Comment by howmayiannoyyou | Hacker News Reader

Comment by howmayiannoyyou | Hacker News Reader

howmayiannoyyou

The world added about a billion people to the 'middle class' with associated increases in consumption. At the same time, especially in the US, there were not the investments in infrastructure & domestic production needed to add productive capacity to meet the overall increase in demand. Instead, the US economy (in particular) has become 'financialized' with investment flowing to speculation, high interest lending & financial product creation - leading to a massive increase in 'accounting dollars' that has to be met (at some point) with an offsetting amount of 'real dollars' on the Fed or Treasury balance sheet. Put another way, there are effectively 3 US Federal Reserves: The real one, the one represented by offshore US dollar denominated financial products (eg. Eurodollars, US denominated foreign debt), and domestic financial products (eg derivatives, Corporate bonds).

Put simply, a Cambrian-like explosion of investment is where we find ourselves. The write downs needed to revert to a stable mean would similarly be fiscal mass extinction events for many enterprises & households.

Over my lifetime I've been increasingly feeling more against the finance industry as it is. After working in fintech I got staunchly against it.

I don't think that finance as an industry shouldn't exist. It does provide a lot of benefits for cashflow, investments, etc., I do understand its role and benefits. My gripe is exactly with the over-financialisation of everything, the increased risks that over-leveraging in multiple sectors create, finance introduced itself as the weakest chain in the link, we got to the point where banks are definitely more powerful than the most poweful economy in the world, simply because a failure in the system can become systemic with a few levers being pulled.

We created a system which every other system in the world is a dependent of, we have a single point of failure on something that by itself generates no value in real terms. It does generate value by increasing our leverage, that is it. We've became hostages of the financing industry and of the risks they take, not us.

Now, I am a dumb rube with vague, unhappy feelings about the financial industry - but it’s not as if Jamie Diamond is running for President on a “clean up finance” platform. Who’s the person who actually understands the game that will carve away all the crap?

There are many who understand it well enough to reform it. The issue is not complexity -- finance isn't even that complicated -- it's a lot less complicated than tech or physics or construction, or logistics or medicine -- it only takes political will to switch to an economy that allows only utility banking and simple vanilla financial contracts. But this would require shutting a lot of things down, and there are a lot of wealthy interests standing in the way.

In this sense, it's just like medicine or higher education. Look at the people benefiting from the current system -- these are the ones who oppose changing it.

> simple vanilla financial contracts

the thing is, that used to be the case a long time ago. But it's insufficient, as increasing complexity of the modern world demands more complex financial products. I don't see them as wrong at all - after all, no one is forced to enter into these contracts, and those who do obviously see a benefit. That's why they proliferated after all.

These financial products are like Chesterton's Fence :

https://wiki.lesswrong.com/wiki/Chesterton%27s_Fence

> the thing is, that used to be the case a long time ago.

Yes, I am aware.

> But it's insufficient

Why? Let's listen to the argument..

> increasing complexity of the modern world demands more complex financial products.

It was Clinton's deregulation that allowed more complex financial products. Products that ended up hurting the real economy. Deregulation that was heavily lobbied for by the financial industry, not by the real economy, and that benefited FIRE, at the expense of the real economy.

But name one need in the real economy that requires complex financial products and we can have a discussion. Generic appeals to the zeitgeist of the "modern world" don't cut it.

> It was Clinton's deregulation

Eurodollar system was already alive for almost a century by then:

"The first seeds of the eventual eurodollar bloom, in domestic US terms, were sown all way back in sixteen – as in the year 1916. Believe it or not, the Federal Reserve Act, then only a few years old, had been modified so that banking syndicates (those able to raise the princely sum of $1 million capital) could form what were called agreement corporations.

What was the agreement? Like the arrangement in London many years later which would make the eurodollar into all it could be (and then some), US agreement corporations would be relatively free of regulation provided that their exclusive focus and customer base didn’t include any domestic Americans or American businesses. "[0]

And from 1975[1] from Richard Debs, FRBNY’s Chief Administrative Officer:

"Finally, for the sake of logic, I should mention the legal framework of the Euro-dollar market, since I included the Euro-dollar market in my working definition of international banking from the point of view of the United States. However, I’m afraid that I can’t do much more than just mention it. The Euro-dollar market itself is not easily definable, and its legal framework, if any, is even less so. The market grew rapidly without the assistance, or burdens, of an integrated or even coordinated set of laws. It is an international—or multinational, or transnational—phenomenon, but it is regulated only to the extent that the Euro-dollar activities of the institutions operating in that market—the Euro-banks— are subject to regulation and supervision by the national jurisdictions in which they operate."

> But name one need in the real economy that requires complex financial products and we can have a discussion.

Some people have the very real need to hedge the risks they face, whether they be growers of grains or the banks that lend to grower of grains or institutions that have idle assets they can lend to markets and generate additional yield on to offset declining yields elsewhere. Yes, these instruments can get used by speculators, but that helps for liquidity purposes for those who want to hedge such risks in markets.

Just because you don't see it being apart of the "real economy" doesn't really matter to those participants.

To me, I think that the biggest issues I have with the current system is the level of moral hazards at play with the centralized and incumbent players (and the centralized governments they have captured) who will fight tooth and nail to avoid the day of reckoning where the excess can be washed out despite the pain it may cause to some people over others who prudently managed risk.

And this is where I think DeFi[2] can step in and provide a leveling playing field, where centralized incumbents and their captured governments cant just stop the DEX they have massive exposure on when the trade they put on blows up in their face (even if it means a "fiscal mass extinction events for many enterprises & households" who have long bitten off more they can chew)

[0][1] https://alhambrapartners.com/2021/09/17/dollar-warning-updat...

[2] https://maroonmacro.substack.com/p/issue-23-the-bull-case-fo...

The existence of the eurodollar market has nothing to do with what we are discussing in this thread. I'm really confused why you are bringing it up, TBH. And neither do Japanese Government Bonds. Or the ECB.

FYI, yes, in order to promote financial stability in eurodollar markets, central banks can arrange mutual swap lines (government to government agreement), but again this has nothing to do with how the US regulates American banks. Europe can regulate European banks however it wants. If the result leads to some eurodollar funding issue, then we can bail them out with a swap line if we want, or not bail them out if we don't want.

> The existence of the eurodollar market has nothing to do with what we are discussing in this thread.

I disagree.

> I'm really confused why you are bringing it up, TBH. And neither do Japanese Government Bonds. Or the ECB.

howmayiannoyyou mentioned "The real one, the one represented by offshore US dollar denominated financial products (eg. Eurodollars, US denominated foreign debt), and domestic financial products (eg derivatives, Corporate bonds)."

The former is encompasses the latter.

All these markets and participants are all interconnected, and alot of their interconnections lie outside of any particular jurisdiction. One would be fooling themseleves if one thinks lines on maps demarcates clear boundaries for the actors, assets and financial arrangements in the space.

> FYI, yes, in order to promote financial stability in eurodollar markets, central banks can arrange mutual swap lines

Swap lines from various actors have existed long before CB swap lines. They wont help with long term issues with counterparty risks, and the quality of collateral (and the rehypothication of such) that cant be papered over for "financial stability"; trying will only guarantee more lack of such "financial stability" in the future (Jerome Powell called the post 2008 global bailout regime in 2012 the "duration bubble" [0, on page 193 of the transcript from the October 2012 FOMC meeting], still being blown larger and larger today).

> but again this has nothing to do with how the US regulates American banks. Europe can regulate European banks however it wants. If the result leads to some eurodollar funding issue, then we can bail them out with a swap line if we want, or not bail them out if we don't want.

If the regulators fail to understand the interconnectivity that happens outside of their jurisdiction and off the balance sheets of the actors (not just banks), then that can mean such regulations mean nothing beyond the paper they are printed in or even worse, failure to understand the consequences of any regulations.

[0] "Meanwhile, we look like we are blowing a fixed-income duration bubble right across the credit spectrum. You can almost say that that is our strategy."

OK, so yes there are many things "interconnected" in the social sense. For example, lending rates in one nation affect trade in another. Music popular in Germany affects music played in New York. OK.

This "interconnectedness" doesn't prohibit the US from reigning in its financial sector by forcing banks to adopt a utility banking model. It really has nothing to do with it.

> This "interconnectedness" doesn't prohibit the US from reigning in its financial sector by forcing banks to adopt a utility banking model. It really has nothing to do with it.

If the US (or any jurisdictions) regulators don't understand how the "interconnectedness" manifests itself on a day today basis (or how it has and continues to evolve), no matter what they "force" (esp if the model is divorced how things are done today), it will be routed around and will be none the wiser until something blows up.

The revolving door between centralized industry and centralized gov regulators certainly doesn't help with that…

There is utility in things like futures contracts, a guaranteed price for grain is very important if a farmer needs to reliably pay a mortgage.

There's significant diminishing utility in allowing that futures contract to be traded millions of times by algos or allowing huge profits by firms that can front-run because they have fiber lines and the best perf coders that see the farmer trying to make the trade before it hits other exchanges.

Simple solution seems to be a financial transaction tax. No need for complex regulations, just decrease the incentives for working in the financial industry. Change will follow.

You say no value, but what about credit/borrowing?

If I want to take out a mortgage, I have to get a loan. Somebody has to put up money to back the loan. Then maybe I sell this loan to somebody else to reduce my risk exposure, and so that they can get retirement income. That's finance.

If you couldn't take out a loan, houses would certainly be cheaper. But it would likely not be cost effective to build them if you can't amortize the expense over 30 years.

If you had to pay 100% cash for housing, the poor would never be able to afford them, I assure you

Are you saying this isn't useful? Same question re: credit cards.

I do agree that government policy has led to excessive risk taking and wealth inequality, especially the federal reserve. But I wouldn't pin that on the finance industry. Moreso populist tendencies seeping into what should be a hard numbers and risk focused profession.

Everybody likes easy money

Alternatives to mortgages already exist in the form of Sharia compliant shared-ownership products. Effectively what you do is pay rent on the fraction of the house you don't own, while purchasing the rest at a regularly re-evaluated rate.

In this model there's no debt and therefore no leverage. Properties have to be bought by either very wealthy investors or the funding has to be crowd sourced.

Hmm the mechanism isn't clear to me. What do you mean by "pay rent on the fraction you don't own".

You buy a piece of the house all cash, and rent the other parts? Doesn't this imply it must be a multi-family unit?

And yeah, with no debt, only the wealthy will be able to afford properties. But maybe I don't understand the mechanism.

A bunch of investors buy 100% of the property and own it through a holding company under mutually agreed investment terms.

The tenant rents the property at the market rate, but gets the option to buy it bit by bit, at the current market price. When they buy e.g. 20% of the property, their rent goes down 20% (because they only pay market rent on the 80% part they don't own).

Fairly simple really.

> single point of failure on something that by itself generates no value in real terms. It does generate value by increasing our leverage, that is it.

This was my point of "no real value". The only value is to advance the future into the present, at the cost of interest. This value is also the critical part making the system brittle, we advance the future far enough until the pressure on the system is too large and then a single spark lights the whole pile on fire. We have a "market correction", meaning: human suffering in humongous scale because some people were too greedy and wanted the future now instead of being able to wait a few years.

And worse, the existence of this system forces everyone who is not wholly accepting it into a disadvantaged position because your competitor is going to take advantage of cheap credit if you try to be cautious, so there is no incentive to not play the game, at all.

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