Comment by dalbasal | Hacker News Reader

Comment by dalbasal | Hacker News Reader

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This doesn’t really speak much to the “master” thing, but over the last few generations we have “financialized” (like securitised, but bigger) huge parts of the economy, and a lot of stuff that wasn’t really part of the economy in the past.

For example, health services are largely financialized via insurance. IE, you don’t directly buy health services, you buy insurance which buys health services. You don’t buy a house, you get a mortgage. You don’t support your parents (or colleagues) in their old age, you pay into pension or superannuation schemes. Education via student loans. Monthly expenses via credit card debt. Large ticket items via dealer finance. Public services via national debt…….Companies via private equity. Everything has a financial layer between payment and consumption.

Underlying a lot of this is a relatively simple fact that if debt is available, consumers (from 18 year olds to Finance Ministers) will take it. If loans are available for certain products, more of those products will be consumed.

Another (possibly evil) driver is that governments have chosen financialization as instruments for promoting stuff they want to promote. Need more corn? Crop insurance subsidies. Educate the masses? Subsidise student loans. Promote home ownership? Implicitly guarantee retail banks’ losses. Medical care for all? Tax free(subsidy) insurance. Flood problems? Flood insurance. Poverty? Microfinance.

So, banks got big. This has all sorts of weird effects.

One of the biggest problems in my opinion is the inflationary effect of this process. Real estate prices in many places are simply the amount that a bank is willing to lend buyers. If banks increase the amount a buyer can loan, house prices increase proportionally. IMO, the American healthcare saga is not really about ideology or competence or any of the stuff they talk about. The problem is that after 2-3 generations of wide scale subsidised financialization, prices & costs are so high.

My final thought is that part of the problem is the prominence of finance people in pubic decision making. They know finance. They believe in it. They use it to solve problems. They don’t see baks getting bigger as a problem. It’s kind of like the lawyer problem, who also have a lot of presence in politics. That means the legal field gets bigger all the time.

> My final thought is that part of the problem is the prominence of finance people in pubic decision making.

Indeed, I've read a few articles in NYTimes/WSJ now on the sale of public services in the US such as fire and water services to private equity firms. And the whole thing is told as a cautionary tale about banks and capitalism, which misses the bigger picture in how these things always start.

Typically the problems start because the government was overleveraged from taking on too much debt, typically due to poor financial management fueled by initially cheap capital from bankers operating in and out of government. Then when hard times come they continue to seek the easy answers from the bankers (instead of making hard choices like spending less) and end up selling off public resources giftwrapped in pseudo-market sounding language with very little of the actual benefits of markets: competition, private salaries, flexibility, etc.

These "banks" are famously like an octopus wrapping their tentacles around everything. We have some old effective methods for handling this type of behaviour when it's used improperly in the private sector, and there the harm is limited to a few usually wealthy parties. But it starts to get dangerous when these half-baked financial schemes that have worked in private markets get pigeonholed into government. Critical services like emergency services or drinking water are often ill-suited (and more importantly ill-prepared) to handle the potential downside.

Hopefully one day politicians will learn this lesson and learn to keep things simple in the public sector. Governments everywhere have a consistent track record of not managing money well and have a high-turnover of executives by design, so any complex financial instruments are just setting them up for failure and exploitation. Anything to do with government should be made dummy proof and straightforward. Public services should be run like public services. Mixing of private/public should be the exception, not the standard. And I say that as someone biased towards the private sector.

Wow this is really well written.

Sometimes I feel like this "extra layer"/middleman-adding is not only just to enable government interventions but is just fluff added so we could create jobs for those whose skills don't go beyond the typical white-collar worker. I might be wrong, but the image of extraneous University administrators and "not-enough" skilled labor kinda paints this picture.

Thanks. Always surprising how nice a friendly word is.

That's (in a somewhat roundabout way) is similar to one of David Graeber's arguments, you might like his book.

The financialization you're talking about doesn't seem bad per se; it streamlines and "purifies" the exchange you actually want to do.

For example, if I have extra money, and I know someone who could ramp up his productivity if only he could make a one-time investment (say, a cow for his farm), then I buy him a cow in return for a share of its milk. Then, to diversify, I can find thirty such people. Then I find someone who can sell the milk for a cut...[1]

Instead of all of that, we have banks, where I just give them the money, and they make the loans (and do screening, credit reporting, foreclosure, etc) and pass me a cut of the returns.

Nothing is wrong with that. The problem is when you have perverse incentives to start with (e.g. in fields like health care, or with lenders who have asymmetric information about the loans in a portfolio there's excessive trust in the vetting), where financialization just puts the same problem on steroids.

[1] Late edit: a better example of the "impure exchange" might be if I wanted to save for my retirement so I raised one more cow than I usually would with the intent to lend it out to others who are still working in return for milk, with the usual frictions like needing to convert to non-milk.

one of the things that irks me about (consumer) banks is that they've somehow convinced consumers that they should pay for banking services, instead of the receiving returns for loaning the banks money (which is what a checking or savings account is).

some of this is due to a lack of financial literacy on the part of consumers (financiers know that loans should come with an interest rate, not a charge for the privilege of loaning the money in the first place, but consumers on the whole apparently don't).

but there is also a regulatory mechanism exploited by consumer banks: FDIC insurance. without insurance, people are understandably reluctant to loan money to banks since they don't know if they'll get the money back. so the government (again, understandably) steps in and guarantees with tax dollars that you'll get that money back, even if the bankers are crooks. but of course, that means the government must try to tease out the crooks with a stringent set of tests and regulations around who they'll insure. and just like that, you have an anti-competitive choke point where incumbent banks use the regulations to guard against future competitors by keeping the regulatory barrier high.

(this is just another example of the financialization via insurance that you elucidate)

also, use cash. it's transaction-cost free, anonymous and universally accepted.

find a local credit union.

yes, that's what i do. =)

but i wish more people would realize how much they neuter competition and lose in actual cash-in-hand by indulging the big banks and not shopping around. make the banks compete for your money by finding the best returns for your cash. it takes a few minutes on a site like http://www.bankrate.com/ to do so.

most consumers have a checking account or two, a couple credit cards, maybe a savings account, a car loan and a mortgage--all things well understood and competitively handled by a credit union. many people tout convenience as their main decision-making factor, but big banks are not any more convenient than credit unions--technology has leveled that playing field. i suspect the real reason we use big banks is our ingrained herding instinct and the psychological safety that implies (however illusory that is).

And it is based on the simple assumption that we can accumulate debt at any pace forever. Unfortunately I am not convinced it is the case. There is a debt to GDP ratio where the system will break.

Is there? Public or private debt? What model do you have that tells us where it is?

Yes, if the payments become too onerous or the ability to roll over is compromised (Greece passim), then you have a serious problem, but the whole thing does not magically blow up at a certain level.

Also, remember that at a global balance sheet level, debt == savings. Debt (personal+state+corporate) has expanded because there are more and more people saving for their pensions, and the savings glut has pushed down the price of debt.

(and the "missing trillions" stashed in tax havens have to be lent out somewhere, too)

I agree, you can't specify a specific ratio to the second decimal where things will blow up. Greece blew up below where Japan is now. Not the least because it is largely irrational. How much is too much debt? It's when your creditors decide to cancel your credit card. I am not convinced that how that debt is financed will change much. It's really a loss of confidence risk, which like a market downturn is impossible to predict. But you nevertheless just know it will happen and that any incremental indebtedness brings us closer.

private, as the numbers i have seen is that when private debt hits something like 200% of GDP bad things starts to happen.

the crazy part is that it does not even need to be a complete halt in lending that cause it, just enough of a dip that expenses (debt repayments etc) outpace income (from the turnover of existing money plus the money coming in as newly issued loans).

And the whole debt equals savings thing is a fallacy that sadly the economics profession has convinced itself is true. The Bank of England released a document a few years back that showed how private lending effectively puts new money into circulation.

http://www.bankofengland.co.uk/publications/Documents/quarte...

Funny enough public debt is largely a non-issue, as long as said debt is denominated in the nation's own currency.

> Funny enough public debt is largely a non-issue, as long as said debt is denominated in the nation's own currency.

You seem to imply that money printing, and the resulting inflation, is painless and a non problem. I am not sure I agree with that. Lots of people will suffer in a high inflationary environment. Pensioners to start with.

This suggests that said pensioners only have a fixed, non-interest bearing pool of money to make payments from.

If so is the case, something is badly wrong with the society that extends beyond the realm of economics.

The problem with financial services is customers are greedy - not banks 2. The challenge in building any business - is that they always start by trying to solve a problem - but power always corrupts 1. If google’s aim was to truly organise the worlds information or xxx would it behave like thsi 2. We say capitalism is good as through the pursuit of capital appreciation - these kinds of problems aggressively get solved but we reward financially - the creation of monopolies 3. This then leads to all kinds of things: styling of innovation; but also pronounces the accumulation of capital 4. The solution is whether you can construct a company in another way 5. I think its now clear that you strive to be too greedy - that power / money will eventually corrupt 1. Google search results 2. Uber vs lyft 3. Microsoft 6. But this process takes years

There are 2 sides to the economy, supply and demand.

Yes, the policies you describe do boost demand and that does cause inflation, but the supply side is not irrelevant. Less NIMBYism will help with housing costs, and maybe some reform could help with education supply. If demand is increasing (for example due to population growth and finance), ideally supply should also be able to increase.

This is a very well written argument. Any time government makes borrowing some asset easier, it gets abused. Subsidies, barring few exceptions are bad for the economy and now-a-days there seems to fairly unanimous agreement among economists about the same.

Economist has presented a well written argument here: https://www.economist.com/news/briefing/21651220-most-wester...

Countries like The Netherlands or Germany are considered so stable by the financial sector that they can get loans at negative interest rates. At that point, why not get the loan?

Don't conflate rent seeking (usury) with financialization.

These things that you describe, do you think that they're not productive and not worthwhile? If you do - how so?

I don’t have an overarching theory, if that’s your question.

Some of them are probably good, others not.

Home mortgages have mostly done what the politicians and public wanted in rural and suburban areas. Some price inflation happened as a side effect, but a lot of that extra cost went into bigger homes so people get something for it. Slightly distorting to the market, but nothing terrible.

In dense urban environments where supply is inelastic, price inflation was a lot worse yielded a lot less. This is probably one of the biggest cost of living problems.

I think the financialization of ordinary health services (not things like cancer or accidents) is terrible. I think it makes the whole industry a lot worse. Ultimately though, this is/was driven by consumer and voter demand not scheming villains.

Collectively, I think they might add up to different classes of problems.

Agreed. Govt should issue money or force issuance of money against productive endeavor not rentier activity. Plus tax labour, not land.

We have a total disaster mid-way through. This has to change.

> tax labour, not land

Why do you think this?

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