever let large companies suffer the consequences of a bad investment (or brazen illegal activity). So, if we think bailouts and the like are necessary to prevent society from collapsing, recognizing the finance industry as a crucial component of our economy, what's the reason for allowing financiers to keep skimming off the top when they're allowed to burden taxpayers with all the risk? Finance is important, and sure, moving money around is hard. But so is making things. I'd like to see people who make things and people who move money to earn income on about the same order of magnitude. I'd also like to see companies held accountable when they commit crimes. (also--dismissing viewpoints you disagree with for being too "meta-contrarian" is bad form imo. Anyone who has criticisms of the way things are is just doing it to be cool? I'm going to call this way of arguing "meta-meta-contrarian")

kaymanb 6y ago
I also found this to be one of these articles weak points. The author (rightfully) argues that what bankers do is difficult, and so it makes sense that they are compensated for it. But they also use this as an excuse for the finance industries short-comings: pricing mortgage backed securities is hard, coordinating bailouts is hard, so are bankers really to blame if they don't get it perfectly right? I don't think you can have it both ways.
SpicyLemonZest 6y ago
I think you're misunderstanding what "risk" means here. It's not that they have a moral right to be wealthy because their companies are at risk of catastrophic failure; it's that they perform the valuable service of making risky investments that other people can't. Mortgages are the canonical example; they allow lots of people to buy homes who wouldn't otherwise be able, and they could never work if some individual person had to take the risk that the borrower might default.

deleted 6y ago

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r0p3 6y ago

>“They’re all in the bankers’ pockets” lacks explanatory power. Rich and powerful people spend most of their energy fighting other rich and powerful people, not altruistically conspiring with them. And the finance industry isn’t even that rich. Johnson & Johnson is bigger than any bank in the world, why aren’t the rich and powerful in the pocket of Big Band-Aid? >I have an alternative explanation: Finance is the miracle glue that keeps our civilization intact. No one understands exactly how it works, so fucking with it in any way should be terrifying. People in power can see that. ... His simplistic description of the idea that people in power recognize that finance helps maintain the power structures that give them that authority is... Frustrating.

throwaway667555 6y ago
Your sentence is a bit of a mindf**, I appreciate it. It reduces the quoted text to near-gibberish.
elcomet 6y ago
> Johnson & Johnson is bigger than any bank in the world, why aren’t the rich and powerful in the pocket of Big Band-Aid? But they are. Look at the many scandals around Johnson & Johnson on corruption cases...
AbrahamParangi 6y ago
I think the point is that those power structures do more than just maintain the authority of a ruling class. They also keep the lights on and the wolf from the door. Is there a better system? Probably! But we know what happens when you break our existing system and it’s extremely ugly.
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andrepd 6y ago

Bunch of hogwash. - "Bankers and financeers deserve their pay because they take all the risk", the mind cringes at this one. Risk, what risk?? When was the last time any banker or financieer personally risked anything in their activity?? They get it right, they get paid millions. They get it wrong... they also get paid millions! After 2008 nobody went to jail, no person responsible responsible got homeless, or lost their yacht, never mind their house, or lost their life savings, etc. Simply put: any person with no savings that takes a low-paid unprotected job is risking infinitely more than any Wall Street-type. If they are in a position that if the company fails they lose their home, their kids go hungry, they can't afford healthcare, etc, then they are risking infinitely more than anyone who "invests" in that company. - Besides that, capital paid an average of ~5% risk free, staying remarkably constant in the past 2 century. This is empirical data that contradict the fact that rich investors get paid for their acumen. - Also, even if they did take on "risk", do they deserve to get paid 300x, 400x, 1000x more than the people actually making the things? It's ridiculous and indefensible. - Banks are fundamentally a scam. They "loan" out money that THEY DO NOT OWN! When issuing a loan, they credit themselves with assets, create a liability at the central bank, then when they get paid back they pocket the interest. Then why can't I, a person looking to buy a home, or to start a business, skip the middle-man then and create a liability myself with the central bank? Ah, no, because it can't be a free for all and there has to be someone regulating that and deciding who gets credit and how much. Okay! Then why is it a handful of rich people? Why is that decision not made democractically! Hell, even an "algorithm" (in the sense of a set of well-defined procedures that return ACCEPT or REJECT in a completely transparent way for any request for credit) would be better than what we have now. Essentially, we've privatised risk assessment and fucking credit, the most fundamental concept without which no economy can ever work! We are all slaves to the decisions of the people with the capital, there is no accountability, and if things go south it's all our money that goes into fixing things. Reminder that ~200 people control over 40t USD (that's $40,000,000,000,000) in assets. If that's not neofeudalism I don't know what is. - "But we can look at MBS as a solution to a coordination problem. There are 10,000 families who want to move into a house today and pay for it over a couple of decades. There are 10,000 construction workers who want to build a house today and get paid for it today." So finance institutions get paid billions for those 10,000 mortgages because they are "coordinating" 10,000 contractors. Right, are we supposed to be all stupid? Also, this is indeed a problem, but exacerbated precisely because capital and credit is privatised and not democratically or algorithmically controlled. So we have to beg Our Lords to dispense some money and let it flow in our economy (for an exorbitant fee, of course). - "The groupthink that gripped everyone else, from mortgage lenders to bank traders to rating agencies [about mortgage-backed securities], was too pervasive to be overcome by institutional incentives." Again, completely misrepresenting the causes of the problem. Perverse institutional incentives are precisely what caused this! They were making absolute bank peddling this crap assets. Why should they stop? I wouldn't. They had no incentive to do so. They knew that when the bubble burst it would not be their problem. People getting their homes foreclosed would suffer, yes, but not them. They would be far too rich to suffer any meaningful consequence (even if they took some personal financial loss). With some luck, since they had the political and regulatory system completely captured, they could avoid suffering any consequences at all, big or small (which is what ended up happening). Rating agencies again had all incentives to mark trash as AAA. What's the penalty if they failed again? EDIT: I welcome constructive dialog if you think I'm misrepresenting things.

Tycho 6y ago

Finance and the Good Society by Robert Shiller is a good book which outlines the vital functions the financial sector fulfils for a civilisation.

A12-B 6y ago

Did finance need defending?

malka 6y ago
It does need propaganda.
knorker 6y ago
I see a lot of people not understanding that finance adds any value at all. I recently saw the documentary "System Error" which aims to push Marxist propaganda (the movie is sprinkled with Marx quotes on full screen, so that's not an exaggeration), where common tropes are repeated not recognising that finance adds value. People (and documentaries) criticizing wall street for its bad parts often end up throwing the baby out with the bath water, lumping together terrible acts and trends with the whole idea of finance, and even of economics. E.g. there's plenty to criticize, but when you say things like "finance is built on debt", you know what people think, if you don't elaborate. They think of credit card debt, crippling medical bills, etc. But from a finance perspective debt is merely a way to cause your illiquid assets to be useful to you as liquid assets. Even your credit card does that. You have an illiquid asset that is "your next pay check", that a credit card allows you to spend. It doesn't matter that the pay check is in the future, it's still an asset. Of course what you can legitimately criticize is that "that's not how credit cards are actually used on encouraged to be used". Yes. That's bad. It's exploitative and bad in other ways. But it's not inherently bad. And of course many more other ways. Stocks are a way to finance a company realizing its potential. (as are loans, and other investments, for the company). Without finance these potentials will not be realized. And people who don't know better just simplify this as "our economy is run on debt", which is true, but still not honest… because of the implications. Does finance add value to the degree it extracts money as a middleman? Hard to say. Maybe it does. But that absolutely does not mean that the people involved deserve the spoils. It's just not that hard, not that qualified.
6510 6y ago
The finite resource is trust. Just look what happened to those running shop on faith?

addicted 6y ago

I agree to the extent that the issues with the financial industry are less issues with the financial industry and the failure of society and government to appropriately regulate the finance industry. For all the nonsense about unconstrained free markets, the reality is a well functioning free market is fairly fragile and requires a lot of curation and guidelines to be something we would appreciate. In the absence of this governance, a free market devolves to might is right (where might can be earned by any of wealth, physical power, popularity, etc depending on time and place). The big problem was that a belief that laissez-Faire non interventionist capitalism would spontaneously lead to well functioning free markets has/had taken hold over society which has led to damage not just to the broader society but also to the financial industry specifically.

fractionalhare 6y ago

> And the finance industry isn’t even that rich. Johnson & Johnson is bigger than any bank in the world, why aren’t the rich and powerful in the pocket of Big Band-Aid? Well, no. Maybe by market cap, but that isn't the important metric here. Power consists of what is controlled and stewarded, not just what is owned. JnJ controls billions of dollars of capital. The largest banks control trillions of dollars of capital, each. JnJ is core infrastructure for healthcare; banks are core infrastructure for everything that exists in the capitalist fabric of society. Banks may not be that wealthy by ownership, but this isn't really the right lens for critically examining how much power they wield compared to other industries. EDIT: To whoever downvoted me: this comment isn't a defense of finance. It's a statement of fact refuting one of the author's points.

twic 6y ago
Maybe they downvoted you because they thought it wasn't a very convincing refutation.
- fractionalhare 6y ago
  Maybe, but why wouldn't they find it convincing? Any one of the major banks literally controls at least an order of magnitude more money in the economy than Johnson and Johnson does. Market cap and valuation has nothing to do with capital that is controlled. The author doesn't do a good job of rebutting the idea that finance is incredibly powerful in society by focusing on what financial firms are technically worth if you discount their client liabilities.
  - twic 6y ago
    I think your argument would be stronger if you unpacked "controlled and stewarded" a bit. What capital are you talking about, and in what sense do banks control it? How can and do banks use that capital to exert power?

mvaliente2001 6y ago

This article is both interesting and frustrating. On one hand, it makes a good job justifying the existence of financial instruments. On the other hand, it seems to have a huge blind spot about how the actors (mis)use them, the consequences it carries and _who should pay for them_.

wutbrodo 6y ago
That was my impression too. For those with the medieval-peasant view that moving money around is "fake work", it's an interesting basic description of the value of finance. But the rest of the article isn't just useless, it's wrong-headed. There's never been any question in my mind that finance creates value. My best friend (and one of the smartest people I know) is a quant at Goldman. My complaint about the government-finance nexus is that it causes all kinds of screwed incentives (a problem any government system needs to contend with), and is constantly and transparently abused by actors within the financial system. It's incredibly weird to see the author seemingly lose 20 IQ points the minute he attempts to rebut common criticisms of finance. The author has a much worse problem with the blind spot he's describing than the hypothetical people he sneers at throughout the article.

A12-B 6y ago

The irony of using corn markets as an analogy when they are the most subsidised industry in America is lost on him. At the end of the day this has always been a question of who 'deserves' what, dismissed by people like the author saying the concept of 'deserving' isn't real, while staring squarely in the face an industry that someone decided deserves a subsidy. If the concept of deserving wasn't real and people were simply paid according what they bring to the table, we would live in a utopia.

mattmcknight 6y ago

"There is really just one glaring problem with government regulation of banks – it’s too nice to the government. The US government decreed that US treasuries have a risk-weight of 0%, that they’re considered a highly liquid asset on par with cash, that the government is exempt from single-counterparty limits, and so on and so forth." This gets to the heart of the network effects of the 2008 housing price crash. People were modeling mortgage risk as lower because of the implicit guarantee of the government sponsored enterprises which went into conservatorship. If we think about financial institutions trying to hold this kind of debt to meet their risk ratios, there is a lot of incentive to create and hold more of this "low risk" money. This ends up creating counterparty risk, when a sizable chunk of everyone's "low risk" assets drop in market value. It seems like there would be benefit in running the models with a number other than 0 in there for US Treasury risk.

borellvi 6y ago

Sometiems I wonder how much debt is the right amount of dept. Looks like we now live in a dept based society where getting into ultra leveraged dept (mortgage) is the most sentible thing to do for a family. Governaments do exactly the same with bond issuance. When did this become acceptable? Is it good? How much dept do we want to carry forward? Does dept matter anymore? Unfortunately the author doesn't talk about any of these points.

kqr 6y ago
Debt (or more generally, an economy based on promises) is what carries essentially all of modern civilization. Going back to silver and gold coins takes us back to Ancient Greece. It works, but it is very inefficient and very little gets done by comparison. And even so, metal coins aren't actually the goods they're traded for, so you're still relying on a promise of sorts. A gift economy would be the truly promise-free way of life. There's a reason we have very little knowledge of how those work: they don't produce much worth remembering for future generations.

twic 6y ago

A broad and fuzzy point is that most people don't actually know very much at all about the financial industry. Very many have strong opinions about it nonetheless. One particular point that i think gets lost is that the industry is highly heterogeneous. There are retail banks, commercial banks, investment banks (bulge bracket and boutique), building societies, savings and loans, insurance firms, reinsurance firms, hedge funds, open-ended investment companies, investment trusts, mutual funds, mutual fund managers, private equity firms, proprietary trading firms, exchanges, multilateral trading facilities, brokers, dealers, broker-dealers, payment networks, depositories, fintechs, service providers, and god knows what else. There are (usually) many of each. And every organisation has different interests and incentives. The organisations which get the most attention are usually the ones which have gone bust or done crime (or both). But most organisations have not gone bust or done crime. So most people's impressions are formed from an unrepresentative sample. For every hedge fund that has manipulated a market, or bank that has funded arms shipments to a sanction country, there are dozens more that are just doing their job and complying with the law. You never hear about them.

mint2 6y ago
While that may be, some of the largest banks that exist are helping give the industry a bad name: Wells Fargo, Deutsche bank, and hsbc for example all have made bad news. And then there’s the whole corporate raiding thing from hedge funds.
- KMag 6y ago
  > And then there’s the whole corporate raiding thing from hedge funds. Only a small percentage of hedge funds participate in leveraged buyouts.

oa335 6y ago

This article sets up a straw man argument. The finance industry does provide value, but he we elides over the issue that most people have with the industry, which is that losses and risk of the systems are incurred (e.g. bailouts) by the broader public while the gains are realized by the select few who have been granted a government monopoly on creating money (fractional reserve banking). If banking does something good for the public, and if it should be government-backed, then shouldn’t bankers operate (and be compensated) like public servants? The entire piece just reads like motivated reasoning TBH.

scooble 6y ago
There seemed to be a sudden shift in the middle where we went from ‘it’s good for banks to lend people money to start taco stands’ to ‘it’s good for banks to take bets on how many people will default on their mortgage’. To my untrained eye these look like very different activities .
- deleted 6y ago
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- kqr 6y ago
  Think of it this way: any economic activity that depends on future outcomes is effectively equivalent to a bet. Lending money is betting the debtor will not default. Making the bet about many people instead of one is, ostensibly, a way to lower the risk and thereby make the odds more palatable to a wider range of investors. Translation: more effectively move money from where it sits to where it will do good.
lhh 6y ago
These complaints don’t seem to align with reality from what I can tell. The TARP “bailout” was one of the biggest, which taxpayers profited on. The nationalization of Fannie and Freddie was hugely expensive, but I don’t see how that can be called a bailout, since equity holders were wiped out. As the article states, the vast majority of the benefits of such programs come from driving confidence in the functioning of the system so markets don’t freeze up. Moral hazard is a real thing, but it seems like the government walked the line pretty well during the crisis. What bailouts enriched private citizens at the expense of the public?

carapace 6y ago

The urge to signal my intelligence is irresistible, here's a meta-contrarian position for ya: High finance is a form of Numerology. Change my mind: Show the economic theory that predicts things. Physicists have the Standard Model, and it's really good, like Feynman says, "thickness of a human hair over the distance from NY to LA" good. I say that a proper scientific economics can be better understood as ecology + psychology.