Comment by zacinbusiness | Hacker News Reader

Comment by zacinbusiness | Hacker News Reader

I find the whole banking world to be fascinating, much in the same way that I find the topic of cancer to be fascinating. Both are extremely complex and yet fundamentally simple. Don't get me wrong, I'd much rather have a bank than have cancer, I'm just saying that I love learning about how these complex systems work, how they work with (and against) other systems, and so forth.

In the case of international finance, I think it's really cool how an institution can help another institution raise capital, move debt, and mitigate losses. Like any system that involves independent actors, banking can (and usually is) diseased by those who are able (both intellectually and financially) to game it for their own gain and to the detriment of the system as a whole.

Banking, it seems, is almost aware of how self-destructive it is. These entities take on complex risks that the smartest people in the world can barely understand and they hope that everything will "just work" or, when things don't work, they rely on their overall value to the system - we can't let banks fail.

Still, I don't think all bankers are socially worthless. They help to create confidence in the banking system and in finance in general. It's only the "bad" bankers that are worthless, and even then they are only worthless to those who stand to lose if they fail.

This is the reason why it's not just a few bad apples:

"Moral hazard is insidious. It lurks in people's minds and stealthily causes them to make ever riskier, and less principled, decisions. It also fosters Gresham's Dynamics. A Gresham's Dynamic describes an environment in which unethical behavior crowds out ethical behavior. For example, analysts in ratings agencies prior to the crisis had to decide whether they would inflate their ratings to please their customers. Those agencies were, and are, paid for their ratings by the financial institutions that are seeking to have their products rated as highly as possible. The result was that analysts that gave inflated AAA ratings were promoted. Analysts that refused to inflate, were fired. Gresham's Dynamics were omnipresent in the institutions that brought our economy crashing down.

Here is what we now face:

- The structural problems and Gresham's Dynamics in our political economy have been preserved and reinforced.

- The same people that drove us to the brink are still, for the most part, our decision makers.

- We have infused enormous moral hazard into all levels of our economy.

- The majority of politicians and regulators - regardless of party affiliation - are complicit.

http://www.capitalismwithoutfailure.com/2011/02/lawyers-view...

It's the first time I've run across the term "Gresham's Dynamic"; it very clearly captures a concept I've been trying to explain to explain in my own words, albeit applied to a wider topic. Is the use of the phrase limited to discussions about economies?

There's a similar term "lemon market", for markets where the bad drives out the good.

http://en.wikipedia.org/wiki/The_Market_for_Lemons

Heh... I've noted an example of a lemon market recently: blenders.

Try buying a consumer-grade blender. It will break in under a year. You have to buy commercial grade (e.g. Vitamix) or don't bother. All the consumer-grade blenders on the market are junk.

Treadmills are like this too.

Banks can do whatever they want. It's the Bail-Out part that bothers me. But the Bail-In (The Cyprus Template' where the saver's money is confiscated) that's even more scarier. Check out this Bloomberg chart: http://imgur.com/mjkOn1W If I understand correcly my savings are noted as 'an investment in the bank'. Nice...

So student loans can't be written off, but savings accounts can? Weird world we live in...

Ah yes, the student-loans. Incredible world indeed. Personal debt that enslaves people for live is okay, but writing off big bets by big banks (or entire countries!) is no problem. On a side note: the more a student can borrow, the more the cost of education rises... This is made possible by governement as well as banks by the way. I feel Iceland did it right: let the banks go bust and even write off personal debt of people's morgage.

>> the more a student can borrow, the more the cost of education rises...

Yeah, it's like house prices. Houses inflate to whatever people can afford. So when the price of houses goes out of reach of a lot of people (like here in the UK) the obvious solution is for the government to demand people get easier access to debt, and to start pumping public money into the housing market. Because that totally won't just inflate the prices further...

Oh yeah, it's the same thing overhere. I used to love watching the BBC's program where people "flipped" houses. Nowadays the reruns come with a official warning, ha ha!

You could write off both in theory. However, writing off student loans is not profitable to the people who can write it off, whereas writing off savings accounts is.

Yup. http://business.time.com/2012/02/09/why-cant-you-discharge-s...

I think the main reason behind this is that student loans are unsecured, and the people they are making the loans to generally have little to no collateral to put up. In order to incentivize lenders to make the loans, they need to have some sort of guarantees, otherwise there would be little incentive for everyone not to declare bankruptcy after graduation, take the hit on the credit score for a few years, and then emerge with a basically free education.

Or you could take the Australian approach: loans from the government are paid back via taxes once you're earning enough.

http://en.wikipedia.org/wiki/Tertiary_education_fees_in_Aust...

That way they can't be written off, but if you don't make much initially you're not saddled with paying a fixed amount.

I don't know if I'm being naive here but could it be possible that even though bankers acted criminally, the economy and by proxy a lot of average folk, would still have been worst of without a bailout?

It's called a racket for a reason:

0. Complexity allows bullshit to conceal the capture of additional money. Case in point: Enron.

1. Goldman Sachs is way too fucking connected. How else would the "non"-double jeopardy prosecution of Sergey Aleynikov and S. 3642 be even remotely possible?

> Still, I don't think all bankers are socially worthless. They help to create confidence in the banking system and in finance in general.

I don't believe I observe that value in my daily life. Would there be sufficient confidence in finance without investment banking? Surely, there was confidence in finance long before the current generation of exotic derivatives? Surely, there was more confidence in the past, when people were able to relate to what was going on?

Even if the financial industry is apparently building value for now, it seems to be building value on top of a house of cards. And nobody is really sure that the base is stable.

We can argue that this creates value out of nothing, but I don't view that as a good thing - especially not now that a large percentage of the economy is dependent on the financial industry having a steady hand.

I think you don't know quite how old investment banking is. Hundreds and hundreds of years old. Look up the history of the Rothschilds, say, and the industry was well established before even them.

You're right that a lot of finance is mostly smoke and mirrors. I send you money through my bank, but what actually happens is that debt gets moved around, rather than money. The result is that it looks like I have less money and you have more. And it gets even more tricky when I start paying you back for the loan on my house - you sell off a bundle of loans to someone else, who says that the bundle of loans they bought is a good investment, because now they own debt which is the primary market commodity. Now, there's a market that's built on there being a predictable ratio of payers to defaulters, which makes it easy to calculate how much the commodity is worth.

But we do get the benefit of the trickery - I can go buy shoes at a store because the employees are paid out of debt, rather than out of the store's profits (which are mostly reinvested into other capital that, hopefully, exceeds the debt). Without the debt, and the ability of the market to utilize it as a commodity, I wouldn't be able to participate in mass-market purchasing, and thus my $50 shoes would cost $200

I believe it's an exaggeration to claim that shoe manufacturers would quadruple their charges if they did not have access to debt.

The structure of a successful business would be essentially the same. Plus, the bank is already charging an amount which corresponds to the value provided.

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