10 ms·

The Financial Sector Is the Greatest Parasite in Human History

98 points by Tycho 13y ago

deleted 13y ago
[deleted]
rdl 13y ago
Bigger than government? Arguably at least the military and internal-to-government overhead is a direct parasite on everyone else, and its only value is fighting other parasites (other governments). Some parts of government seem to be very useful, but it's a big enough sector that just the parasite parts are probably the biggest parasite.
- craigyk 13y ago
  yes. why even bother to argue your point? while a lot of government spending might not benefit you directly, the odds are that someone out there is getting some kind of service from it. Also, a sizable fraction of government money is going to salaries of middle-class workers. They, in turn, are likely to spend that money on things you might consider useful or neat, thereby helping the overall economy. The process might be inefficient (or less efficient than a perfectly executed and fictitious counterpart) but that doesn't make it a parasite.
  - rdl 13y ago
    The military part is negative-sum for the world. A competent engineer designing weapons, even if he makes $150k to spend on food/cars/etc. and support those people, is still depriving humanity of the $100k to near-infinity of positive contribution ("consumer surplus") he could be making, some of which he'd capture as additional expected income, if he worked on something genuinely useful to humanity. The only reason we have a military is to protect from other militaries; therefore, militarism is a parasite.
    - jfoutz 13y ago
      What has DARPA done for me lately? Money seems to be an excellent motivator, but when death is on the line people seem to embrace a little more out of the box thinking. Rent seeking and collusion to avoid innovation seem to be problems with both the money and violence types of power.
      - robotresearcher 13y ago
        "What has DARPA done for me lately?" How about the internet? If that's too last-century for you, you can look forward to the benefits of DARPA funding the development of the basic tech and Open Source software that's driving the rapid development of robots right now.
        jfoutz 13y ago
        Easy tiger. The point was not all military spending is a waste.
        rdl 13y ago
        Useful side effects for sure, but even if you took away the direct non-financial costs of the military (non-zero chance of nuclear armageddon...), I think there are things we as a species could work on which would produce the same kind of competitive, focused effort. The "space race" accomplished a lot, and consumer IT tech (say, mobile phones) has progressed even faster than military tech (outside maybe an existential war like WW2).
        arg01 13y ago
        I don't disagree with your wider point that their are other useful motivators out there but it's worth noting that the space race was militarily motivated. Sputnik flying overhead effectively showed the soviets had/would have the ability to drop bombs anywhere in the world. Even the space shuttle was influenced in design by militaristic influence.
        13y ago
  - MBlume 13y ago
    You lost me at the broken-window fallacy. If you want to give people handouts, call them handouts. Don't give them a bunch of bullshit to do and pretend it's constructive.
- praxeologist 13y ago
  Government is worse and it enables a lot of the ills of banking, not a popular opinion on largely state-apologist HN though.
  - rdl 13y ago
    I wasn't even making a general anti-government argument, but the much weaker argument against parts of the government which exist only because government, not because of any actual purpose external to government.
billspreston 13y ago
Who keeps pushing this meme? If anything, the worst parasites are lobby groups and politicians.
- adventured 13y ago
  It's a populist call to arms. You'll be seeing a lot more of it over the next few years, expanding ever more loudly toward the rich, wall street, bankers, and corporations, with calls for much higher tax levels and minimum wage. The Fed's asset bubble-based fake recovery did absolutely nothing for the bottom 50%, but has vastly increased the wealth of the top 10%, the future social consequences of that are obvious.
  - brc 13y ago
    Indeed. If you take a populist rant like this, and replace keywords like '1%', 'rich', 'banker' with words like 'Jew','Semitic' and 'Zionists' - you start to get an appreciation for how ugly these latest movements really are through the lens of history. Do I mean that some of the public policy choices of the last decade are beyond criticism? No, definitely not. 'Too big to fail' is a terrible phrase because it calcifies economies and entrenches bad practice. But the latest meme of 'if you're rich you're a parasite and should be stripped of your property' is disturbing for me. It lumps a class of people into a 'generally bad' category without looking at specific problems. There are angry young people out there who have been fed a simplified story and are running around with 'eat the rich' style placards. That is worrying to any ordered society.
    - honestcoyote 13y ago
      To be fair, the actions of many (not all) of the rich in this country have brought it on themselves. When the middle class is stagnant or declining, and the wealthy keep getting richer and richer, then the populist rhetoric will take root. And who can blame them exactly? When wages are stagnant, income inequality is rising, most companies have little-to-no loyalty to their employees and discard them at will, and many of the rich and comfortable push relentlessly towards eliminating the safety net, then those at the bottom are going to feel more than a little resentful. They feel ignored and powerless, which is a correct assessment of their position. While not all the rich are bad, it's very hard in the current climate to have the slightest bit of sympathy for them. They, as a class, have the power to change things and avoid the coming storms, but, they've already shown they're not the least bit interested in addressing the immense financial inequalities and the problems to an ordered society caused by such divisions.
arbuge 13y ago
Warren Buffett's Gotrocks anecdote is an interesting take on this: http://money.cnn.com/2006/03/05/news/newsmakers/buffett_fortune/ http://money.cnn.com/2006/03/05/news/newsmakers/buffett_fort...
tim333 13y ago
The military has been worse historically surely? At least the financial sector has some function you'd miss if they didn't exist - banks, insurers etc are useful although I'll give you that about half their activities are parasite like. I'm basing that number on Krugman http://www.nytimes.com/2009/03/27/opinion/27krugman.html?_r=1 http://www.nytimes.com/2009/03/27/opinion/27krugman.html?_r=...
- refurb 13y ago
  The military? Ask Hawaiians over the age of 80 how useful the military is.
- Turing_Machine 13y ago
  "The military has been worse historically surely?" Ask Ukraine about the consequences of getting rid of your military.
  - protomyth 13y ago
    "Military costs too much until you get invaded" is a common thread throughout history.
    - logfromblammo 13y ago
      Recent history has shown that nigh-universal private ownership of small arms is, if not an absolute deterrent to invasion, a great multiplier for the costs of an occupation. A rifle behind every blade of grass and 96 nuclear warheads in every submarine would seem to be as much as you need to prevent an overt invasion. Projecting your power into other countries, on the other hand--that will cost you quite a lot more. Switzerland seems to have a decent anti-invasion model. Arm everyone able to lift a rifle and make almost your entire country into a giant fortress, and you won't get invaded until well after your neighbors are overrun. They don't spend a lot on their military, relative to more militaristic nations, but it is clear that anyone wishing to take the country would have to spend a lot more than the defenders.
refurb 13y ago
The financial sector provides no services? What? If I want to sell my company, the banks sure as hell provide a service. They provide a valuation, put together a pitch book, shop the company around and close the deal. How is that not a service?
- jabgrabdthrow 13y ago
  You can be a parasite and still provide a service, no?
  - refurb 13y ago
    The crux of the author's argument is that the financial services provides neither a good nor a service.
  - logfromblammo 13y ago
    A tapeworm will help you lose weight, right?
    - sliverstorm 13y ago
      "Rust- the racer's friend" - me
  - jes 13y ago
    Can you elaborate on this? I'm not seeing it. If you have someone willing to provide a service, and someone else willing to buy the service that is offered, how is this a problem? If the service provider doesn't provide the service that was agreed upon, the parties work to find a remedy, perhaps by going to court, or arbitration, etc. Are you including more than the buyer and the seller in your analysis?
    - benched 13y ago
      I think you are presenting a pristine idealization of a free market that doesn't exist in the world.
babuskov 13y ago
"The Financial Sector" is too broad to make a statement like that.
guylhem 13y ago
Maybe it's just me, but the maths seems strange. I just quickly glanced at some figures, like "Have they earned it?", and it seemed wrong. The author says the total return for say Barclay was 12.61%. bc -l running in a terminal disagree Taking 100 as the base value to ease our math: 100x1.112x1.0825x0.9452x1.1088=126.156497322240000 That's a 26% something cumulative return in 4 years. What is this 12.61% meant to represent?? The average per year was closer to 6.5% if that's what he meant. (Edit- replaced the * by x and added an =)
- rm999 13y ago
  >The rule of thumb is that hedge funds charge a 2% per year management fee and keep 20% of all profits, >All returns shown are net of fees So, subtract 20% from the 3 positive numbers, and that's about 6% in fees (this may be off by a bit, I'm quickly approximating the math in my head). Subtract another ~8% for 4 years of fees, and that's about 14% combined fees. 26% - 14% = 12%. Seems to be about right. The author could have made the way he calculated the fees more clear, but his point stands that a huge % of hedge fund profits go to fees.
thatthatis 13y ago
Just like the transportation industry parasites, all the finance industry does is move things around. Neither makes anything. /s
Eleutheria 13y ago
“The few who understand the system will either be so interested in its profits or be so dependent upon its favours that there will be no opposition from that class, while on the other hand, the great body of people, mentally incapable of comprehending the tremendous advantage that capital derives from the system, will bear its burdens without complaint, and perhaps without even suspecting that the system is inimical to their interests” .- Self
- gruseom 13y ago
  Fake, according to http://en.wikiquote.org/wiki/Conspiracy http://en.wikiquote.org/wiki/Conspiracy.
  - Eleutheria 13y ago
    Updated. Not fake anymore.
  - fsk 13y ago
    Even if it is a fake quote, the point it makes is true.
harrystone 13y ago
That brush is so broad it's blocking out the sun.
quanticle 13y ago
The problem isn't the financial industry. Or, rather, the financial industry is only a special-case of the problem. The problem is middle-men. Specifically, it's the fact the Internet has made a certain class of people, whose job it was to take money from people and give it to people who need money (in exchange for a cut) obsolete. The financial industry is the man-in-the-middle between lenders and borrowers. The recording industry is the man-in-the-middle between listeners and artists. Auto-dealerships are the man-in-the-middle between car companies and car buyers. Realtors are the man-in-the-middle between home buyers and home sellers. In every case, these used to be vital services in a pre-Internet, pre-cheap-communication world. But now, they all look like parasites, simply because we don't need their services any more. And, instead of refocusing their business around providing information and helping the market clear, all of these industries are trying to carve out regulatory havens that would allow them to continue business as usual whilst imposing higher costs on the rest of us. It is this rent-seeking behavior that makes them parasites.
- marcosdumay 13y ago
  It's funny how the Internet only become widespread about 20 years ago, yet we need people like you remembering us how it was like before. It's amazing how fast we changed, and how fast we got used to it.
  - xarball 13y ago
    We need people like you. What a parasite! Should we pay him?
  - quanticle 13y ago
    They funny thing is that I'm only in my 20's :) It's not that I necessarily remember how times were before the Internet (I was but a child then), but I study a lot of history in my spare time. So maybe everyone needs to sit down and read a few books and think about how different life was when you couldn't just look up whatever you wanted to know in a matter of minutes.
- SaltySailor 13y ago
  I'm guessing you didn't spend more than 30 seconds skimming the article.
avaku 13y ago
Thanks HN! Although, there is an element of overcompensation in finance, as well as a lot of overconfident people with more testosterone than knowledge, it still does provide hell of a lot of services. I'm happy to see that the HN crowd doesn't really "just believe" whatever is said in that article. True, I agree the management fees are high. However, the argument about HFT is basically "kitchen level" of someone who doesn't know a thing about it and just read some blogs and watched something on TV. HFT firms get paid for providing liquidity in the market. How exact that happens is actually easy to understand, but not many people bother. All these stories about front running "fair investors" are almost a complete fake (there was some issue about flash trading but that has gone away now).
tailrecursion 13y ago
If the scandals described in this article and Taibi's articles are the result of a few bad actors, and if the result of these scandals is a broad perception on the part of the public that the entire financial sector is corrupt, then Goldman Sachs should be interested in policing its own. I wonder if G.S. feels unable to police itself, or maybe they feel the aluminum story is not a problem, or that what they did was harmless. I don't know what they think about what they do. I can't really blame below average people for cheating -- they're not good enough to win playing by the same rules as everyone else. But if I'm to draw a circle around the corrupt people should I draw it around a piece of G.S., or around the whole company. It seems like the scandals keep happening, and that market manipulation such as laddering and hoarding are considered by the financial industry as another way to make money. If the financial industry isn't greased entirely on deception, then I'd like to know what percentage is deceptive and what percentage is figuring out a hedge plan for e.g. BMW's exchange rate risk. I can see how billions can be made one way, but I don't see how billions can be made the other way.
ergoproxy 13y ago
The article doesn't address the question: Why has the GDP share of the FIRE sector recently grown so much so fast? If its growth were the result of increasing authentic demand for financial services, or increasing efficiency in the supply of financial services, then that would be OK. However, I see three main bad reasons for the recent explosive growth in the FIRE sector: 1. Their cost of borrowing is artificially low. They don't need depositors anymore. They can borrow limitless funds from the Federal Reserve now at 0.25%. Their real borrowing rate is actually negative if we're honest about inflation, rather than relying on fabricated government numbers that leave out housing, healthcare, food, fuel and education. 2. The Fed is creating artificial demand for financial products. After the 2008-9 crisis, the Fed has created $3T out of thin air and used half of it to buy mortgage backed securities. 3. Over the last 30 years, the federal government has shown its willingness to bailout failed financial institutions that took on too much risk-- We saw it with the S&L crisis of the 1980s and 1990s; we saw it with the 1998 bailout of LTCM; and we saw it again with the $700B TARP in 2008. If we would simply allow the free market (rather than The Fed and federal government) to determine interest rates, and the demand for securities, and the appropriate level of risk appetite, then we'd see the FIRE sector shrink back to its historically low share of GDP. Page 37 of this paper by Thomas Philippon charts the growth of the US Financial Industry as a share of GDP from 1860 to 2007: http://pages.stern.nyu.edu/~tphilipp/papers/finsize_old.pdf http://pages.stern.nyu.edu/~tphilipp/papers/finsize_old.pdf

98 points by Tycho 13y ago

deleted 13y ago

[deleted]

rdl 13y ago

Bigger than government? Arguably at least the military and internal-to-government overhead is a direct parasite on everyone else, and its only value is fighting other parasites (other governments). Some parts of government seem to be very useful, but it's a big enough sector that just the parasite parts are probably the biggest parasite.

craigyk 13y ago
yes. why even bother to argue your point? while a lot of government spending might not benefit you directly, the odds are that someone out there is getting some kind of service from it. Also, a sizable fraction of government money is going to salaries of middle-class workers. They, in turn, are likely to spend that money on things you might consider useful or neat, thereby helping the overall economy. The process might be inefficient (or less efficient than a perfectly executed and fictitious counterpart) but that doesn't make it a parasite.
- rdl 13y ago
  The military part is negative-sum for the world. A competent engineer designing weapons, even if he makes $150k to spend on food/cars/etc. and support those people, is still depriving humanity of the $100k to near-infinity of positive contribution ("consumer surplus") he could be making, some of which he'd capture as additional expected income, if he worked on something genuinely useful to humanity. The only reason we have a military is to protect from other militaries; therefore, militarism is a parasite.
  - jfoutz 13y ago
    What has DARPA done for me lately? Money seems to be an excellent motivator, but when death is on the line people seem to embrace a little more out of the box thinking. Rent seeking and collusion to avoid innovation seem to be problems with both the money and violence types of power.
    - robotresearcher 13y ago
      "What has DARPA done for me lately?" How about the internet? If that's too last-century for you, you can look forward to the benefits of DARPA funding the development of the basic tech and Open Source software that's driving the rapid development of robots right now.
      - jfoutz 13y ago
        Easy tiger. The point was not all military spending is a waste.
        rdl 13y ago
        Useful side effects for sure, but even if you took away the direct non-financial costs of the military (non-zero chance of nuclear armageddon...), I think there are things we as a species could work on which would produce the same kind of competitive, focused effort. The "space race" accomplished a lot, and consumer IT tech (say, mobile phones) has progressed even faster than military tech (outside maybe an existential war like WW2).
        arg01 13y ago
        I don't disagree with your wider point that their are other useful motivators out there but it's worth noting that the space race was militarily motivated. Sputnik flying overhead effectively showed the soviets had/would have the ability to drop bombs anywhere in the world. Even the space shuttle was influenced in design by militaristic influence.
        13y ago
- MBlume 13y ago
  You lost me at the broken-window fallacy. If you want to give people handouts, call them handouts. Don't give them a bunch of bullshit to do and pretend it's constructive.
praxeologist 13y ago
Government is worse and it enables a lot of the ills of banking, not a popular opinion on largely state-apologist HN though.
- rdl 13y ago
  I wasn't even making a general anti-government argument, but the much weaker argument against parts of the government which exist only because government, not because of any actual purpose external to government.

billspreston 13y ago

Who keeps pushing this meme? If anything, the worst parasites are lobby groups and politicians.

adventured 13y ago
It's a populist call to arms. You'll be seeing a lot more of it over the next few years, expanding ever more loudly toward the rich, wall street, bankers, and corporations, with calls for much higher tax levels and minimum wage. The Fed's asset bubble-based fake recovery did absolutely nothing for the bottom 50%, but has vastly increased the wealth of the top 10%, the future social consequences of that are obvious.
- brc 13y ago
  Indeed. If you take a populist rant like this, and replace keywords like '1%', 'rich', 'banker' with words like 'Jew','Semitic' and 'Zionists' - you start to get an appreciation for how ugly these latest movements really are through the lens of history. Do I mean that some of the public policy choices of the last decade are beyond criticism? No, definitely not. 'Too big to fail' is a terrible phrase because it calcifies economies and entrenches bad practice. But the latest meme of 'if you're rich you're a parasite and should be stripped of your property' is disturbing for me. It lumps a class of people into a 'generally bad' category without looking at specific problems. There are angry young people out there who have been fed a simplified story and are running around with 'eat the rich' style placards. That is worrying to any ordered society.
  - honestcoyote 13y ago
    To be fair, the actions of many (not all) of the rich in this country have brought it on themselves. When the middle class is stagnant or declining, and the wealthy keep getting richer and richer, then the populist rhetoric will take root. And who can blame them exactly? When wages are stagnant, income inequality is rising, most companies have little-to-no loyalty to their employees and discard them at will, and many of the rich and comfortable push relentlessly towards eliminating the safety net, then those at the bottom are going to feel more than a little resentful. They feel ignored and powerless, which is a correct assessment of their position. While not all the rich are bad, it's very hard in the current climate to have the slightest bit of sympathy for them. They, as a class, have the power to change things and avoid the coming storms, but, they've already shown they're not the least bit interested in addressing the immense financial inequalities and the problems to an ordered society caused by such divisions.

arbuge 13y ago

Warren Buffett's Gotrocks anecdote is an interesting take on this: http://money.cnn.com/2006/03/05/news/newsmakers/buffett_fortune/ http://money.cnn.com/2006/03/05/news/newsmakers/buffett_fort...

tim333 13y ago

The military has been worse historically surely? At least the financial sector has some function you'd miss if they didn't exist - banks, insurers etc are useful although I'll give you that about half their activities are parasite like. I'm basing that number on Krugman http://www.nytimes.com/2009/03/27/opinion/27krugman.html?_r=1 http://www.nytimes.com/2009/03/27/opinion/27krugman.html?_r=...

refurb 13y ago
The military? Ask Hawaiians over the age of 80 how useful the military is.
Turing_Machine 13y ago
"The military has been worse historically surely?" Ask Ukraine about the consequences of getting rid of your military.
- protomyth 13y ago
  "Military costs too much until you get invaded" is a common thread throughout history.
  - logfromblammo 13y ago
    Recent history has shown that nigh-universal private ownership of small arms is, if not an absolute deterrent to invasion, a great multiplier for the costs of an occupation. A rifle behind every blade of grass and 96 nuclear warheads in every submarine would seem to be as much as you need to prevent an overt invasion. Projecting your power into other countries, on the other hand--that will cost you quite a lot more. Switzerland seems to have a decent anti-invasion model. Arm everyone able to lift a rifle and make almost your entire country into a giant fortress, and you won't get invaded until well after your neighbors are overrun. They don't spend a lot on their military, relative to more militaristic nations, but it is clear that anyone wishing to take the country would have to spend a lot more than the defenders.

refurb 13y ago

The financial sector provides no services? What? If I want to sell my company, the banks sure as hell provide a service. They provide a valuation, put together a pitch book, shop the company around and close the deal. How is that not a service?

jabgrabdthrow 13y ago
You can be a parasite and still provide a service, no?
- refurb 13y ago
  The crux of the author's argument is that the financial services provides neither a good nor a service.
- logfromblammo 13y ago
  A tapeworm will help you lose weight, right?
  - sliverstorm 13y ago
    "Rust- the racer's friend" - me
- jes 13y ago
  Can you elaborate on this? I'm not seeing it. If you have someone willing to provide a service, and someone else willing to buy the service that is offered, how is this a problem? If the service provider doesn't provide the service that was agreed upon, the parties work to find a remedy, perhaps by going to court, or arbitration, etc. Are you including more than the buyer and the seller in your analysis?
  - benched 13y ago
    I think you are presenting a pristine idealization of a free market that doesn't exist in the world.

babuskov 13y ago

"The Financial Sector" is too broad to make a statement like that.

guylhem 13y ago

Maybe it's just me, but the maths seems strange. I just quickly glanced at some figures, like "Have they earned it?", and it seemed wrong. The author says the total return for say Barclay was 12.61%. bc -l running in a terminal disagree Taking 100 as the base value to ease our math: 100x1.112x1.0825x0.9452x1.1088=126.156497322240000 That's a 26% something cumulative return in 4 years. What is this 12.61% meant to represent?? The average per year was closer to 6.5% if that's what he meant. (Edit- replaced the * by x and added an =)

rm999 13y ago
>The rule of thumb is that hedge funds charge a 2% per year management fee and keep 20% of all profits, >All returns shown are net of fees So, subtract 20% from the 3 positive numbers, and that's about 6% in fees (this may be off by a bit, I'm quickly approximating the math in my head). Subtract another ~8% for 4 years of fees, and that's about 14% combined fees. 26% - 14% = 12%. Seems to be about right. The author could have made the way he calculated the fees more clear, but his point stands that a huge % of hedge fund profits go to fees.

thatthatis 13y ago

Just like the transportation industry parasites, all the finance industry does is move things around. Neither makes anything. /s

Eleutheria 13y ago

“The few who understand the system will either be so interested in its profits or be so dependent upon its favours that there will be no opposition from that class, while on the other hand, the great body of people, mentally incapable of comprehending the tremendous advantage that capital derives from the system, will bear its burdens without complaint, and perhaps without even suspecting that the system is inimical to their interests” .- Self

gruseom 13y ago
Fake, according to http://en.wikiquote.org/wiki/Conspiracy http://en.wikiquote.org/wiki/Conspiracy.
- Eleutheria 13y ago
  Updated. Not fake anymore.
- fsk 13y ago
  Even if it is a fake quote, the point it makes is true.

harrystone 13y ago

That brush is so broad it's blocking out the sun.

quanticle 13y ago

The problem isn't the financial industry. Or, rather, the financial industry is only a special-case of the problem. The problem is middle-men. Specifically, it's the fact the Internet has made a certain class of people, whose job it was to take money from people and give it to people who need money (in exchange for a cut) obsolete. The financial industry is the man-in-the-middle between lenders and borrowers. The recording industry is the man-in-the-middle between listeners and artists. Auto-dealerships are the man-in-the-middle between car companies and car buyers. Realtors are the man-in-the-middle between home buyers and home sellers. In every case, these used to be vital services in a pre-Internet, pre-cheap-communication world. But now, they all look like parasites, simply because we don't need their services any more. And, instead of refocusing their business around providing information and helping the market clear, all of these industries are trying to carve out regulatory havens that would allow them to continue business as usual whilst imposing higher costs on the rest of us. It is this rent-seeking behavior that makes them parasites.

marcosdumay 13y ago
It's funny how the Internet only become widespread about 20 years ago, yet we need people like you remembering us how it was like before. It's amazing how fast we changed, and how fast we got used to it.
- xarball 13y ago
  We need people like you. What a parasite! Should we pay him?
- quanticle 13y ago
  They funny thing is that I'm only in my 20's :) It's not that I necessarily remember how times were before the Internet (I was but a child then), but I study a lot of history in my spare time. So maybe everyone needs to sit down and read a few books and think about how different life was when you couldn't just look up whatever you wanted to know in a matter of minutes.
SaltySailor 13y ago
I'm guessing you didn't spend more than 30 seconds skimming the article.

avaku 13y ago

Thanks HN! Although, there is an element of overcompensation in finance, as well as a lot of overconfident people with more testosterone than knowledge, it still does provide hell of a lot of services. I'm happy to see that the HN crowd doesn't really "just believe" whatever is said in that article. True, I agree the management fees are high. However, the argument about HFT is basically "kitchen level" of someone who doesn't know a thing about it and just read some blogs and watched something on TV. HFT firms get paid for providing liquidity in the market. How exact that happens is actually easy to understand, but not many people bother. All these stories about front running "fair investors" are almost a complete fake (there was some issue about flash trading but that has gone away now).

tailrecursion 13y ago

If the scandals described in this article and Taibi's articles are the result of a few bad actors, and if the result of these scandals is a broad perception on the part of the public that the entire financial sector is corrupt, then Goldman Sachs should be interested in policing its own. I wonder if G.S. feels unable to police itself, or maybe they feel the aluminum story is not a problem, or that what they did was harmless. I don't know what they think about what they do. I can't really blame below average people for cheating -- they're not good enough to win playing by the same rules as everyone else. But if I'm to draw a circle around the corrupt people should I draw it around a piece of G.S., or around the whole company. It seems like the scandals keep happening, and that market manipulation such as laddering and hoarding are considered by the financial industry as another way to make money. If the financial industry isn't greased entirely on deception, then I'd like to know what percentage is deceptive and what percentage is figuring out a hedge plan for e.g. BMW's exchange rate risk. I can see how billions can be made one way, but I don't see how billions can be made the other way.

ergoproxy 13y ago

The article doesn't address the question: Why has the GDP share of the FIRE sector recently grown so much so fast? If its growth were the result of increasing authentic demand for financial services, or increasing efficiency in the supply of financial services, then that would be OK. However, I see three main bad reasons for the recent explosive growth in the FIRE sector: 1. Their cost of borrowing is artificially low. They don't need depositors anymore. They can borrow limitless funds from the Federal Reserve now at 0.25%. Their real borrowing rate is actually negative if we're honest about inflation, rather than relying on fabricated government numbers that leave out housing, healthcare, food, fuel and education. 2. The Fed is creating artificial demand for financial products. After the 2008-9 crisis, the Fed has created $3T out of thin air and used half of it to buy mortgage backed securities. 3. Over the last 30 years, the federal government has shown its willingness to bailout failed financial institutions that took on too much risk-- We saw it with the S&L crisis of the 1980s and 1990s; we saw it with the 1998 bailout of LTCM; and we saw it again with the $700B TARP in 2008. If we would simply allow the free market (rather than The Fed and federal government) to determine interest rates, and the demand for securities, and the appropriate level of risk appetite, then we'd see the FIRE sector shrink back to its historically low share of GDP. Page 37 of this paper by Thomas Philippon charts the growth of the US Financial Industry as a share of GDP from 1860 to 2007: http://pages.stern.nyu.edu/~tphilipp/papers/finsize_old.pdf http://pages.stern.nyu.edu/~tphilipp/papers/finsize_old.pdf