5 ms·

Wall Street and Silicon Valley

69 points by dirtyaura 15y ago

chime 15y ago
> Whenever someone criticizes “Wall Street,” someone else tries to defend Wall Street by saying that without it we wouldn’t have Silicon Valley and all of its wonders. Criticizing Wall Street is a very broad term and its defense is equally general. No person who knows anything about markets will say corporations, stock exchanges, or liquidity shouldn't exist. The author is replying to someone who is broadly defending Wall Street's role in VC, private equity, IPOs, and debt. This is a diversion from what the problem with Wall Street really is. I have no problems or complaints about the actual functions and goals of markets. My problems with Wall Street are things that nobody tries to defend but nobody seems to stop: 1) Revolving-Door: Between the top banks, Federal Reserve, and US Treasury. Ex-CEO of GS should not be allowed to dictate or enforce monetary policy. Similarly ex-management of big pharma should not be allowed to run FDA. I saw an OccupyWallStreet sign that expressed this beautifully: Separation of Corporation and State. 2) Capital Gains tax: Income tax is progressive. Why not Capital Gains tax above 15%? I understand the whole I'm taking a "risk" factor. But will pg really shutdown YC if long-term CG is higher? Short-term CG is already same as Income Tax: http://en.wikipedia.org/wiki/Capital_gains_tax_in_the_United_States http://en.wikipedia.org/wiki/Capital_gains_tax_in_the_United... - but long-term is just 1 year. This means, instead of giving a CEO a salary of $10m (taxable at 35%), you just give him $10m in stock that he can collect after 12 months. After the first year has rolled by, it is no different from a regular paycheck. I'd say 99.9% of people cannot afford $0 income for a year but those who can, pay significantly lower taxes. And there are other ways to treat short-term gains as long-term. So why not make long-term to actually be long-term, like 5 years? 3) Funny Quant business: My friends and professors in college suggested that I switch my major from CompSci/Econ to Operations Research/Math because banks on Wall Street were looking for kids like me who loved numbers. The more I looked into it, the more disgusted I felt. Yes, I can comprehend why improving a linear optimization algo. by 0.01% can result in $5m in profits so as a business, it makes perfect sense to hire the smartest people you can find to work on these problems. The issue I have with this is that these operations serve no capital market purpose. I know they're not illegal and I know they're not directly harmful. But they are also not necessary and they indirectly harm everyone because the banks find them as bigger sources of profit than their investment operations. It's like an MD selling power bracelets - not illegal, not directly harmful but you know that if they keep this up and make a lot more money this way, they have less incentive to dispense regular medical advice which is harmful.
- Goladus 15y ago
  Additionally, with regards to the quant business, that they compete for engineering and software development talent probably diverts good people away from the product, research, and service side of the economy.
- prostoalex 15y ago
  I never quite bought into the concept of treating long-term capital gains in a special way. In fact, a glance at http://en.wikipedia.org/wiki/Capital_gains_tax http://en.wikipedia.org/wiki/Capital_gains_tax suggests that only Hungary, India and United States have a notion of special taxation for long-term capital gains (it's 12 months in India and USA and 3 years in Hungary). Treating LTCG as income would simplify tax preparation, but any time this gets brought up, the politicians bring up the small business owners who are unfairly penalized for selling their business.
  - chime 15y ago
    > small business owners who are unfairly penalized for selling their business. If you work for little profit and low salary for 10 years and finally managed to sell your business for $200k gains, I can understand why you don't want to pay 33% just for that one year, especially since you no longer have a source of income until you create another business or get a job. Paying 33% instead of 15% seems unfair. I personally fit into the same dilemma where in 2011 my wife and I will have high income but I won't be making anywhere close in 2012 when I go full-time on my app/startup. I believe there can be solutions to this such that SMBs are not harmed while at the same time, making sure top 0.01% doesn't qualify for it. Changing the brackets for LTCG can work (15% for < $250k, 20% for < $500k, 33% for < $1m, 35% otherwise). Tax deferment could be another solution. Problem is that SMBs are used as a shield to defend the ones with Cayman Island and Swiss Bank accounts. It's not about being anti-corporation or anti-government. It's about being pro-fair.
    - brown9-2 15y ago
      If you work for little profit and low salary for 10 years and finally managed to sell your business for $200k gains, I can understand why you don't want to pay 33% just for that one year, especially since you no longer have a source of income until you create another business or get a job. Paying 33% instead of 15% seems unfair. Can you elaborate on why this is unfair? From a simplistic point of view, this hypothetical person worked for 10 years and ended up with a gain of 200k (assuming income in other years was negligible). Why is it unfair to tax this gain - which can be thought of as receiving the income for 10 years in one shot - at normal income rates? Is it because if it was normal income, the 20k/year amount would not be taxed at 33%?
justincormack 15y ago
Our modern institutions, the banks and the corporation, arose in a period when business was very capital intensive, you had to build big factories to compete. But recently, large areas of business have been changed by technology to require far less capital. Not all of them, building chip factories has not, but look at say the media business, it used to cost a huge amount to build printing plants for newspapers, but this is all starting to go away, taking with it the rationale for the large corporation which used to have to be that big to finance the capital. Silicon Valley is funding the smaller scale firms of the new economy, but that does not require huge amounts of money; meanwhile Wall Street is mostly large amounts of leveraged capital that does not have productive use in the real economy any more, so it tends to feed into asset price bubbles. Its a big long term shift in the balance.
- cellis 15y ago
  Ironically, one of these asset price bubbles is...Silicon Valley! How else could a photo app get $40 million before it even has customers?
Shenglong 15y ago
The art of investment banking has been around for centuries, and by no means started with Wall Street. If you look back many hundred years, the Church had outlawed usury (charging interest on loans), effectively meaning lenders had no more incentive to lend to people who needed it. To solve this problems, some of the first derivatives were invented (yes, some derivatives have a purpose). A lender would trade money to a farmer in exchange for, say, a flock of sheep (although the farmer would keep the sheep). Their repurchase agreement would state that after a year, the farmer would buy the sheep back from the lender, but any baby sheep would still belong to the lender because they were born while the sheep were in the lender's possession. SV might do fine with WS, but I really do believe finance and tech work well, hand in hand.
- winestock 15y ago
  >If you look back many hundred years, the Church had outlawed usury (charging interest on loans) Correction: Usury was the charging of interest on an unproductive loan. If the principle of the loan was meant to buy food for a family, then the lender could not charge interest. If the principle was meant to start a business then the charging of interest was not usury. The big problem was that, for a long time, theologians followed Aristotle on the question if money, itself, was "fruitful" or not. Aristotle said that it wasn't. In the later Middle Ages, theologians made a distinction between money and the uses of money. That distinction led to the conclusion I gave in the previous paragraph. Okay, I'm nitpicking, but this medieval usury issue is a pet peeve of mine.
  - Shenglong 15y ago
    I actually was not aware; I appreciate the clarification!
jwatte 15y ago
Saying risk capital worked before a liquid second market existed is like saying food distribution worked before the supermarket. I agree that Wall Street financiers seem to focus too much on using secondary (and tertiary) effects to simply amass wealth, and i worry that that actually has a negative overall effect on society. But without a liquid secondary market, the primary market is significantly stymied!
- nandemo 15y ago
  Exactly. As I was reading, I was thinking "yeah, record players were invented a 100 years ago, who needs MP3 portable players?"

69 points by dirtyaura 15y ago

chime 15y ago

> Whenever someone criticizes “Wall Street,” someone else tries to defend Wall Street by saying that without it we wouldn’t have Silicon Valley and all of its wonders. Criticizing Wall Street is a very broad term and its defense is equally general. No person who knows anything about markets will say corporations, stock exchanges, or liquidity shouldn't exist. The author is replying to someone who is broadly defending Wall Street's role in VC, private equity, IPOs, and debt. This is a diversion from what the problem with Wall Street really is. I have no problems or complaints about the actual functions and goals of markets. My problems with Wall Street are things that nobody tries to defend but nobody seems to stop: 1) Revolving-Door: Between the top banks, Federal Reserve, and US Treasury. Ex-CEO of GS should not be allowed to dictate or enforce monetary policy. Similarly ex-management of big pharma should not be allowed to run FDA. I saw an OccupyWallStreet sign that expressed this beautifully: Separation of Corporation and State. 2) Capital Gains tax: Income tax is progressive. Why not Capital Gains tax above 15%? I understand the whole I'm taking a "risk" factor. But will pg really shutdown YC if long-term CG is higher? Short-term CG is already same as Income Tax: http://en.wikipedia.org/wiki/Capital_gains_tax_in_the_United_States http://en.wikipedia.org/wiki/Capital_gains_tax_in_the_United... - but long-term is just 1 year. This means, instead of giving a CEO a salary of $10m (taxable at 35%), you just give him $10m in stock that he can collect after 12 months. After the first year has rolled by, it is no different from a regular paycheck. I'd say 99.9% of people cannot afford $0 income for a year but those who can, pay significantly lower taxes. And there are other ways to treat short-term gains as long-term. So why not make long-term to actually be long-term, like 5 years? 3) Funny Quant business: My friends and professors in college suggested that I switch my major from CompSci/Econ to Operations Research/Math because banks on Wall Street were looking for kids like me who loved numbers. The more I looked into it, the more disgusted I felt. Yes, I can comprehend why improving a linear optimization algo. by 0.01% can result in $5m in profits so as a business, it makes perfect sense to hire the smartest people you can find to work on these problems. The issue I have with this is that these operations serve no capital market purpose. I know they're not illegal and I know they're not directly harmful. But they are also not necessary and they indirectly harm everyone because the banks find them as bigger sources of profit than their investment operations. It's like an MD selling power bracelets - not illegal, not directly harmful but you know that if they keep this up and make a lot more money this way, they have less incentive to dispense regular medical advice which is harmful.

Goladus 15y ago
Additionally, with regards to the quant business, that they compete for engineering and software development talent probably diverts good people away from the product, research, and service side of the economy.
prostoalex 15y ago
I never quite bought into the concept of treating long-term capital gains in a special way. In fact, a glance at http://en.wikipedia.org/wiki/Capital_gains_tax http://en.wikipedia.org/wiki/Capital_gains_tax suggests that only Hungary, India and United States have a notion of special taxation for long-term capital gains (it's 12 months in India and USA and 3 years in Hungary). Treating LTCG as income would simplify tax preparation, but any time this gets brought up, the politicians bring up the small business owners who are unfairly penalized for selling their business.
- chime 15y ago
  > small business owners who are unfairly penalized for selling their business. If you work for little profit and low salary for 10 years and finally managed to sell your business for $200k gains, I can understand why you don't want to pay 33% just for that one year, especially since you no longer have a source of income until you create another business or get a job. Paying 33% instead of 15% seems unfair. I personally fit into the same dilemma where in 2011 my wife and I will have high income but I won't be making anywhere close in 2012 when I go full-time on my app/startup. I believe there can be solutions to this such that SMBs are not harmed while at the same time, making sure top 0.01% doesn't qualify for it. Changing the brackets for LTCG can work (15% for < $250k, 20% for < $500k, 33% for < $1m, 35% otherwise). Tax deferment could be another solution. Problem is that SMBs are used as a shield to defend the ones with Cayman Island and Swiss Bank accounts. It's not about being anti-corporation or anti-government. It's about being pro-fair.
  - brown9-2 15y ago
    If you work for little profit and low salary for 10 years and finally managed to sell your business for $200k gains, I can understand why you don't want to pay 33% just for that one year, especially since you no longer have a source of income until you create another business or get a job. Paying 33% instead of 15% seems unfair. Can you elaborate on why this is unfair? From a simplistic point of view, this hypothetical person worked for 10 years and ended up with a gain of 200k (assuming income in other years was negligible). Why is it unfair to tax this gain - which can be thought of as receiving the income for 10 years in one shot - at normal income rates? Is it because if it was normal income, the 20k/year amount would not be taxed at 33%?

justincormack 15y ago

Our modern institutions, the banks and the corporation, arose in a period when business was very capital intensive, you had to build big factories to compete. But recently, large areas of business have been changed by technology to require far less capital. Not all of them, building chip factories has not, but look at say the media business, it used to cost a huge amount to build printing plants for newspapers, but this is all starting to go away, taking with it the rationale for the large corporation which used to have to be that big to finance the capital. Silicon Valley is funding the smaller scale firms of the new economy, but that does not require huge amounts of money; meanwhile Wall Street is mostly large amounts of leveraged capital that does not have productive use in the real economy any more, so it tends to feed into asset price bubbles. Its a big long term shift in the balance.

cellis 15y ago
Ironically, one of these asset price bubbles is...Silicon Valley! How else could a photo app get $40 million before it even has customers?

Shenglong 15y ago

The art of investment banking has been around for centuries, and by no means started with Wall Street. If you look back many hundred years, the Church had outlawed usury (charging interest on loans), effectively meaning lenders had no more incentive to lend to people who needed it. To solve this problems, some of the first derivatives were invented (yes, some derivatives have a purpose). A lender would trade money to a farmer in exchange for, say, a flock of sheep (although the farmer would keep the sheep). Their repurchase agreement would state that after a year, the farmer would buy the sheep back from the lender, but any baby sheep would still belong to the lender because they were born while the sheep were in the lender's possession. SV might do fine with WS, but I really do believe finance and tech work well, hand in hand.

winestock 15y ago
>If you look back many hundred years, the Church had outlawed usury (charging interest on loans) Correction: Usury was the charging of interest on an unproductive loan. If the principle of the loan was meant to buy food for a family, then the lender could not charge interest. If the principle was meant to start a business then the charging of interest was not usury. The big problem was that, for a long time, theologians followed Aristotle on the question if money, itself, was "fruitful" or not. Aristotle said that it wasn't. In the later Middle Ages, theologians made a distinction between money and the uses of money. That distinction led to the conclusion I gave in the previous paragraph. Okay, I'm nitpicking, but this medieval usury issue is a pet peeve of mine.
- Shenglong 15y ago
  I actually was not aware; I appreciate the clarification!

jwatte 15y ago

Saying risk capital worked before a liquid second market existed is like saying food distribution worked before the supermarket. I agree that Wall Street financiers seem to focus too much on using secondary (and tertiary) effects to simply amass wealth, and i worry that that actually has a negative overall effect on society. But without a liquid secondary market, the primary market is significantly stymied!

nandemo 15y ago
Exactly. As I was reading, I was thinking "yeah, record players were invented a 100 years ago, who needs MP3 portable players?"