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Comment by rsj_hn | Hacker News Reader

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.

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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.

> 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…

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