Hacker News Reader

Comment by lxm | Hacker News Reader

Mervyn King, formerly of the Bank of England, in "The End of Alchemy" has a great parable of an island populated by fishermen. It starts with a pretty basic need of financing the nets and boats to do the fishing, where the lender then gets slowly repaid with the fish caught.

At some point a finance person steps in and introduces a credit lending facility, which overall is a good thing for the health of the economy. Then, in decision to not take on too much risk, the said finance person offloads the loans in a securitized fashion to other wealthy islanders who then benefit from fishing booms and receive below average returns in years that are dry.

Then another finance person figures out the futures contracts, which act as insurance to fishermen and guarantee a reasonable price even at times of market over-supply.

At some point trading the loan securities and fishing future contracts starts paying more than humble fishing, which means that the best and brightest switch into finance, creating a stigma for fishing as less desirable occupation for under-achievers. Majority of island's GDP is now comprised of fishing-related loans and futures, with fishing itself occupying a relatively small niche.

This, of course, collapses at some point, but the problem is that it's hard to point out that one step that's completely irrational and bonkers - everything created by finance industry has found some demand among fishermen and simplified their lives.

View on HN

Many years ago I was chatting with a friend who is an economics professor about debt. It basically boils down to a simple rule, debt that is invested in something productive is a good idea and debt that isn't isn't.

Take the parable and replace the finance industry with a Casino that lets you gamble on credit. The fisherman will all stop fishing, take credit, and play the roulette. For some time their debt will keep growing but they could end up with more cash vs. fishing. As long as the Casino makes sure they are fishing enough to pay back their debt then the Casino will get richer and the fisherman will get poorer. But that's what they get for gambling. If the government steps in and says you can borrow from the Casino forever, at zero interest rate, and you never have to pay it back, why wouldn't I go play the roulette?

Futures make perfect sense when the two sides to the trade are protecting themselves against complementary eventualities and are simply seeking insurance. If they each consider the cost of that insurance there's no problem and that takes into account the cut the intermediary takes. If banks are making bad loans because they know that if the loan doesn't get repaid the government will step in and save them and if it does they'll make a lot of money, that's the point where the system breaks.

EDIT: Also consider that without insurance, one bad year of fishing, and everyone on the island is dead. This is not hypothetical, in the not so distance past a draught was a death sentence to entire communities. The key is IMO speculation vs. legitimate use. The government needs to step in to discourage speculation through regulation and various other policies.

Everyone on the island is dead without fish for a year regardless of insurance.

Taken in the broadest sense of the term, insurance could be long term food reserves or a contract with a neighboring village for assistance in times of need in exchange for premiums.

Maybe I'm jaded or missing something obvious, but the point that seems bonkers to me is the part where the loan originator offloads 100% of the risk in the loans they originated. That seems like a very clear principle / agent problem where the originator no longer bears any risk for loan failure, only failure to sell the loan. That creates incentives for increasingly complicated/opaque packaging of loans that fail to sell - CDOs.

Having the pendulum swing to another opposite (requiring 100% of the loans to be kept on books) creates two problems I can see. Only wealthiest institutions can participate, so in good times rich get richer. It also creates a monopsony of loan buyers, likely increasing the costs of borrowing.

Fundamentally, the problem with loan writers unloading the loans is that it decouples their incentives. You end up with a fundamentally unstable system, where the loan writers are incentivized to further increase the spread between what the loans say and what the collateral or debtor is capable of, while offloading their liability so that it's evenly spread among the entire financial system.

It doesn't matter that it makes loans more accessible (in fact to some degree that's part of the problem); it doesn't matter that it makes the market more efficient when the market is up. The decoupled incentives make the system prone to extremely painful crashes that are unfair to everyone.

I think you are getting to the core of the issue, which is that when the underwriter is decoupled from the result, they must either be regulated or their customers (the real creditors) must have skin in the game. The regulations have been ineffective (so far), and the creditors have always been bailed out; we should not be surprised that creditors are unscrupulous about lending to questionable borrowers.

Or you know we could enforce our laws. Many of those loans were fraudulent and outright criminal to grant. The threat of years in jail is a pretty good way to keep people honest.

Both good points. I'd also note that it would be very hard if not impossible to legislate for the 'right' kinds of risk arbitrage and against the 'wrong' ones.

I suspect that legislation will never be able to run ahead of the human capacity to rapidly and efficiently paint oneself into a corner.

Rather than trying to prevent the resulting busts at all costs, it seems that it would be more effective to work towards building support systems that are antifragile in the face of economic downturns.

Or have I totally missed the point here?

So the best plan seems to be just to break the banks up to the point where they can be allowed to fail; be sure to allow them to fail when the time comes; and let natural selection do its thing.

> so in good times rich get richer.

And then in the bad times... the rich get richer again.

Christ, this stuff turns my stomach.

Mostly by accident I am reading "Capital in the 21st Century" by Thomas Piketty and "Debt" by David Graeber.

Piketty is a liberal economist who is writing about the nature of income inequality. His thesis is that income inequality is basically inevitable without political intervention.

Graeber is an anarchist anthropologist exploring the history of debt, and its relationship to social control.

They are both very interesting in their own right, and they provide interesting counterpoint to each other. Using the framework of economics, Piketty sort of lays bare some serious structural problems. Graeber steps outside of that framework and challenges it.

Highly recommend both of these to anyone interested in these things.

Just ordered these two, thanks.

Any other texts you can recommend for someone who wants to know more about how this arcane world of economics and flow of captial actually works?

Financial education is one aspect of my life I've always neglected and I wish to change that.

Perhaps having a rule where the originator must keep some meaningful percentage of the loan on its books would help, say 30%? Then the originator always has skin in the game.

Or simply require verification of income. In Canada if you want a mortgage loan you are required to show proof of income, ie. a gov tax return showing your income. My understanding is that in the US verification of income was often waived making it possible to grant bad loans.

Exactly. If you don't believe finanicialization is a problem, you have a tendency to believe more financial instruments are a good solution in all cases. You have only a hammer, everything looks like a nail.

My answer would be that any change that did not help increase the fish production was a change too far. The insurances over market over-supplies are designed to break a fundamental feature of free-market and were not installed with a central planning to counteract, so I would draw the line there.

> everything created by finance industry has found some demand among fishermen

Casinos and drug dealers use the same excuse. "People want our shit!"

I really believe that, while it is interesting to measure economical activity by the amount of money exchanged, it should also be measured by the amount of actual "stuff" produced: MWh for energy, calories for food, etc... It is much harder to measure, but it helps notice when an economy's growth relies too much on the financial sector.

I see finance a bit like the cardboard box industry: it does help and is necessary, and its activities grow when other activities grow, but it is an anomaly when it grows without the rest of the industry following it.

So how would you take into consideration over-fishing? Having constantly increasing production would be good for a while until it is not. There would have to be some sort of artificial limit set, either by the fishermen themselves (which would be a cartel and well, frowned upon), or by another authority on the island (which in that case would be regulation).

Outside of that there would be an ever increase in fishing, until a crash in fish numbers. Though perhaps this could be the cause of the crash in the story, an absence of fish unraveled the whole economy.

Over supply happens because we don't have a reliable measurement of demand to base our production on. Demand has traditionally been extremely poorly estimated with slow, out of sync, paper-based processes. Now that information can be relayed instantaneously.

Perhaps a smart demand system which measures current and future demands for fish based on information input directly (P2P) from the end-user to the supply network, using some sort of utility model (which would factor in diminishing returns per user), could keep demand and supply in better balance.

The post I answered to assumed that only two entities existed in the island: financial actors and fishermen and explores what it means for the economy when we apply the basic assumptions of free-market : individual agents planning for short-term gains.

I worked within those bounds, I am actually a pretty strong advocate of sane regulation of free-market, partly because I agree with the GP: free-markets unchecked lead to some insane financial cons. And also to the tragedy of the commons that you explain.

It sounds like you're saying that markets should adhere to a first-year university understanding of Microeconomics 101, because that's your definition of a free market.

I'm more than happy to be corrected.

State a clear criticism then, instead of vague and smug dismissal.

Does my (indeed) simple model of free market misses something a more complex model shows?

Decreasing prices are usually the consequence of oversupply and lead to a decrease of production. That's indeed econ 101: a free market regulates production.

If you offer an insurance that proposes to shield people from such an effect, you are either lying to them or you are planning to replace this regulation by another mechanism, most likely planned production (which can actually perform better than free-market in some cases).

Banks are not in the business of managing industries. They are in the business of making profits (another simplistic yet surprisingly accurate model!), so I doubt that it would turn down possible profits in order to protect an industrial field.

Insurances conceived by a state, as a braking mechanism to dampen the results of market regulation, they can work. Insurances designed to generate financial profits and sold under the promise to shields agents from industry-wide effects? This is a clear step out of the land of useful financial tools that helps production.

The irrational step is when people start to believe that they need money, when in fact they need fish. When people start to believe that they need loans, when in fact they need nets and boats. In the end, they deem this made up number called GDP more important than fish and hunger.

See, with fish, it's obvious that catching more than the community needs to survive and piling it up in one's basement is wasteful and counter-productive. Yet, with money, not only does it seem like a good idea but it quickly becomes the ultimate goal of the participants.

Money (especially with positive interest rates) is a terrible abstraction of value.

This is the most spot on comment in the whole discussion.

We have become so utterly focused on the specifics of lending rules and incentives, yet the biggest problem is more simple: there are not actually enough homes available to house all the people that want to buy a home to live in. There would be no housing crisis if we had a regulatory environment that encouraged the housing market to produce enough homes to actually meet demand, at prices people can afford.

That means smaller individual spaces (be they single family or multi-family buildings, built with vastly more automated processes, and streamlined permitting and approval processes.

It is mind-boggling that today that in a major city today in the US a working person should have to pay 30+ years of income just to afford a space to sleep.

Travel a little to actual first world countries and it is not hard to find places with far more sane balance of housing construction to population, with prices at far lower multiples of average income.

The irrational and bonkers part is where that giant financial industry ceases to believe that it could be risky to lend boat money to a fisherman.

It's not necessarily irrational and bonkers for there to be more money changing hands in the fishing financial industry than among fishermen themselves. By itself, what does that really mean? It doesn't mean that money is being created out of thin air. People are making bets in that system, they are loaning money and taking specific complex risks, and as a result some people will lose everything. But also, some fishermen will be able to buy a boat or survive a season of poor catch, even in situations where many fishermen experience misfortune simultaneously.

The question is how it affects the community. Maybe there's a big crash and people in the island lose their livelihoods. Or maybe the very existence of their livelihoods is due to financial services that make the fishing industry large, robust, and prosperous.

But why do you only blame the the financial industry, and not the fisherman? Everyone loses when stupid risks are taken.

> But why do you only blame the the financial industry, and not the fisherman?

Because the fisherman has no alternative. If loans are given too freely then taking the loan becomes necessary to compete in the market against competitors who do.

I suspect that the financiers will make that very same argument.

Except that the fisherman weren't the ones lobbying for regulations that allow/encourage the finance industry to do that.

If you put the name of a housecat on a loan application, and someone buys a boat in the cat's name, it's kind of hard to blame the cat.

> At some point trading the loan securities and fishing future contracts starts paying more than humble fishing

This analogy relies on the financiers being either good speculators and arbitrageurs of risk, or charging high fees, ie: they need to get their high "fish salary" from somewhere.

Point is that the two reasons the financiers are being well paid are either that they're good at their job (a good thing), or that they're bilking the fishermen out of their output (which relies on the fishermen being conned into paying for overpriced financial services).

If each fisherman is willing to pay some trivial amount say $3 each year for some service that they find significant value out of than they are happy. Finance seems to often behave like programming where they do it at scale.

When there are 12.3 million fisherman you could argue that the fisherman are indeed being conned into paying for overpriced financial services. But then you get into a question of value. Perhaps it is actually worth $300/year to each fisherman for this service and that is where it started and was only driven down to $3 by competition (and yet still very profitable as it only actually costs say 30cents on average)

I'd speculate that it's the point at which the insurance and futures markets allow for buyers that are unprepared or unable to prepare for actually receiving a shipment.

This leads to a market in which speculation is allowed, instead of biding on the actual outcome of supply/demand interacting.

This isn't necessarily so clear cut. Some percentage of market activity due to speculation helps to smooth capital flows over time. In an industry like fishing, profitable speculation can keep the industry afloat in tough times (e.g buying up fishing debt in a slump for pennies on the dollar because you know the fish are still there and this was just a bad season) or damp down an overheated and unsustainable market (e.g. shorting fishing futures).

It's interesting that you think speculation is bad and yet you're sitting there speculating. Kind of self refuting no?

To me the bottom line is: people and companies who want to cut the pie to get crumbs. The more they cut, the more crumbs. But also the more likely it is that the pie crumbles.

And that island is called Iceland.

See also Schiff's How an Economy Grows and Why It Crashes

> It starts with a pretty basic need of financing the nets and boats to do the fishing, where the lender then gets slowly repaid with the fish caught.

> At some point a finance person steps in and introduces a credit lending facility

It sounds like there was already a credit lending facility? As far as I can tell, "credit lending" just means giving someone a loan now in exchange for being paid back (more, usually) later.

> At some point trading the loan securities and fishing future contracts starts paying more than humble fishing

Historically, the point at which this occurs is the introduction of loans and futures. There's no transition point.

Assuming an economy consisting solely of fishers and financiers, compensation for financiers is limited by the amount of fish produced, but it's quite possible even then that one financier produces more fish than one fisherman does. And your example presumes other classes of workers when fishing requires nets and boats as capital goods.

> This, of course, collapses at some point, but the problem is that it's hard to point out that one step that's completely irrational and bonkers

You say that like a collapse demonstrates that a mistake occurred at some point. Everything collapses some of the time.

Pretty much by definition, the financier is not producing any fish. Their utility is in providing finance for the industry. While this does seem to have utility, in and of itself it doesn't produce anything. It is a role that exists to manipulate and imaginary construct (money).

If removing the financier causes fish production to drop, the financier was producing fish.

They mat, through directing caputal flows, have enabled more fish production. They certainly did not produce a single anchovy.

More likely, they inserted themselves into the production cycle somewhere they weren't needed, and started creaming off a proportion of the fisb trade, while actually adding nothing of value to the process.

That's really interesting. It reminds of me Schiff's parable story: How An Economy Grows And Why It Crashes

Assuming this island is a closed system (it is an island after all), where did the initial lender with the capital and the "other wealthy islanders" come from?

This is a great comment. I hope it reaches many people.

In the spirit of this comment, and I can't find the particular article I'm looking for right now, but Paul Krugman many years back was writing about how financial services should move more towards a public utility model.

The argument is, we would all be better off if we separate off all the risk-taking in finance to for-profit companies that can fail without posing greater risk to the economy.

The more mundane, more-necessary, day-to-day financing that we all need (home loans, etc.), according to Krugman, should move to the public utility model. It's not complicated and if the companies that do these jobs fail they pose enormous risk to the entire economy.

This is the analogy I can think of: If our water company became bigger, more risk-friendly, and more profit-oriented, people would obviously know that is ridiculous. Basic financial services is not any more complicated, to be honest.

The welfare of humanity would benefit enormously from an even more robust version of Glass-Steagall, but the finance industry is so entrenched in US politics I don't see it happening.

The business of a bank is to understand and trade in risk. That's simple when the risks are simple, but complex as the risks get more complex; 40 years ago it would have seemed obviously ridiculous for programming to be the proportion of our economy that it is now, but programming has grown more complex in proportion to the businesses it's applied to. So it is with finance. (Water supply doesn't require understanding the business; supplying water to a simple business is the same as supplying water to a complex business, whereas making a loan to a simple business and making a loan to a complex business are very different).

What line would you even try to draw? It's very difficult to trade risk without a central clearinghouse. It's very difficult to run a central clearinghouse without being willing to guarantee at least some of the risk at least some of the time (you can limit how much, but we already regulate bank capital ratios etc.). Diversification is the banks' best defense against the risks they're taking, so if you require the separation of two more-or-less independent categories of risk (as Glass-Steagall does) that seems likely to make bank failures more likely, not less.

> day-to-day financing that we all need (home loans, etc.), according to Krugman, should move to the public utility model

I couldn't disagree more. Making home loans "too necessary to fail" pretty much guarantees a catastophic speculative bubble in residential property. Which, coincidentally, is what we're seeing in many places.

I quite like the idea of ringfenced utility banking, possibly even nationalized, but would set the "necessary" bar a lot higher.

Presumably doing this right would restrict these loans to "financing". Which is to say, to people with reasonable cash-flow who are seeking up-front capital for a purchase. A good public utility lender would offer low rates, but would have to reject more home-loan applications than the existing speculative players. By this measure, of course, Fannie and Freddie were the opposite of public utility lenders.

Done right, I'd like to think that utility lending would constrain bubble growth. Low-risk borrowing would get utility loans, producing actually-guaranteed-AAA investments. High-risk borrowing would remain with private lenders looking for risk, much like business loans do today.

The daylight between the two would (hopefully) prevent both housing price bubbles (by offering a stable rate floor) and credit bubbles (by clearly dividing safe, non-profit-seeking loans from speculation). It would likely price up risky loans, but we saw in 2008 that those were dangerously underpriced to begin with.

It's an interesting idea anyway, as is a utility model for 'safe' banking activities - non-interest-bearing deposits and financial services.

> Low-risk borrowing would get utility loans, producing actually-guaranteed-AAA investments.

I think this is where it falls over. Providing an actual guarantee for things that are low- but not zero-risk is just another way of saying "mispricing risk", and it creates the wrong incentives for pretty much everyone. Borrowers want to push the definition of "low-risk" so they can borrow at a subsidized rate. Lenders (in which I'm including the people buying your "actually-guaranteed-AAA investments") want to push it so that they can lend at zero risk but still make nonzero profit. Governments administering a public utility banking system want to push it because jam today gets votes today, and who cares about tomorrow?

IMO this is all happening already with the artificially-low interest rates being pushed by central banks almost everywhere; if they wanted to repeat 2008 I'm not sure they could do a better job.

My idea of "utility banking" would exclude any kind of loans. It would include only things which are genuinely risk-free, like transfers and deposits.

This is a reasonable point.

The distinction I was hoping to draw was between cash-flow loans and investment loans, where the former are (like interbank overnights) non-zero risk but immensely reliable. But it's probably impossible to set up that system without people manipulating it to get profitable rates (...like interbank loans).

Certainly, we don't have a great track record of the government properly evaluating what's actually for real safe. I was thinking that we could keep limit lending by preventing rate-based profits (like electric companies, which profit on coverage but not prices), but realistically that just moves the incentive from profit to popularity. Hand out good loans to bad risks, get reelected, blame the markets when they explode. Sounds painfully familiar, actually.

So yes: likely better to treat financial services as different from risk-bearing products altogether. You'd have utility "money storage" that does deposits, transfers, maybe offers financial advice, but doesn't extend any credit/investment of its own.

That's a good point. We would still want to separate the stuff like home loans from higher risk, more profitable finance.

What practical form would this separation entail? If they're really lower-risk then they'll naturally attract lower interest rates; what do you envisage beyond that?

> In the spirit of this comment, and I can't find the particular article I'm looking for right now, but Paul Krugman many years back was writing about how financial services should move more towards a public utility model.

Fanny Mae and Freddie Mac ... do exactly that. They are abused by politicians for achieving social ends (which should not be their function), first time the politicians know they won't be in office when it blows up (making loan decisions on any factor other than risk should not be done, unless you're prepared to bail out, but that of course means no positive discrimination without bailouts). The second and subsequent set of politicians know they're not really creating a risk, just modifying an existing one slightly. And that's when these companies don't just directly preferentially treat connected investors. Imho Fannie Mae is on track to need another bailout some 6-10 months after the election.

> The argument is, we would all be better off if we separate off all the risk-taking in finance to for-profit companies that can fail without posing greater risk to the economy.

Given that the government rescues "systemic risks", and CDS contracts are an easy way to transform local risk into systemic risk. Widely-held CDS for a large percentage of loans, like currently exists, means either loan defaults have no effect on the system or crashes the entire thing.

Now you could say. "Easy, let's just outlaw CDS contracts". But that's stupidly easy to circumvent, secondly it would disadvantage smaller players further. Or you could say you need more than 2% collateral, but that would immediately collapse pretty much all banks (and they're strongly incentivized to make damn sure that won't change) so can't be done.

> from an even more robust version of Glass-Steagall, but the finance industry ...

That's equivalent to demanding more collateral for loans. Yes if you can get to the end state the chances of getting your money back when things go south would go up by a lot, but how do you get there ? If you demanded that happens from day 1, all banks would collapse right then and there.

I think the more important lesson to be drawn from Glass-Steagall and the related changes of that era is the timing of those regulations : it was introduced just too late. Just barely too late ... to help anyone. It was a PR measure. The same is true for bank guarantees : always remember that the government will never pay those guarantees. If it ever comes to it, the government will withdraw the guarantee before they pay anything. Or do it like Greece and Brazil did : pay it out in worthless non-currency "dollars" that you can't actually buy anything with.

>Fanny Mae and Freddie Mac ... do exactly that.

Actually, that's not exactly correct. What FNMA and FHLMC do is buy mortgages on a secondary market and securitize them into MBS securities, and provide loan guarantees. I'm sure you know that. I'm sure you also know that the goal here of those two is to make home loans more accessible to all of us. They are also GSE's, so I see the comparison to utility companies. OK, but if we think about it, are these enterprises necessary? What I mean is and what you have to understand is that the goal here is not: "let's lend people money for homes through heavily-regulated entities (banks) which do not then go and gamble with that money (what Glass-Steagall wants to prevent," which is what Krugman was discussing, but rather, "let's create a government sponsored bureaucracy that writes some contracts down on pieces of paper to manipulate market equilibrium in an effort improve home loan lending."

>They are abused by politicians

It is certainly true that politicians are prone to be corrupt, I can't argue with you there. You know everyone knows the expression, "as crooked as a politician." I think what we have to concede here is that there's no perfect solution here. Economics is, at its very foundation, not a natural science--it is about people, and people are never, and will never be, perfect. Some people are inspiring, but in fact, some people are awful. It's my belief that we should learn from history and not repeat the same mistakes, again, after we repealed Glass-Steagall and paid the price for it in 2008.

How would Glass-Steagall have prevented, or even affected, the events of 2008?

Originally, Glass-Steagall placed a firewall between commercial and investment banking. That isolated deposit banking from high-risk securities and investment trading.

It wouldn't have prevented every part of the subprime crisis (Bear Stearns wasn't even a deposit bank), but it would potentially have lessened the scope of the crisis.

- Preventatively, it would have restricted the size of the CDO/CDS market. Without access to commercial banking deposits there would have been much less money to invest there.

- Reactively, it would have better protected deposits and saved the FDIC a small fortune. Indymac alone ran the FDIC $9 billion and depositors another $0.27 billion.

Its decline and repeal completely reshaped US investment banking, to the point where the entire industry would have looked completely different if the law had been applied 1933-2008. Of course, that's not entirely a good thing.

Some chunk of the pre-2008 growth has to be attributed to a flexible banking industry keeping us out of liquidity traps, and that was a genuine, non-special-interests reason to alter the law. Clinton didn't (exactly) repeal Glass-Steagall, he formalized a change that regulators had made far earlier by limiting enforcement of the firewall.

I can't say that long-term enforcement of Glass-Steagall would have been better, but I can certainly say that it would have altered the entire landscape that the subprime crisis happened in.

But surely RMBS would have ended up on the deposit-banking side? I mean fundamentally Indymac owned a lot of bad mortgages - with perhaps more intermediation than there would have been otherwise, but we expect retail deposit banks to own mortgages, that's a large part of their raison d'etre.

Please remember, in reading explanations of this, that the entire financial industry has a vested interest in complicating what they do to the average person.

The basic theory of Glass-Steagall is to separate risk-taking in finance with the "mundane," finance, as Krugman was saying.

On one side of the coin in finance, you have the boring finance: home loans, small business loans, that day-to-day stuff is not complicated and is necessary service to the economy. By the way, we can't let these banks "fail," or go out of business. That would cause economic destruction beyond what is reasonable. Fortunately, this type of banking is not very risky, either.

Now, you have the other side of banking, which involves risk-taking. Some of this is stuff such as investment banking and private equity which is actually very necessary for efficient allocation of resources. These types of businesses need to be allowed to fail, though, since not letting them fail would be a redistribution of wealth from the taxpayer to the rich, and it would also mean people who are not good at efficiently allocating resources get to keep their jobs while smart people who can do it better, get crowded out by the politics of government handouts.

Also on the risk-taking side of finance you have securitization and a lot of "financial alchemy," stuff. Fannie Mae and Freddie Mac arguably even fall in this category. This side of finance needs to also be allowed to fail for the same reasons.

I hope that makes sense. I recommend picking up an intro and intermediate-level macroecon textbooks for further reading.

But the crisis was a failure of home loans - which are as risky as anything that merchant banks do. There really was a collapse in house prices, there really were a lot of people who defaulted on their mortgages.

My oft-recommended book Doing Capitalism in the Innovation Economy [1] hammers on this idea of that financing of speculative vs. mundane ventures are fundamentally different games. The author argues that speculative finance is a good thing, as long as it's not just speculating on finance itself. In fact, it's so useful that the government should encourage it. He cites the long-term advancements produced by incredible amounts of public money injected into the defense industry, the space industry, the National Institutes of Health, the NSF, and so forth. But, he argues that such speculation needs to be cordoned off from the mundane economy, so that when bubbles burst, they don't take down the systems everyday people rely on.

[1] http://www.amazon.com/Doing-Capitalism-Innovation-Economy-Sp...

I've also seen the suggestion that regardless of where lending goes, "safe" financial services should be moved out into a utility format. That is, investments and loans shouldn't be conflated with non-interest-bearing deposits and money movement.

Right now, people are caught in a weird double-bind that mostly serves a small part of the finance industry.

- If you don't have a bank account with a balance, you pay through the nose to access money and paperwork (e.g. notary fees, high fees on welfare debit cards, wire transfer prices).

- If you do, you expose yourself to the risk-taking of the banking industry. That means losing your deposits with Washington Mutual or IndyMac, and if you stay below the FDIC cap it still means getting scammed when Wells Fargo opens you a fraudulent account.

There are some good reasons to combine these things, and some of the costs for non-account-holders reflect the actual price of moving money. But it's not obvious that access to non-investment services should be inescapably bound up with exposure to investment risks and pressures.

Would that be the same Paul Krugman who only a few months ago said the big banks are not a systemic threat anymore, in an effort to undermine Bernie Sanders' anti-big bank message?

http://www.huffingtonpost.com/entry/elizabeth-warren-big-ban...

As far as I can tell his point that shadow banking, Lehman et al, and not the regular banks were the main villains in the GFC is actually pretty accurate.

Yes I know... I stopped reading Krugman. I don't know, it seemed like he used to give a shit and write informatively. Now he just tows the party line and even seems disingenuous at times to be honest.

I think the saying is "toes the line", although I could be mistaken.

Or maybe he just has a good-faith disagreement about the importance of bank size?

I kinda wish they let those banks fail.

Those banks turned around and raised fees for everyone. Don't loan to most small business. Don't loan to most self-employed. Are just horrid institutions.

They have just seemingly given the wealthy credit?

They have given the wealthy so much money; somedays these 1 percenter's appear to be just gambling?

Literally just gambling, except in the realestate market. That market is still a sure thing for them, and very rich investor knows it. And they know so many of us will never qualify for loans; so jack up that rent Thurstan!

This recovery hasen't helped guys like me, or my mother who relied of safe cd rates to get ahead. (And no--I'm not blaming banks on low fed interest rates. I probally shouldn't have even wrote that last sentance.)

I probally should comment--I'm no expert.

I just wonder if we severely regulated credit default swaps, and the derivitave markets--the crash in 2008 would have been less dramatic?

The one thing I liked about Bush is he wanted the poor/middle class in homes. He believe little guys should be given a chance. I just wish he went about it with more regulations, on the big boys.

My brother in-law used to flip houses. He now is a yoga instructor. The banks won't talk to him. Houses are still being flipped, but only by the wealthy. They are making a killing in my county. They are buying up everything. Why not, at these interest rates, and banks that are literally bending over.

>Those banks turned around and raised fees for everyone. Don't loan to most small business. Don't loan to most self-employed. Are just horrid institutions. > >They have just seemingly given the wealthy credit?

Let me relate a short story about my experiences with my regional retail bank.

Since I don't have my paperwork in order with Vanguard after changing my address, I haven't been able to put my saving money into ETFs and bonds and such like I should. So it's been piling up for more than a year (yeah, irresponsible of me, I know!) in my retail bank accounts, checking and savings.

When it piled up to more than $25k, the bank "invited" me to join their "Platinum" accounts. These would impose a whole bunch of minimums on how much I have to keep in my accounts (minimum $10k in checking, minimum $15k in savings, something like that), in exchange for which they would... waive a few fees. And raise my interest rate on savings to the highest heights of 1% annually!

Whereas for the normal account, you get 0.02% interest annually, and for a credit card, you can get 1.5% cash back on your spending. They'll pay you more to spend than to save!

To the banks, us tech workers with our measly six-figure annual incomes are just more plebs, not even worth an interest rate above inflation.

I wonder if what good we see in capitalism is just the period of it when there's plenty of low hanging fruit for everbody.

What I mean is, we could praise a system where any guy can buy a cheap house, renovate it and call it his own. Now, take it to its logical conclusion and you'll soon have agents with access to credit leveraging all the capital to acquire every single flipable house out there and extracting maximum rent out of the people who would have got them renovated themselves in less "efficient" times.

> the said finance person offloads the loans in a securitized fashion to other wealthy islanders who then benefit from fishing booms and receive below average returns in years that are dry.

This part. This was the part that was fucking bonkers.

Reply on news.ycombinator.com