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But if all businesses really need is reasonable access to credit then isn't all this financial innovation merely amounting to highly developed parasitism that s

But if all businesses really need is reasonable access to credit then isn't all this financial innovation merely amounting to highly developed parasitism that saps the strength of firms, thus the economy and society? Does finance genuinely help business or society in any of this?

AtlasBarfed 3y ago
I recall the breathless praise of the wizardry of the finance departments in GE and IBM back in the 2000s, and their wunderkind revenue production. Of course it was a house of cards, but small fry compared to the contemporaneous castle of cards that was the mortgage crisis. GE basically imploded from becoming a finance-first company, IBM kept their toes a bit more grounded. Cue the next government bailout in about 2-3 years.
joshuaissac 3y ago
Having a stronger financial industry lets companies (both new and established) get funding more easily and more cheaply. That leads to more investment and development in those other industries. American companies are much better financed than European ones.
singhrac 3y ago
Yes. You can argue that it shouldn’t pay so well, or that there are bad actors, but the financial industry DOES genuinely help society. Like all businesses, they provide services that people want. The easiest example is insurance (e.g. home or auto insurance). Paying premiums sucks, but losing your house is an unimaginable loss for most people. Finance as a whole is a risk transfer mechanism. You transfer the risk of your car getting totaled to State Farm. You might even own some State Farm stock; probably you own some exposure to the risks of American companies, and they pay you for that risk (in expected stock growth). The other easy example is mortgages. Ask anyone from Europe or even a third world country how easy it is to get a 30-year ARM or 10-year fixed like is common in the US. Lenders might have caused the financial crisis (no disagreement here) but post-crisis Americans are able to buy homes because the financial industry is ready to evaluate and lend.
- m0llusk 3y ago
  You are dodging the issue with this. These financial services you name have been available throughout my nearly 60 year life. In the past they were no where near as profitable and represented a much smaller slice of the economy. In the last 10-20 years there has been huge growth in the financial sector such that it is taking in much more money and represents a much larger portion of the economy. Was there really any genuine growth in service, or is this just a tumor on markets growing as it can? Looks a lot more like that latter. And there appears to be a considerable amount of damage being done. Socially debt is considered an important obligation such that walking away from a loan is terrible not only for credit but also social standing and status. Yet financial services have grown to the point that they have a great ability to predict ability to pay and to use that to make loans that they know quite well will very likely never be paid back. Exactly what percentage of recent financial growth is essentially fraudulent activity?
  - deleted 3y ago
    [deleted]
  - singhrac 3y ago
    I’m not dodging the issue. You asked if finance played a useful role in society, and I gave concrete examples where it did. Those services are more profitable because they are more valuable, because they are now better at transferring risk. Sure, you can say that you don’t understand the value that a derivatives product provides, and some people are buying them when they shouldn’t, but that hardly describes the entirety of an industry. Just because you can’t imagine why someone would want borrow money in a complex way doesn’t mean it doesn’t make sense to them. Let me give you another example where financial innovation has made people’s lives (slightly) better. Many people of my parents generation bought strange investment products with very high management fees from people like Fidelity and Morningstar. Today they’re more likely to buy a low fee index fund like Vanguard. Or a target retirement fund that reduces their risk as they get older. I argue that the financial products still existed 40 years ago, but they were more obtuse and a worse deal.
Arnt 3y ago
It depends. Finance genuinely helps, there's no doubt about that. But I think there are diminishing returns. A deeper market with a greater variety of lenders always helps, but it's not clear to me that a very large/varied market is much better than a large/varied market. Anecdata: the founders/startups where I live had a lot more bad stories to tell twenty years ago than in the recent past. Just from hearsay in one sector of one city, Silicon Valley has a better financing environment than here today, but even if the graph in the WSJ article shows a bigger gap, the stories I've heard tell about a smaller gap. Maybe that sector has grown to pass a usability threshold here, and the US has grown more without passing a threshold. I wouldn't know and all I have is hearsay, but the hearsay is enough to make the doubt what the WSJ graph really shows. I realise that there are fields where the US has no peer. If you want to finance a takeover as big as Twitter, then you really need big debt markets, and the US has by far the biggest. I feel, intuitively, that that may not be well connected to the greater economy or the health of median companies, though.
nonameiguess 3y ago
You're asking a couple different things here and it's not clear how or if they relate to the article posted. The second question is does finance help business or society. As answered, yes, it definitely does. Your response to that answer was to say the person was dodging your question, but they didn't. They just only answered one, not both. Your first question was is all this financial innovation merely amounting to highly developed parasitism? This question isn't near as clear. What is "all this financial innovation" you're referring to? To be fair, the article itself isn't super clear on all the factors that make the author think the US is so far outpacing Europe. But there are three things specifically named. First, offering low-fee passive investments like ETFs. Second, less banking system fragmentation because all of the United States speaks a common language and uses a single regulatory system, and obviously the one country in the union controls its own currency. Third, it mentions greater public sector investment. The US government has injected a lot more money into its economy and financial industries than Europeans governments have. I would not think any of those things qualify as parasitism, so presumably you're referring to unrelated things to bring up a personal hobby horse that has nothing to do with this specific article or discussion. I'm guessing you mean broader financialization of all industry (i.e. automakers are more banks than automakers) and the development of increasingly sophisticated high-risk, high-yield derivatives and securitization of things that used to not be tradeable that has happened since the 1980s. If that's what you mean, it's reasonable to ask if those things are positive, but why here? Does every discussion need to turn into the same discussion?

AtlasBarfed 3y ago

I recall the breathless praise of the wizardry of the finance departments in GE and IBM back in the 2000s, and their wunderkind revenue production. Of course it was a house of cards, but small fry compared to the contemporaneous castle of cards that was the mortgage crisis. GE basically imploded from becoming a finance-first company, IBM kept their toes a bit more grounded. Cue the next government bailout in about 2-3 years.

joshuaissac 3y ago

Having a stronger financial industry lets companies (both new and established) get funding more easily and more cheaply. That leads to more investment and development in those other industries. American companies are much better financed than European ones.

singhrac 3y ago

Yes. You can argue that it shouldn’t pay so well, or that there are bad actors, but the financial industry DOES genuinely help society. Like all businesses, they provide services that people want. The easiest example is insurance (e.g. home or auto insurance). Paying premiums sucks, but losing your house is an unimaginable loss for most people. Finance as a whole is a risk transfer mechanism. You transfer the risk of your car getting totaled to State Farm. You might even own some State Farm stock; probably you own some exposure to the risks of American companies, and they pay you for that risk (in expected stock growth). The other easy example is mortgages. Ask anyone from Europe or even a third world country how easy it is to get a 30-year ARM or 10-year fixed like is common in the US. Lenders might have caused the financial crisis (no disagreement here) but post-crisis Americans are able to buy homes because the financial industry is ready to evaluate and lend.

m0llusk 3y ago
You are dodging the issue with this. These financial services you name have been available throughout my nearly 60 year life. In the past they were no where near as profitable and represented a much smaller slice of the economy. In the last 10-20 years there has been huge growth in the financial sector such that it is taking in much more money and represents a much larger portion of the economy. Was there really any genuine growth in service, or is this just a tumor on markets growing as it can? Looks a lot more like that latter. And there appears to be a considerable amount of damage being done. Socially debt is considered an important obligation such that walking away from a loan is terrible not only for credit but also social standing and status. Yet financial services have grown to the point that they have a great ability to predict ability to pay and to use that to make loans that they know quite well will very likely never be paid back. Exactly what percentage of recent financial growth is essentially fraudulent activity?
- deleted 3y ago
  [deleted]
- singhrac 3y ago
  I’m not dodging the issue. You asked if finance played a useful role in society, and I gave concrete examples where it did. Those services are more profitable because they are more valuable, because they are now better at transferring risk. Sure, you can say that you don’t understand the value that a derivatives product provides, and some people are buying them when they shouldn’t, but that hardly describes the entirety of an industry. Just because you can’t imagine why someone would want borrow money in a complex way doesn’t mean it doesn’t make sense to them. Let me give you another example where financial innovation has made people’s lives (slightly) better. Many people of my parents generation bought strange investment products with very high management fees from people like Fidelity and Morningstar. Today they’re more likely to buy a low fee index fund like Vanguard. Or a target retirement fund that reduces their risk as they get older. I argue that the financial products still existed 40 years ago, but they were more obtuse and a worse deal.

Arnt 3y ago

It depends. Finance genuinely helps, there's no doubt about that. But I think there are diminishing returns. A deeper market with a greater variety of lenders always helps, but it's not clear to me that a very large/varied market is much better than a large/varied market. Anecdata: the founders/startups where I live had a lot more bad stories to tell twenty years ago than in the recent past. Just from hearsay in one sector of one city, Silicon Valley has a better financing environment than here today, but even if the graph in the WSJ article shows a bigger gap, the stories I've heard tell about a smaller gap. Maybe that sector has grown to pass a usability threshold here, and the US has grown more without passing a threshold. I wouldn't know and all I have is hearsay, but the hearsay is enough to make the doubt what the WSJ graph really shows. I realise that there are fields where the US has no peer. If you want to finance a takeover as big as Twitter, then you really need big debt markets, and the US has by far the biggest. I feel, intuitively, that that may not be well connected to the greater economy or the health of median companies, though.

nonameiguess 3y ago

You're asking a couple different things here and it's not clear how or if they relate to the article posted. The second question is does finance help business or society. As answered, yes, it definitely does. Your response to that answer was to say the person was dodging your question, but they didn't. They just only answered one, not both. Your first question was is all this financial innovation merely amounting to highly developed parasitism? This question isn't near as clear. What is "all this financial innovation" you're referring to? To be fair, the article itself isn't super clear on all the factors that make the author think the US is so far outpacing Europe. But there are three things specifically named. First, offering low-fee passive investments like ETFs. Second, less banking system fragmentation because all of the United States speaks a common language and uses a single regulatory system, and obviously the one country in the union controls its own currency. Third, it mentions greater public sector investment. The US government has injected a lot more money into its economy and financial industries than Europeans governments have. I would not think any of those things qualify as parasitism, so presumably you're referring to unrelated things to bring up a personal hobby horse that has nothing to do with this specific article or discussion. I'm guessing you mean broader financialization of all industry (i.e. automakers are more banks than automakers) and the development of increasingly sophisticated high-risk, high-yield derivatives and securitization of things that used to not be tradeable that has happened since the 1980s. If that's what you mean, it's reasonable to ask if those things are positive, but why here? Does every discussion need to turn into the same discussion?