24 ms·

The Rent Is Too Damn High: The Enormous Cost of Letting Finance Rule

147 points by pje 13y ago

api 13y ago
The rich are simply not smart enough to intelligently allocate their capital. Things like rent extraction schemes (formulaic investment patterns) and bubbles (indicative of simple herd behavior) dominate because they are easy, dumb ways to make more money off existing money. You don't see big investments in new technology, science, infrastructure, or other complex and difficult areas because by and large the financiers do not understand these things. But they do understand finance itself, as well as big dumb markets like real estate. These schemes are dumb because they contain the seeds of their own destruction. Rent extraction eventually kills the golden goose or provokes a populist revolt, while bubbles are basically casino gambling. The libertarian anti-tax/anti-government revolution was largely predicated on the idea that private capital would be so much smarter and more agile than state capital. What we're seeing is that this isn't the case. Private capital is every bit as stupid as the state; Goldman Sachs is not that different from a Soviet planning bureau.
- nickthemagicman 13y ago
  I love your comment. I'm hoping as tech takes over and democratizes the capital allocation schemes, these fat cats will actually have some true competition.
  - api 13y ago
    A more general statement can be made: A central problem in all modern economies -- whether socialistically or capitalistically organized -- is the accumulation of monolithic stores of wealth exceeding the cognitive capacity of small groups of human beings to intelligently allocate it. We might call this the "big dumb money problem." As the original article points out, it's a bigger problem than merely one of waste. Big dumb money often operates in ways that are actively harmful.
    - logfromblammo 13y ago
      Combine the big dumb money problem with the agency problem, and you will see that no one capable of allocating a huge pile of capital intelligently could ever be trusted to do it. The logical thing to do is to allocate as much as possible to yourself as quickly as possible, before someone else can come along and do exactly the same thing. The financial sector really needs an ever-aware watchdog standing behind it at all times, pointing a big, scary gun at its skull. When the only consequence to taking everything you can get is having more than you can use, guess what happens. The only alternative is to decentralize completely, which no nation on the planet will attempt, because they benefit from living at the center of the money web almost as much as the banks.
    - dkuntz2 13y ago
      Perhaps banks could implement a negative interest rate. Money you don't use goes to science (or something equally "good" for humanity)?
      - skylan_q 13y ago
        a negative interest rate Guess what drives consumption and consumerism. :)
        dkuntz2 13y ago
        Perhaps. The whole system would need some redoing as well, such as providing everyone with basic necessities. Part of the negative interest could be used to help provide those.
      - breischl 13y ago
        Yeah, but then nobody would ever deposit money in the bank. Much more clever to call it something seemingly unrelated, like "inflation".
      - twic 13y ago
        This is called "tax".
  - JonFish85 13y ago
    You mean like tech has taken over and democratized San Francisco?
  - deleted 13y ago
    [deleted]
  - michaelochurch 13y ago
    I'm hoping as tech takes over and democratizes the capital allocation schemes, these fat cats will actually have some true competition. VC is way worse than Wall Street. I wouldn't trust the Valley to manage a bag of rock salt. Finance is a lot less classist and racist and sexist, by far, than VC-funded tech because it actually respects high-level talent. Once you prove that you're smart, people will take you seriously as, at the least, a quant or quant trader. Those may not be high-status roles (compared to banking and old-style, guts-and-glory, trading) but if you're good in them, you can make more than enough money to have a good life. The VC-funded world, for all its pretenses to the contrary, doesn't really value talent beyond about 2-3 standard deviations because it has no way of recognizing it. There are really smart people in the Valley, but not in king-making roles. That is why mediocrities like Evan Spiegel and Lucas Duplan get their early backers and snowball into serious entities. You just have to be good at social proof arbitrage.
    - api 13y ago
      "social proof arbitrage." There is a lot of win in that phrase.
- jbellis 13y ago
  No, the libertarian political philosophy is that incentives matter, so that if companies can make easy money by getting the government to play favorites (primarily by regulating smaller competitors out of the market, as well as straightforward politically connected loans), they will. The solution is therefore to make it so the government can't play favorites.
  - api 13y ago
    What you describe is another problem: a high degree of naiveté among libertarians when it comes to the connection between economic power and political power. Large concentrations of economic power almost always proceed to purchase political influence and subvert the free market. It's usually far more profitable to do that than to play by free market rules.
    - jbellis 13y ago
      Libertarians would say that it's the traditional liberal response (try to make it hard to purchase influence) that is naive: you've only been trying for a hundred years, and it hasn't worked yet.
      - scarmig 13y ago
        Classical liberals, Rawlsian liberals, and libertarians all face the same public choice issues: they're not something any side can simply wave a wand at and make go away. The annoying part comes when either side pretends like the other side faces them as a unique challenge and the other isn't subject to it. (Traditional Burkean conservatism, on the other hand, doesn't face that issue in the same way: it accepts that government is inherently corruptible as part of the human condition and rejects the idea of a rationalist State.)
      - jbooth 13y ago
        Making it hardER is certainly possible. Get rid of the Citizens' United decision, enforce some rules on lobbying and campaign finance, re-institute the split between savings banks and investment banks, as a matter of fact break up a few of them so that the influence is less concentrated. We had things working that way a few short decades ago and while it wasn't a golden age, it wasn't as much of a gilded age as today either. Life is shades of gray. You're never going to have a government small enough or an economy small enough that it's not worth it to play dirty, outside of complete anarchy which it turns out is significantly dirtier. What you can do is limit the damage.
- loceng 13y ago
  The "rich" were smart enough to find a way to be able to pool resources, or "lucky" enough to have been born into a situation. The problem is we need to be investing in everyone, equally, until they prove they can use resources better than others and then allot them more resources. The first trick is doing it in a way that is fair, and the second trick is doing this while in transition from the old systems.
- enoch_r 13y ago
  If the market is "stupid", what testable results do we expect? Here's one: smart people who figure out better ways to allocate money should be able to consistently beat the market performance. Great--now let's test that hypothesis! Studies have consistently shown there is very little or no autocorrelation between excess returns--that is, someone who beats the market in year n is essentially no more likely to beat the market in year n+1 than anyone else. This is very different than a field like programming or basketball, where someone who performs well one year will probably perform well the next year. To me, this is absurdly good evidence that the market is not "stupid," even when I think it is. Worse, arguments like this don't merely say that the market is stupid and could be beaten--they use the author's personal views on the stupidity of particular market movements to make that claim. In other words, to accept this argument, I need to believe that you are one of the (maybe) few people on the planet who can consistently beat the market. I don't believe that.
  - grey-area 13y ago
    If the market is "stupid", what testable results do we expect? Here's one: smart people who figure out better ways to allocate money should be able to consistently beat the market performance. Markets behaving irrationally/stupidly != Markets behaving predictably So I disagree that if markets are stupid (irrational is a better word, but stupid would do) other people in the know could take advantage of them. Just because a given person cannot predict the movements of the market, that doesn't mean the market encodes some special unknown information or is in some aggregate sense smarter or more informed than that person. If the market moves essentially randomly in the short term, the most informed person would not have much chance of beating it. The market doesn't need to be clever to beat you, on the contrary, often it beats people by persisting in stupidity for much longer than they thought possible, or longer than they have time for, until they give in and invest, and then perhaps soon after it reverts to something resembling rational for a short while. That's not to mention the many ways in which our stock markets and other markets are rigged and stacked by insiders (insider trading, market manipulation, LIBOR, forex etc). So your contention that you'd need to be incredibly talented to 'beat the market' as you put it isn't very convincing - there is another explanation for the studies you cite - almost no-one is able to consistently beat the market, except by luck. I suspect (though it is just supposition), that markets are the average of all the uninformed and panicky humans who make them up, and that in those crowds of investors and speculators you'll find a madding mill of people all looking for the main chance which oscillates in a chaotic manner, not a huge collective wisdom which outshines everyone on the planet.
- hershel 13y ago
  >> You don't see big investments in new technology, science, infrastructure, or other complex and difficult areas because by and large the financiers do not understand these things. Isn't this the role of of venture capitalists to understand those things(with regards to science and tech), and they build specific expertise to understand those things(including hiring top notch entrepreneurs )? But venture returns are not that great(average 7% annual) which explains the little money invested in them(less than $15 billion in 2013).
- Dewie 13y ago
  This might be slightly relevant here: http://arxiv.org/pdf/1002.2284.pdf http://arxiv.org/pdf/1002.2284.pdf
soup10 13y ago
"Those who work in banking, venture capital, and other financial firms are in charge of allocating the economy’s investment resources. They decide, in a decentralized and competitive way, which companies and industries will shrink and which will grow. It makes sense that a nation would allocate many of its most talented and thus highly compensated individuals to the task." The simple flaw with this idea is that wall street is squarely focused on making more money. Not making society better. Not allocating capital effectively. Not even on creating wealth(which is distinct from money). The single guiding equation for all deals and transactions is "how can we make as much money as possible with as little risk as possible and also stay out of jail". That wall street occasionally invests in companies that actually do create wealth and allocate capital to the betterment of society is more a case of broken clock sometimes being right.
- jbooth 13y ago
  And that's as it should be. State-allocated capital without a private finance sector has failed miserably, like in terms of millions of people starving, everywhere it's been tried. There's a middle ground here. "Well-regulated market". Communists don't understand the market part (see Great Leap Forward) and Libertarians are idolators who think the market will automatically settle into the best thing for society if only we didn't have a government (see Somalia).
  - bduerst 13y ago
    Most of the self-proclaimed libertarians I have spoken to typically resort to 'No True Scotsmans' whenever you bring up a counter to their utopia. I say "utopia" because to them, a libertarian future was an insulated fantasy in which they controlled how everyone behaves.
    - deleted 13y ago
      [deleted]
  - soup10 13y ago
    I'm not advocating more government programs or central planning. I think it's more of a cultural issue and balancing social responsibility with profits.
chrisBob 13y ago
I firmly believe that the financial sector is nothing more than a thief. If you are making money, but not a product then you are stealing from someone. The high speed traders are the best and easiest to explain example. Having said, that I send about 5-10% of my income every month to my financial advisor for him to invest because I don't know of any better option. Can anyone tell me a way to save for retirement that produces similar results and isn't funding criminals?
- gaius 13y ago
  Of course that is nonsense. What finance really is is the buying and selling of risk. Charging a fee to assume the risk of an asset changing in value (say, an airline pays a bank for an option on buying oil at a set price) is honest business. You make money at it by specializing in evaluating and managing risk and by being better at it than organizations for whom it is not their core competence.
  - pgwhalen 13y ago
    Wow, this is really a superb way of describing finance concisely. Financiers often get tangled in certain interests in unfair or unscrupulous ways, but fundamentally it is not thievery.
  - georgemcbay 13y ago
    It stops being an honest business when you can fail at it very badly, have your short-term losses covered by taxpayer bailouts and then just keep going as usual.
    - gopher1 13y ago
      Or when you can set up a financial services company whose entire mission is to trade based on insider information and market manipulation, but with a leadership structure that protects top executives from prosecution because they technically never get their hands dirty. See: http://www.pbs.org/wgbh/pages/frontline/to-catch-a-trader/ http://www.pbs.org/wgbh/pages/frontline/to-catch-a-trader/
snake_plissken 13y ago
I'm curious about the apparent decoupling/lag between net-rent and gross-rent that begins sometime in the mid-90s. For most of the chart's time series, they correlate fairly well.
manishsharan 13y ago
I am techie working in the banking industry for last decade for some of the top banks in Canada. Here is what I have noticed from a micro perspective: In these lines of businesses --commercial banking, online banking , retail banking -- the pay is shit, the work is heavily outsourced and the PCs are crappy and stifling bureaucracy . Where as in capital markets Line Of Business, the pay is awesome, the PCs/notebooks are best of class and there is virtually no outsourcing and little bureaucracy. This leads me to believe that banks value capital markets operations more that commercial banking. However, it is obvious that commercial banking provides more value to the society as they enable businesses to borrow to grow and expand . Capital markets and trading activities of the bank earn more profits but I doubt they have as much impact on growth of a business. Finance will always rule ; however society should make an effort to discriminate between different sub-sectors of finance industry. Short term trading is not as valuable to society as giving $100mm loan to a businesses.
- afterburner 13y ago
  "Finance will always rule" That was not nearly as true today as it was before 1980. Things don't have to be this way.
- twic 13y ago
  In London, i observe considerable bureaucracy, outsourcing, and all-round incompetence in capital markets organisations. Quite possibly less than in retail operations, though.
- Florin_Andrei 13y ago
  Where I grew up there's a saying: Whoever holds the bread and the knife, will cut a bigger slice for himself.
michaelochurch 13y ago
Why are diamonds more expensive than water, when the latter is far more useful? Because there’s a lot of water in the world but very few diamonds. Diamonds are actually a great metaphor for overpriced executive "talent". Why? First, diamonds are not fucking rare. The price has been heavily manipulated. In executives, the manipulation pertains to the closed social network of entrenched parasites who can get those jobs: a similar cartel over high-echelon relationships (and owed favors, and extortions). The scarcity is illusory; there are a hundred times more people who are competent to fill their shoes. Second, many diamonds are junk. Third, diamonds are not really natural. Diamonds from the earth must be carved into a man-made shape through technical means, and (anyway) artificial diamonds are often superior in quantity. Similarly, "executive talent" is an artificial artifact, not some genetically-ordained rarity. Fourth, there's a lot of negativity and violence, even, involved in keeping this phony scarcity intact. I guess the major difference is that few diamonds have negative value, while most corporate executives do. The greatest trick these assholes (the upper class) ever played on society is convincing us that we need them, and that they are somehow so special that having connections to their stupid little club should be the #1 dominating factor in who makes the most money, gets to make important decisions, and works in the highest-level jobs.
- jquery 13y ago
  > First, diamonds are not fucking rare. True, but jewel-grade diamonds are rare. Likewise, run-of-the-mill executive talent isn't rare... but top quality talent is.
  - ForHackernews 13y ago
    "The difference is that the world diamond market is largely controlled by a single private enterprise, the South Africa-based De Beers cartel. The geniuses behind De Beers recognized early on that a stable, profitable diamond industry depended on controlling both supply and demand. De Beers rarely discovers new sources of diamonds; rather, it focuses on controlling existing ones, limiting production, and if necessary buying up surplus gems and stockpiling them to prop up the market. It sets prices arbitrarily and cuts off supplies to dealers who buy through unauthorized channels. On the marketing side, De Beers hired advertising firms, starting with N.W. Ayer in the late 1930s, to render axiomatic the idea that diamonds = true love." http://www.straightdope.com/columns/read/2524/is-a-diamonds-price-a-true-measure-of-its-value http://www.straightdope.com/columns/read/2524/is-a-diamonds-... http://www.barnesandnoble.com/w/the-rise-and-fall-of-diamonds-edward-jay-epstein/1013550616?ean=2940012796721 http://www.barnesandnoble.com/w/the-rise-and-fall-of-diamond...
nawitus 13y ago
Sad to see such a low-quality article being upvoted on Hacker News. Kinda like that other massively upvoted low-quality article on AI. Anyway, it's a strange article. It says the problem is rent-extraction, which seems to be a nother name for rent seeking. Rent seeking is these days defined to mean corrupting regulators, yet the article claims that the solution is even more regulation. In an efficient market without monopolies there's no such thing as rent seeking. Anyway, the biggest problem with this article is it's naievity and blaming rich people in a populistic fashion. Advocating for nationalization of banking? Come on.
- gopher1 13y ago
  Please explain, how do you get an efficient market without monopolies if you don't have anti-trust regulation?
  - jpadkins 13y ago
    Please name a natural* monopoly or cartel? *not created by the government or by government regulations. The most monopolistic sectors of the economy (FIRE, healthcare, energy, defense) are also the most regulated.
    - alex_young 13y ago
      Please name a company which thrives without a government or government regulations.
    - nikatwork 13y ago
      The monopolies create regulations through lobbying (aka bribery). You anti-regulation people have it nearly right but stop short of the deeper truth. The problem is not the concept of regulations, the problem is a corrupt-by-design government that accepts cash payments to create unfair regulations.
- dctoedt 13y ago
  > In an efficient market without monopolies there's no such thing as rent seeking. That's a variation on the assume-a-can-opener fallacy [1]. [1] http://en.wikipedia.org/wiki/Assume_a_can_opener http://en.wikipedia.org/wiki/Assume_a_can_opener
verelo 13y ago
Second sentence "does has". I don't get the feeling this is going to be a great read.
dbingham 13y ago
Woah, did I miss something? When did HN start voting up articles from "a leading voice of the American left, offering socialist perspectives on politics, economics, and culture"? I mean, not that I'm complaining too much, but that's a total shift from what I remember of a year or two ago. Did the demographics shift or have the times changed people's opinions?
- tankenmate 13y ago
  You haven't seen the full effect of the "Controversy Penalty" kick in yet; it'll be coming your way shortly. To quote "A "controversial" story gets severely penalized after hitting 40 comments." -- http://www.righto.com/2013/11/how-hacker-news-ranking-really-works.html http://www.righto.com/2013/11/how-hacker-news-ranking-really...
- Florin_Andrei 13y ago
  Criticizing the wealthy used to be a complete taboo in this country. It looks like things are (very slowly) starting to change. Not a second too soon.
etanazir 13y ago
Some religious people used to call usury a sin.
- AnimalMuppet 13y ago
  Also greed/covetousness.
danmaz74 13y ago
"the top 25 hedge fund managers (financial rent extractors par excellence) make more money than all the CEOs of the S&P 500 combined" This is really impressive, considering that big companies CEOs don't earn little money.
araes 13y ago
A good start on solving this would be to reinstitute Glass-Steagall with the strong provisions (20 & 32), the famous loopholes of the late-70's/80's removed, no grandfather clauses, and aggressive maintenance to fight new loopholes. Course, what politician would support that? You need money to win elections. That big spike that starts in 80 was right after the 1977 decision to allow commercial paper from private banks, and the 1982 decision to allow subsidiaries that could deal in securities. Banks and their lobbyists fought this from nearly the day of inception (Glass himself fought it) right up until the repeal in 1999 when it was pretty much dead. Why? It stops them from doing exactly what they're doing right now. Unfortunately, now all we get is Dodd-Frank, which is all the bureaucracy with none of the bite.
PythonicAlpha 13y ago
Financial sector is our new aristocratic system. Those will be and are now our rulers with the blue blood of money and we others have to sweat to pay for their living. They tell us, that they are needed (as the aristocrats did in the middle ages to the farmers), since we can not go without (system relevant). But the thing is, that by manipulating our democratic systems, they made them self system relevant and they hinder that things can change. What they do is, they take the wealth of the earth away from the 99% and give it to themselves and the other riches. This system will one day kill of any creativity and any living resources of the earth. They are the real anti-socials of the world.
- Florin_Andrei 13y ago
  > Financial sector is our new aristocratic system. Those will be and are now our rulers "Are"? Yes, I'm afraid. "Will be"? It depends. > They tell us, that they are needed (as the aristocrats did in the middle ages to the farmers), since we can not go without An argument echoed by Ayn Rand BTW.
  - api 13y ago
    A lot of people think Rand defended capitalism as we know it, which is quite untrue. Her conception of it was something very different. She referred to the present finance industry types as the "aristocracy of pull." Not that I'm a Rand fanatic per se, but she is often misquoted and completely misunderstood. Some of her supposed fans misunderstand her as much as her opponents.
  - PythonicAlpha 13y ago
    I don't know Ayn Rand. I also don't claim that my opinion is in any way new. And: The financial sector are our new rulers, even when you are not afraid. Ignorance does not save from the truth. Just look into the news. The Occupy movement was suppressed by the police, because the finance sector paid for it. The political system in most western countries is totally under control of the finance sector. We are slaves, but we don't know it (yet). Edit: In second reading your answer, I see that I misinterpreted your statements ... sorry! But for arguments sake, I leave the comment intact.
lmg643 13y ago
I think the thesis is correct - but I couldn't finish this piece. I tuned out after the comment about diamond scarcity. Diamonds are their own example of economic rent extraction through monopoly/artificial supply. Might be more interesting to explore the parallels between diamond cartels and banking cartels. Once concept that is largely dead in American thinking is "anti trust" - the idea that powerful companies might act in mutually beneficial ways. The recent consolidation of mega-financial institutions is a fairly obvious case, but america is either willfully obtuse (or deliberately) in not seeing this as a problem to address. Sure, let one company have larger notional derivatives exposure than the entire world economy (JP Morgan) - what could possibly go wrong? What are you, a communist?? It's hard to do commentary well, referencing a wide range of subjects and facts. Details need to be right.
ianferrel 13y ago
Comparing annual finance sector costs against net investment is approaching completely misleading. It's like being outraged at my annual grocery bill compared to the value of the food in my cupboard (ignoring the cost of all the food I ate).
- collyw 13y ago
  There were a number of comparisons made, such as the amount taken by the sector now, as compared to the 40's. I think you can get a good picture from that of how bloated and inefficient the system is.
jackson1989 13y ago
>>>But there can be no doubt that their compensation is, at best, incomprehensible — at worst, a crime of unfathomable social magnitude. I agree, but these salaries are set by markets and I have to respect the market

147 points by pje 13y ago

api 13y ago

The rich are simply not smart enough to intelligently allocate their capital. Things like rent extraction schemes (formulaic investment patterns) and bubbles (indicative of simple herd behavior) dominate because they are easy, dumb ways to make more money off existing money. You don't see big investments in new technology, science, infrastructure, or other complex and difficult areas because by and large the financiers do not understand these things. But they do understand finance itself, as well as big dumb markets like real estate. These schemes are dumb because they contain the seeds of their own destruction. Rent extraction eventually kills the golden goose or provokes a populist revolt, while bubbles are basically casino gambling. The libertarian anti-tax/anti-government revolution was largely predicated on the idea that private capital would be so much smarter and more agile than state capital. What we're seeing is that this isn't the case. Private capital is every bit as stupid as the state; Goldman Sachs is not that different from a Soviet planning bureau.

nickthemagicman 13y ago
I love your comment. I'm hoping as tech takes over and democratizes the capital allocation schemes, these fat cats will actually have some true competition.
- api 13y ago
  A more general statement can be made: A central problem in all modern economies -- whether socialistically or capitalistically organized -- is the accumulation of monolithic stores of wealth exceeding the cognitive capacity of small groups of human beings to intelligently allocate it. We might call this the "big dumb money problem." As the original article points out, it's a bigger problem than merely one of waste. Big dumb money often operates in ways that are actively harmful.
  - logfromblammo 13y ago
    Combine the big dumb money problem with the agency problem, and you will see that no one capable of allocating a huge pile of capital intelligently could ever be trusted to do it. The logical thing to do is to allocate as much as possible to yourself as quickly as possible, before someone else can come along and do exactly the same thing. The financial sector really needs an ever-aware watchdog standing behind it at all times, pointing a big, scary gun at its skull. When the only consequence to taking everything you can get is having more than you can use, guess what happens. The only alternative is to decentralize completely, which no nation on the planet will attempt, because they benefit from living at the center of the money web almost as much as the banks.
  - dkuntz2 13y ago
    Perhaps banks could implement a negative interest rate. Money you don't use goes to science (or something equally "good" for humanity)?
    - skylan_q 13y ago
      a negative interest rate Guess what drives consumption and consumerism. :)
      - dkuntz2 13y ago
        Perhaps. The whole system would need some redoing as well, such as providing everyone with basic necessities. Part of the negative interest could be used to help provide those.
    - breischl 13y ago
      Yeah, but then nobody would ever deposit money in the bank. Much more clever to call it something seemingly unrelated, like "inflation".
    - twic 13y ago
      This is called "tax".
- JonFish85 13y ago
  You mean like tech has taken over and democratized San Francisco?
- deleted 13y ago
  [deleted]
- michaelochurch 13y ago
  I'm hoping as tech takes over and democratizes the capital allocation schemes, these fat cats will actually have some true competition. VC is way worse than Wall Street. I wouldn't trust the Valley to manage a bag of rock salt. Finance is a lot less classist and racist and sexist, by far, than VC-funded tech because it actually respects high-level talent. Once you prove that you're smart, people will take you seriously as, at the least, a quant or quant trader. Those may not be high-status roles (compared to banking and old-style, guts-and-glory, trading) but if you're good in them, you can make more than enough money to have a good life. The VC-funded world, for all its pretenses to the contrary, doesn't really value talent beyond about 2-3 standard deviations because it has no way of recognizing it. There are really smart people in the Valley, but not in king-making roles. That is why mediocrities like Evan Spiegel and Lucas Duplan get their early backers and snowball into serious entities. You just have to be good at social proof arbitrage.
  - api 13y ago
    "social proof arbitrage." There is a lot of win in that phrase.
jbellis 13y ago
No, the libertarian political philosophy is that incentives matter, so that if companies can make easy money by getting the government to play favorites (primarily by regulating smaller competitors out of the market, as well as straightforward politically connected loans), they will. The solution is therefore to make it so the government can't play favorites.
- api 13y ago
  What you describe is another problem: a high degree of naiveté among libertarians when it comes to the connection between economic power and political power. Large concentrations of economic power almost always proceed to purchase political influence and subvert the free market. It's usually far more profitable to do that than to play by free market rules.
  - jbellis 13y ago
    Libertarians would say that it's the traditional liberal response (try to make it hard to purchase influence) that is naive: you've only been trying for a hundred years, and it hasn't worked yet.
    - scarmig 13y ago
      Classical liberals, Rawlsian liberals, and libertarians all face the same public choice issues: they're not something any side can simply wave a wand at and make go away. The annoying part comes when either side pretends like the other side faces them as a unique challenge and the other isn't subject to it. (Traditional Burkean conservatism, on the other hand, doesn't face that issue in the same way: it accepts that government is inherently corruptible as part of the human condition and rejects the idea of a rationalist State.)
    - jbooth 13y ago
      Making it hardER is certainly possible. Get rid of the Citizens' United decision, enforce some rules on lobbying and campaign finance, re-institute the split between savings banks and investment banks, as a matter of fact break up a few of them so that the influence is less concentrated. We had things working that way a few short decades ago and while it wasn't a golden age, it wasn't as much of a gilded age as today either. Life is shades of gray. You're never going to have a government small enough or an economy small enough that it's not worth it to play dirty, outside of complete anarchy which it turns out is significantly dirtier. What you can do is limit the damage.
loceng 13y ago
The "rich" were smart enough to find a way to be able to pool resources, or "lucky" enough to have been born into a situation. The problem is we need to be investing in everyone, equally, until they prove they can use resources better than others and then allot them more resources. The first trick is doing it in a way that is fair, and the second trick is doing this while in transition from the old systems.
enoch_r 13y ago
If the market is "stupid", what testable results do we expect? Here's one: smart people who figure out better ways to allocate money should be able to consistently beat the market performance. Great--now let's test that hypothesis! Studies have consistently shown there is very little or no autocorrelation between excess returns--that is, someone who beats the market in year n is essentially no more likely to beat the market in year n+1 than anyone else. This is very different than a field like programming or basketball, where someone who performs well one year will probably perform well the next year. To me, this is absurdly good evidence that the market is not "stupid," even when I think it is. Worse, arguments like this don't merely say that the market is stupid and could be beaten--they use the author's personal views on the stupidity of particular market movements to make that claim. In other words, to accept this argument, I need to believe that you are one of the (maybe) few people on the planet who can consistently beat the market. I don't believe that.
- grey-area 13y ago
  If the market is "stupid", what testable results do we expect? Here's one: smart people who figure out better ways to allocate money should be able to consistently beat the market performance. Markets behaving irrationally/stupidly != Markets behaving predictably So I disagree that if markets are stupid (irrational is a better word, but stupid would do) other people in the know could take advantage of them. Just because a given person cannot predict the movements of the market, that doesn't mean the market encodes some special unknown information or is in some aggregate sense smarter or more informed than that person. If the market moves essentially randomly in the short term, the most informed person would not have much chance of beating it. The market doesn't need to be clever to beat you, on the contrary, often it beats people by persisting in stupidity for much longer than they thought possible, or longer than they have time for, until they give in and invest, and then perhaps soon after it reverts to something resembling rational for a short while. That's not to mention the many ways in which our stock markets and other markets are rigged and stacked by insiders (insider trading, market manipulation, LIBOR, forex etc). So your contention that you'd need to be incredibly talented to 'beat the market' as you put it isn't very convincing - there is another explanation for the studies you cite - almost no-one is able to consistently beat the market, except by luck. I suspect (though it is just supposition), that markets are the average of all the uninformed and panicky humans who make them up, and that in those crowds of investors and speculators you'll find a madding mill of people all looking for the main chance which oscillates in a chaotic manner, not a huge collective wisdom which outshines everyone on the planet.
hershel 13y ago
>> You don't see big investments in new technology, science, infrastructure, or other complex and difficult areas because by and large the financiers do not understand these things. Isn't this the role of of venture capitalists to understand those things(with regards to science and tech), and they build specific expertise to understand those things(including hiring top notch entrepreneurs )? But venture returns are not that great(average 7% annual) which explains the little money invested in them(less than $15 billion in 2013).
Dewie 13y ago
This might be slightly relevant here: http://arxiv.org/pdf/1002.2284.pdf http://arxiv.org/pdf/1002.2284.pdf

soup10 13y ago

"Those who work in banking, venture capital, and other financial firms are in charge of allocating the economy’s investment resources. They decide, in a decentralized and competitive way, which companies and industries will shrink and which will grow. It makes sense that a nation would allocate many of its most talented and thus highly compensated individuals to the task." The simple flaw with this idea is that wall street is squarely focused on making more money. Not making society better. Not allocating capital effectively. Not even on creating wealth(which is distinct from money). The single guiding equation for all deals and transactions is "how can we make as much money as possible with as little risk as possible and also stay out of jail". That wall street occasionally invests in companies that actually do create wealth and allocate capital to the betterment of society is more a case of broken clock sometimes being right.

jbooth 13y ago
And that's as it should be. State-allocated capital without a private finance sector has failed miserably, like in terms of millions of people starving, everywhere it's been tried. There's a middle ground here. "Well-regulated market". Communists don't understand the market part (see Great Leap Forward) and Libertarians are idolators who think the market will automatically settle into the best thing for society if only we didn't have a government (see Somalia).
- bduerst 13y ago
  Most of the self-proclaimed libertarians I have spoken to typically resort to 'No True Scotsmans' whenever you bring up a counter to their utopia. I say "utopia" because to them, a libertarian future was an insulated fantasy in which they controlled how everyone behaves.
  - deleted 13y ago
    [deleted]
- soup10 13y ago
  I'm not advocating more government programs or central planning. I think it's more of a cultural issue and balancing social responsibility with profits.

chrisBob 13y ago

I firmly believe that the financial sector is nothing more than a thief. If you are making money, but not a product then you are stealing from someone. The high speed traders are the best and easiest to explain example. Having said, that I send about 5-10% of my income every month to my financial advisor for him to invest because I don't know of any better option. Can anyone tell me a way to save for retirement that produces similar results and isn't funding criminals?

gaius 13y ago
Of course that is nonsense. What finance really is is the buying and selling of risk. Charging a fee to assume the risk of an asset changing in value (say, an airline pays a bank for an option on buying oil at a set price) is honest business. You make money at it by specializing in evaluating and managing risk and by being better at it than organizations for whom it is not their core competence.
- pgwhalen 13y ago
  Wow, this is really a superb way of describing finance concisely. Financiers often get tangled in certain interests in unfair or unscrupulous ways, but fundamentally it is not thievery.
- georgemcbay 13y ago
  It stops being an honest business when you can fail at it very badly, have your short-term losses covered by taxpayer bailouts and then just keep going as usual.
  - gopher1 13y ago
    Or when you can set up a financial services company whose entire mission is to trade based on insider information and market manipulation, but with a leadership structure that protects top executives from prosecution because they technically never get their hands dirty. See: http://www.pbs.org/wgbh/pages/frontline/to-catch-a-trader/ http://www.pbs.org/wgbh/pages/frontline/to-catch-a-trader/

snake_plissken 13y ago

I'm curious about the apparent decoupling/lag between net-rent and gross-rent that begins sometime in the mid-90s. For most of the chart's time series, they correlate fairly well.

manishsharan 13y ago

I am techie working in the banking industry for last decade for some of the top banks in Canada. Here is what I have noticed from a micro perspective: In these lines of businesses --commercial banking, online banking , retail banking -- the pay is shit, the work is heavily outsourced and the PCs are crappy and stifling bureaucracy . Where as in capital markets Line Of Business, the pay is awesome, the PCs/notebooks are best of class and there is virtually no outsourcing and little bureaucracy. This leads me to believe that banks value capital markets operations more that commercial banking. However, it is obvious that commercial banking provides more value to the society as they enable businesses to borrow to grow and expand . Capital markets and trading activities of the bank earn more profits but I doubt they have as much impact on growth of a business. Finance will always rule ; however society should make an effort to discriminate between different sub-sectors of finance industry. Short term trading is not as valuable to society as giving $100mm loan to a businesses.

afterburner 13y ago
"Finance will always rule" That was not nearly as true today as it was before 1980. Things don't have to be this way.
twic 13y ago
In London, i observe considerable bureaucracy, outsourcing, and all-round incompetence in capital markets organisations. Quite possibly less than in retail operations, though.
Florin_Andrei 13y ago
Where I grew up there's a saying: Whoever holds the bread and the knife, will cut a bigger slice for himself.

michaelochurch 13y ago

Why are diamonds more expensive than water, when the latter is far more useful? Because there’s a lot of water in the world but very few diamonds. Diamonds are actually a great metaphor for overpriced executive "talent". Why? First, diamonds are not fucking rare. The price has been heavily manipulated. In executives, the manipulation pertains to the closed social network of entrenched parasites who can get those jobs: a similar cartel over high-echelon relationships (and owed favors, and extortions). The scarcity is illusory; there are a hundred times more people who are competent to fill their shoes. Second, many diamonds are junk. Third, diamonds are not really natural. Diamonds from the earth must be carved into a man-made shape through technical means, and (anyway) artificial diamonds are often superior in quantity. Similarly, "executive talent" is an artificial artifact, not some genetically-ordained rarity. Fourth, there's a lot of negativity and violence, even, involved in keeping this phony scarcity intact. I guess the major difference is that few diamonds have negative value, while most corporate executives do. The greatest trick these assholes (the upper class) ever played on society is convincing us that we need them, and that they are somehow so special that having connections to their stupid little club should be the #1 dominating factor in who makes the most money, gets to make important decisions, and works in the highest-level jobs.

jquery 13y ago
> First, diamonds are not fucking rare. True, but jewel-grade diamonds are rare. Likewise, run-of-the-mill executive talent isn't rare... but top quality talent is.
- ForHackernews 13y ago
  "The difference is that the world diamond market is largely controlled by a single private enterprise, the South Africa-based De Beers cartel. The geniuses behind De Beers recognized early on that a stable, profitable diamond industry depended on controlling both supply and demand. De Beers rarely discovers new sources of diamonds; rather, it focuses on controlling existing ones, limiting production, and if necessary buying up surplus gems and stockpiling them to prop up the market. It sets prices arbitrarily and cuts off supplies to dealers who buy through unauthorized channels. On the marketing side, De Beers hired advertising firms, starting with N.W. Ayer in the late 1930s, to render axiomatic the idea that diamonds = true love." http://www.straightdope.com/columns/read/2524/is-a-diamonds-price-a-true-measure-of-its-value http://www.straightdope.com/columns/read/2524/is-a-diamonds-... http://www.barnesandnoble.com/w/the-rise-and-fall-of-diamonds-edward-jay-epstein/1013550616?ean=2940012796721 http://www.barnesandnoble.com/w/the-rise-and-fall-of-diamond...

nawitus 13y ago

Sad to see such a low-quality article being upvoted on Hacker News. Kinda like that other massively upvoted low-quality article on AI. Anyway, it's a strange article. It says the problem is rent-extraction, which seems to be a nother name for rent seeking. Rent seeking is these days defined to mean corrupting regulators, yet the article claims that the solution is even more regulation. In an efficient market without monopolies there's no such thing as rent seeking. Anyway, the biggest problem with this article is it's naievity and blaming rich people in a populistic fashion. Advocating for nationalization of banking? Come on.

gopher1 13y ago
Please explain, how do you get an efficient market without monopolies if you don't have anti-trust regulation?
- jpadkins 13y ago
  Please name a natural* monopoly or cartel? *not created by the government or by government regulations. The most monopolistic sectors of the economy (FIRE, healthcare, energy, defense) are also the most regulated.
  - alex_young 13y ago
    Please name a company which thrives without a government or government regulations.
  - nikatwork 13y ago
    The monopolies create regulations through lobbying (aka bribery). You anti-regulation people have it nearly right but stop short of the deeper truth. The problem is not the concept of regulations, the problem is a corrupt-by-design government that accepts cash payments to create unfair regulations.
dctoedt 13y ago
> In an efficient market without monopolies there's no such thing as rent seeking. That's a variation on the assume-a-can-opener fallacy [1]. [1] http://en.wikipedia.org/wiki/Assume_a_can_opener http://en.wikipedia.org/wiki/Assume_a_can_opener

verelo 13y ago

Second sentence "does has". I don't get the feeling this is going to be a great read.

dbingham 13y ago

Woah, did I miss something? When did HN start voting up articles from "a leading voice of the American left, offering socialist perspectives on politics, economics, and culture"? I mean, not that I'm complaining too much, but that's a total shift from what I remember of a year or two ago. Did the demographics shift or have the times changed people's opinions?

tankenmate 13y ago
You haven't seen the full effect of the "Controversy Penalty" kick in yet; it'll be coming your way shortly. To quote "A "controversial" story gets severely penalized after hitting 40 comments." -- http://www.righto.com/2013/11/how-hacker-news-ranking-really-works.html http://www.righto.com/2013/11/how-hacker-news-ranking-really...
Florin_Andrei 13y ago
Criticizing the wealthy used to be a complete taboo in this country. It looks like things are (very slowly) starting to change. Not a second too soon.

etanazir 13y ago

Some religious people used to call usury a sin.

AnimalMuppet 13y ago
Also greed/covetousness.

danmaz74 13y ago

"the top 25 hedge fund managers (financial rent extractors par excellence) make more money than all the CEOs of the S&P 500 combined" This is really impressive, considering that big companies CEOs don't earn little money.

araes 13y ago

A good start on solving this would be to reinstitute Glass-Steagall with the strong provisions (20 & 32), the famous loopholes of the late-70's/80's removed, no grandfather clauses, and aggressive maintenance to fight new loopholes. Course, what politician would support that? You need money to win elections. That big spike that starts in 80 was right after the 1977 decision to allow commercial paper from private banks, and the 1982 decision to allow subsidiaries that could deal in securities. Banks and their lobbyists fought this from nearly the day of inception (Glass himself fought it) right up until the repeal in 1999 when it was pretty much dead. Why? It stops them from doing exactly what they're doing right now. Unfortunately, now all we get is Dodd-Frank, which is all the bureaucracy with none of the bite.

PythonicAlpha 13y ago

Financial sector is our new aristocratic system. Those will be and are now our rulers with the blue blood of money and we others have to sweat to pay for their living. They tell us, that they are needed (as the aristocrats did in the middle ages to the farmers), since we can not go without (system relevant). But the thing is, that by manipulating our democratic systems, they made them self system relevant and they hinder that things can change. What they do is, they take the wealth of the earth away from the 99% and give it to themselves and the other riches. This system will one day kill of any creativity and any living resources of the earth. They are the real anti-socials of the world.

Florin_Andrei 13y ago
> Financial sector is our new aristocratic system. Those will be and are now our rulers "Are"? Yes, I'm afraid. "Will be"? It depends. > They tell us, that they are needed (as the aristocrats did in the middle ages to the farmers), since we can not go without An argument echoed by Ayn Rand BTW.
- api 13y ago
  A lot of people think Rand defended capitalism as we know it, which is quite untrue. Her conception of it was something very different. She referred to the present finance industry types as the "aristocracy of pull." Not that I'm a Rand fanatic per se, but she is often misquoted and completely misunderstood. Some of her supposed fans misunderstand her as much as her opponents.
- PythonicAlpha 13y ago
  I don't know Ayn Rand. I also don't claim that my opinion is in any way new. And: The financial sector are our new rulers, even when you are not afraid. Ignorance does not save from the truth. Just look into the news. The Occupy movement was suppressed by the police, because the finance sector paid for it. The political system in most western countries is totally under control of the finance sector. We are slaves, but we don't know it (yet). Edit: In second reading your answer, I see that I misinterpreted your statements ... sorry! But for arguments sake, I leave the comment intact.

lmg643 13y ago

I think the thesis is correct - but I couldn't finish this piece. I tuned out after the comment about diamond scarcity. Diamonds are their own example of economic rent extraction through monopoly/artificial supply. Might be more interesting to explore the parallels between diamond cartels and banking cartels. Once concept that is largely dead in American thinking is "anti trust" - the idea that powerful companies might act in mutually beneficial ways. The recent consolidation of mega-financial institutions is a fairly obvious case, but america is either willfully obtuse (or deliberately) in not seeing this as a problem to address. Sure, let one company have larger notional derivatives exposure than the entire world economy (JP Morgan) - what could possibly go wrong? What are you, a communist?? It's hard to do commentary well, referencing a wide range of subjects and facts. Details need to be right.

ianferrel 13y ago

Comparing annual finance sector costs against net investment is approaching completely misleading. It's like being outraged at my annual grocery bill compared to the value of the food in my cupboard (ignoring the cost of all the food I ate).

collyw 13y ago
There were a number of comparisons made, such as the amount taken by the sector now, as compared to the 40's. I think you can get a good picture from that of how bloated and inefficient the system is.

jackson1989 13y ago

>>>But there can be no doubt that their compensation is, at best, incomprehensible — at worst, a crime of unfathomable social magnitude. I agree, but these salaries are set by markets and I have to respect the market