The Rent Is Too Damn High: The Enormous Cost of Letting Finance Rule
jacobinmag.com
jacobinmag.com
The simple flaw with this idea is that wall street is squarely focused on making more money. Not making society better. Not allocating capital effectively. Not even on creating wealth(which is distinct from money). The single guiding equation for all deals and transactions is "how can we make as much money as possible with as little risk as possible and also stay out of jail".
That wall street occasionally invests in companies that actually do create wealth and allocate capital to the betterment of society is more a case of broken clock sometimes being right.
There's a middle ground here. "Well-regulated market". Communists don't understand the market part (see Great Leap Forward) and Libertarians are idolators who think the market will automatically settle into the best thing for society if only we didn't have a government (see Somalia).
Amartya Sen has done a lot of research on this: the big factor that determines whether famines happen or not is less planning than it is democratic political structure.
But food shortages aren't the same as famines, and in the famines (assuming we're talking about the famines of the early 30s), economic incompetence wasn't the primary driving factor, although this may be simply a case where we simply have different definitions of incompetence. Stalin explicitly wanted millions of Ukrainians to die as collective punishment for not being sufficiently red, and it's fair to say that he thought it was better to have a dead peasant than a peasant not part of a collective farm, where they and all their activities could be made easily legible to the Soviet State and placed under bodily control.
Those millions of deaths racked up could have been avoided if Stalin had wanted to, even within the rubric of central planning. It's really not even a matter of the famine being something that could've been "averted": the famine wasn't a natural occurrence but something engineered.
Central planning, particularly central planning under a dictatorship, being highly conducive to psychopaths killing millions of people is something I'd agree with, but it needs explicit argumentation.
I don't disagree with your conclusion about political structure, but if we're talking about pure collective planning with no reliance on private allocation of capital, that's never actually been done with a democratic political structure anyplace larger than a kibbutz. Democratic socialism, IMO, is much closer to well-regulated capitalism than it is to communism.
State-allocated capital without a private finance sector has failed miserably
It is completely wrong. It is a lie. You weren't obviously talking about a spectrum, you were talking crap.
The spectrum comment referred to the socialism/communism terminology, with socialism generally seen as involving a heavily-regulated free market and large public sector, as opposed to communism where the private sector is outlawed. A spectrum.
I dunno; all the bright-line false alternative stuff doesn't work. Economic history is still interesting.
I believe it turns out that the regulation that got repealed probably would not have mattered much other than possibly setting up transparent exchanges for derivatives, and that seem speculative as well. YMMV, IMO, all that.
IM-uneducated-O their national decision makers currently do a better job than ours on economic policy (they actually invest in infrastructure and aren't in bankers' pockets on the plus side, a bit too cozy with leading industrial firms on the minus side), while local government there tends to be very corrupt by our standards.
You're aware that there's a healthy private sector in China currently, right? The name "Deng Xiaopeng" ringing any bells? They've had grains futures markets for 25 years now. Not state-allocated capital for food. Seems kinda implausible that you just missed that one.
I'd suggest reading a newspaper sometime. Maybe a history book or two.
I didn't claim that the existence of any state spending at all causes famine. That would be ridiculous to claim. Does US highway spending mean that we're undergoing a famine RIGHT NOW? I mean, the human race would be extinct if that claim held true, given that governments have generally existed most places.
What's your angle, here? What on earth are you trying to prove? To who?
...which companies and industries will shrink and which will grow.
If there's no demand for the product or service, where is the business and financial model?
The financiers don't determine what will turn a profit. They only predict what will return a profit. A market that signals growth and large profits will attract more investment. Investing in a market that doesn't return a profit is something financiers try to avoid. The market shapes the investors decisions, and the decisions shape the market.
Its about the unbearable amount of money they extract for the service they provide.
It may not have a single, "simple" solution, but it is always worth keeping in mind -- necessarily so, I would argue.
Recently, we've had an extreme emphasis, in much of our (U.S., "Western") rhetoric, on the individual and competition.
However, such emphasis, in the extreme, does not scale too well.
One might argue that we are failing at scale, for some fundamental reasons.
I don't think the two goals—greed and making society better—are necessarily orthogonal, as you seem to be asserting. The incentive structure just isn't set up correctly.
"Bloated and inefficient, the financial sector is focused on hooking up bankers with large bonuses rather than matching savings with investment."
The simple flaw in your argument is that you assume that these things are usually mutually exclusive. In fact, it is typically the opposite; they usually are one in the same. The things that are "best" for society also tend to make the most money. People pay for things because they want (or need [2])them, because it makes their lives better [1]. To extend this to investments, smart investments are investments to companies who will eventually make money, because their products are worth buying.
Investing money is an incredibly rewarding but very risky activity. Smart investments will make upwards of 100x ROI, bad ones will lose every penny. Having smart investors is an imperative to maximizing the usefulness of money. Just look at Solyndra ;)
1. since people are having trouble understanding how to interpret this sentence let me clarify. "Better" is completely subjective. For the purpose of making buying decisions, "better" is whatever the person making this buying decision defines as "better" for them. All in all the point of "better" not really being "better" is irrelevant (as it the distinction between want and need). If you want to make the argument that investors are investing in companies that actually make our lives worse, then the solution is typically banning those companies and products directly, not banning investments to those companies.
2. thanks to /u/revscat (yes I know this is not reddit)
More often than not, people pay for things because they must. Food is not optional, nor is clothing, shelter, or health care. For the majority of American population gasoline, auto insurance, and related transportation expenses are similarly non-optional. Similarly electricity and water. For much of the population you can add in child support or day care.
There is not much money, if any, left over for discretionary spending.
The point is that you seem to believe that all spending is voluntary. This is flatly not true, and smacks of willful ideological naïveté.
If you're interested in complex-systems theory, you can try out implementing various simple simulations yourself. It's actually pretty hard to come up with one, even with hilariously optimistic assumptions, where each agent individually optimizing actually leads to a globally optimal outcome! It's even pretty hard to come up with one that works in any reasonable sense at all: you quickly get swamped by system-endogenous effects and all sorts of weird oscillations and attractors that have nothing to do with the utility function. Fun times living in emergent-effects-land!
...when you don't have the mental apparatus necessary to perceive it. BTW, I'm not referring to intelligence.
(With apologies to Upton Sinclair)
Nope. I could really want a cigarette, bottle of alcohol, or a large cheese burger with 2 patties, doesn't mean it would make my life better. In fact, it's likely to make my life worse. So, really there isn't a flaw in grandparent post's argument, the things 'best' for society really don't tend to make the most money.
p.s. not actually, I should be working.
p.p.s see my note on my above comment for a proper response to this.
Stop right there. With jobs moving abroad and wage that is not going up, how would people pay for things they want.
The things that make the most money are the things most desired by the people with the most money to spend. That group of people can only be equated with "Society" if that group of people does in fact form the majority of the society. That's why a large middle class is so important, and why growing differences in income are so threatening.
People pay for things they want out of the choices they are aware of.
"Analysts" - politicians, Joe College, HN posters - tend to use an overly simplified economic model, based primarily on the "Turn Lemons into Lemonade" 3rd-grade economics primer they read as a child.
You can make an awful lot of money in the short term doing things that are horrible for society. Look at natural gas extraction by fracking - are we saying that polluting the water table, the air and ground in an is best?
Or look at the defense industry. The make a lot of money too. Is taking our great intelligence and devoting it to weapons and destruction best for society?
Best might be best for a small group, but is rarely best for society.
Yes, it's better than the alternatives. Cleaner and less CO2 than coal, cheaper than solar/wind/nuclear. It has never polluted the water table. For North American energy, what's better?
> Or look at the defense industry. Since the power WWII superpower era, death and destruction has gone way down. Overwhelming force and vastly superior weapons are making large scale wars a thing of the past. We are actually living in the most peaceful time of human history, from a bodycount perspective.
I agree too much money is spent on defense, but thats a political problem not a banking/investment problem.
Isn't that the opposite of things that are best for society making the most money, which was your original point? Wouldn't society be benefited almost infinitely more if it could harness an almost infinite supply of energy?
http://www.usatoday.com/story/money/business/2014/01/05/some...
That's the first hit on a google search.
Your article simple says there are reports of pollution. Pollution != polluting the water table. All fossil fuel extraction creates pollution.
Hundreds of studies of been done, both public and private about fracking's risk of getting close to the water table. It's never proven to be true. The only study that suggests its possible is the Duke study, but it doesn't prove that it has happened.
This is a hot button issue around here. The water is monitored closely, there are no fracking chemicals showing up in the water tables.
2. (magic happens)
3. the greater good
What I've noticed is that two categories of people believe in such schemes: libertarians, and primary school children.
The "magic" is called "consumer surplus" and it's one of the few defensible things in macroeconomics. It's quite real.
The paradox is that explicitly trying to do things for the greater good very often backfires - although not always.
But as a "control law" - in the sense of running a distributed, massive system - self-interest produces measurably better results than Soviet-style central planning. This rests on information-theoretic foundations and it's early days yet. We're pathetic at macroeconomics, and it's a lot captured by both whim of the moment.
Of course, now we have a lot of hybrids, some that work much better than free markets, some that don't. That's quite new, assuming nothing bad happens to them.
When you have the money, you make the rules. That sums up the problem. Markets are not magical creatures, they exist within the context of social rules and norms. Selling human beings was once seen as rather profitable. Then society decided that selling human beings was wrong, even though it was profitable. You clearly understand this, we banned slavery, we didn't just ban investing in slavery-related businesses.
What I think you are missing is that there are a ton of things that are between "good for society" and something along the lines of slavery that is clearly a bad thing. The problem with these middle "bads" is that they aren't bad enough to be universally and energetically rejected.
This means that there is plenty of room for people with money to get these things made legal, or kept legal, and it is these things that often seem to be more profitable than other, more socially beneficial, activities (possibly because fewer people are morally willing and able to do them). I think of this sort of thing as "meta-competition" because it is competition among those with money to most efficiently turn their money into influence and power that can be used to allow them to make even more money.
As long as money can be converted to power, you can't assume, as you have done, that whatever is legal is socially beneficial (or at least not socially destructive).
More interestingly, society decided that slavery was wrong after it became unprofitable. The same goes for child labor.
Someone should really inform the human traffickers.
Modern human trafficking is prevalent in industries that are themselves illegal, so there isn't free market competition.
The problem with slave labor is considerable expense is necessary to guard them, and the slaves not only do as little as possible but they will actively sabotage the work.
Yes, the cost was huge - that's why stupid things like the Fugitive Slave Law and the Dred Scott Decision happened, leading to the failure of Whiggish Moderation and, well, you know the rest...
What drove slavery into the ... juggernaut it became was more that financial panics in the US ( and also even more globally ) destroyed so much cash value that slaves were all that was left of value when the tide went out.
I recommend the horribly-titled "A Nation of Deadbeats". It's narrative history, but wow its a good story. And at the same time, I bet financialization is completely critical to having the sort of standard of living we have now.
Child labor only became an issue when adult labor began to be idled.
(not to mention the brain drain on the labor markets, and the corrupting influence on politics, and the speculative instabilities, etc.)
"Those who work in banking, venture capital, and other financial firms are
in charge of allocating the economy’s investment resources. They decide, in
a decentralized and competitive way, which companies and industries will
shrink and which will grow. It makes sense that a nation would allocate many
of its most talented and thus highly compensated individuals to the task."
(1) First, yes, it's true that these individuals collectively allocate the capital in our nation (and other nations), but at no point has anyone made a convincing case that this is the optimal (i.e. global maxima) for the overall good of society. There are myriad alternative ways in which society could organize itself to better allocate capital. What evidence out there actually supports the status quo as the best way, especially considering that we've never really given support to any plausible/promising alternatives.
(2) Second, it matters not if you are the "most talented" individuals for the task if you don't act impeccably ethically. The only thing worse them incompetent people with good intentions are competent people with ill intentions. Wall Street if full of the latter, ensuring that their talents are going towards doing a remarkably good job at extracting rent from any of society's productivity gains.
These schemes are dumb because they contain the seeds of their own destruction. Rent extraction eventually kills the golden goose or provokes a populist revolt, while bubbles are basically casino gambling.
The libertarian anti-tax/anti-government revolution was largely predicated on the idea that private capital would be so much smarter and more agile than state capital. What we're seeing is that this isn't the case. Private capital is every bit as stupid as the state; Goldman Sachs is not that different from a Soviet planning bureau.
I'm hoping as tech takes over and democratizes the capital allocation schemes, these fat cats will actually have some true competition.
A central problem in all modern economies -- whether socialistically or capitalistically organized -- is the accumulation of monolithic stores of wealth exceeding the cognitive capacity of small groups of human beings to intelligently allocate it.
We might call this the "big dumb money problem." As the original article points out, it's a bigger problem than merely one of waste. Big dumb money often operates in ways that are actively harmful.
The logical thing to do is to allocate as much as possible to yourself as quickly as possible, before someone else can come along and do exactly the same thing.
The financial sector really needs an ever-aware watchdog standing behind it at all times, pointing a big, scary gun at its skull. When the only consequence to taking everything you can get is having more than you can use, guess what happens.
The only alternative is to decentralize completely, which no nation on the planet will attempt, because they benefit from living at the center of the money web almost as much as the banks.
Guess what drives consumption and consumerism. :)
VC is way worse than Wall Street. I wouldn't trust the Valley to manage a bag of rock salt.
Finance is a lot less classist and racist and sexist, by far, than VC-funded tech because it actually respects high-level talent. Once you prove that you're smart, people will take you seriously as, at the least, a quant or quant trader. Those may not be high-status roles (compared to banking and old-style, guts-and-glory, trading) but if you're good in them, you can make more than enough money to have a good life.
The VC-funded world, for all its pretenses to the contrary, doesn't really value talent beyond about 2-3 standard deviations because it has no way of recognizing it. There are really smart people in the Valley, but not in king-making roles. That is why mediocrities like Evan Spiegel and Lucas Duplan get their early backers and snowball into serious entities. You just have to be good at social proof arbitrage.
There is a lot of win in that phrase.
The annoying part comes when either side pretends like the other side faces them as a unique challenge and the other isn't subject to it.
(Traditional Burkean conservatism, on the other hand, doesn't face that issue in the same way: it accepts that government is inherently corruptible as part of the human condition and rejects the idea of a rationalist State.)
Life is shades of gray. You're never going to have a government small enough or an economy small enough that it's not worth it to play dirty, outside of complete anarchy which it turns out is significantly dirtier. What you can do is limit the damage.
I suppose that I simply do not understand why the ruling was so controversial; it does not make sense to me that General Motors could be restrained from publishing certain things, and that General Electric (which owned NBC at the time of CU v. FEC) would be allowed to publish whatever it wanted, because of its media exemption (as was the government's argument).
Let's get rid of the laws against outright bribery of congressmen while we're at it. That's just giving the government more power, with more laws, right?
Even if you managed it, you still have an absurd over concentration of power and wealth you aren't doing anything about, that just continues to corrupt at all levels of society.
As for the liberal's bete noir the CU decision, I'm pretty ambivalent. It would be far better to break up the big power pool the Federal government represents and thereby make capturing it less useful, then to try to make one big pool of power then insist that people try not to acquire it. The whole thing is the wrong question.
I'm not trying to convince you to "stop being libertarian", I'm trying to convince you to stop being anything-ian. Get in the gray zone, man. It's where actual understanding or admitting that you don't understand happens.
Libertarians these days remind me of nothing so much as college marxists. It's all about theory and ideology, nothing about the real world.
It's not a question of more or less government. Just like it's not a question of socialism vs capitalism.
We know that some problems are best solved when society pools its resources, and other problems are best solved by market forces.
For those problems where pooling society's resources is the way to go (healthcare), it's a question of what are the "regulations"? Are they effective at preventing corruption? Or, are they built in order to facilitate corruption?
The devil is always in the details, and that's what matters, not whether there's more or less regulation. Take healthcare for example, if we went single-payer, that's a government solution, but it also requires far fewer regulations than the current system.
There are systems that can be put in place that are simple and effective at serving the general public. The reason they don't get put in place is because big business has captured the legislators. Is this the fault of government, or is this the fault of big business? I think we need to fight to put in place those simple, effective systems and not eschew all government. People's memories are short, but we've seen what happens when the government is small or non-existent.
To be honest, that's usually my line.
However I find the balance right now is so grossly in favor of the government being given all the power (to the point that on the so-called "libertarian haven" of HN, libertarians are routinely openly mocked for their beliefs, almost uniquely amongst the political orientations here) that it is not an unreasonable approximation to speak of the government just having power stripped from it. That takes some structure to pull off (many of which were actually written into our government, and defanged in various ways over time), and that's why I'm a libertarian and not an anarchist, but there's no contradiction, precisely because liberatarianism isn't anarchism.
As with the other message, if the point is to convince me that I shouldn't be a libertarian, one should probably avoid arguing against anarchism instead. In the meantime, I can't help but notice the frequency of the basic argument
1. Sometimes governments need power.
2. So, yeah, they need this power too.
Libertarians don't always have a good counter to this fact of life.
Stop infighting. This article is dead-on in describing a major modern problem. Only by holding the conflicting thoughts of multiple philosophical decompositions in your head can you ever hope to see a solution.
Because of this, it means that companies are typically very bad at looking at things in the long-term because it's far away and playing for higher profits overall over higher immediate profits doesn't make more money immediately for the owners.
----
The problem isn't that the government's corrupt, it's that the businesses are.
If there's no regulating force there's much less of an incentive for companies to be forthright with individuals. I've heard people argue that private consumer protection agencies would help alleviate the problem, but there's nothing requiring the companies to open up to certain agencies, and nothing to keep an industry from creating a jointly owned agency, which is the only one with access to the entire industry.
While the consumers would be able to chose the agencies they believe most, there are industries which are inescapable, and if the entire industry ever created their own agency, or refused any agency access, there's nothing you, or really anyone, can do about it.
The only other two ingredients are an informed intellectual populace that can properly interpret with complete information whatever businesses propose, and some kind of democratic justice system that can call bullshit when someones being a dick to avoid the exploitation of anyone who doesn't have complete information.
The reason we have all these businesses using a corrupting influence on politicians to bias is because governments have a monopoly on violence that corporate interests would love a piece of.
Great--now let's test that hypothesis! Studies have consistently shown there is very little or no autocorrelation between excess returns--that is, someone who beats the market in year n is essentially no more likely to beat the market in year n+1 than anyone else. This is very different than a field like programming or basketball, where someone who performs well one year will probably perform well the next year.
To me, this is absurdly good evidence that the market is not "stupid," even when I think it is.
Worse, arguments like this don't merely say that the market is stupid and could be beaten--they use the author's personal views on the stupidity of particular market movements to make that claim. In other words, to accept this argument, I need to believe that you are one of the (maybe) few people on the planet who can consistently beat the market. I don't believe that.
Markets behaving irrationally/stupidly != Markets behaving predictably
So I disagree that if markets are stupid (irrational is a better word, but stupid would do) other people in the know could take advantage of them. Just because a given person cannot predict the movements of the market, that doesn't mean the market encodes some special unknown information or is in some aggregate sense smarter or more informed than that person. If the market moves essentially randomly in the short term, the most informed person would not have much chance of beating it.
The market doesn't need to be clever to beat you, on the contrary, often it beats people by persisting in stupidity for much longer than they thought possible, or longer than they have time for, until they give in and invest, and then perhaps soon after it reverts to something resembling rational for a short while. That's not to mention the many ways in which our stock markets and other markets are rigged and stacked by insiders (insider trading, market manipulation, LIBOR, forex etc). So your contention that you'd need to be incredibly talented to 'beat the market' as you put it isn't very convincing - there is another explanation for the studies you cite - almost no-one is able to consistently beat the market, except by luck.
I suspect (though it is just supposition), that markets are the average of all the uninformed and panicky humans who make them up, and that in those crowds of investors and speculators you'll find a madding mill of people all looking for the main chance which oscillates in a chaotic manner, not a huge collective wisdom which outshines everyone on the planet.
> The rich are simply not smart enough to intelligently allocate their capital. [...] You don't see big investments in new technology, science, infrastructure, or other complex and difficult areas because by and large the financiers do not understand these things.
To me, this is saying: tech, science, and infrastructure and undercapitalized relative to their expected returns. It is very difficult for me to construct a model in which a) capital is foolishly providing too little capital to certain sectors relative to the returns it should get, and b) those sectors don't provide outsized returns to the capital they do get.
Of course, such a model is possible! It's possible that returns are random but allocations are still irrational. But what does such a model look like?
One possibility is that returns are totally unrelated to the underlying performance of an asset. For example: new technology is a more rational allocation of capital, and would provide greater return, but it doesn't, because return is totally disconnected from the performance of the technology.
To me, that possibility seems quite unlikely. Yes, the anti-EMH position holds that prices frequently depart from their underlying value--but the idea that there is zero connection, as would be required by such a model, is not tenable. It's absolutely clear that real-world events have effects on asset prices. If, say, Oculus Rift becomes extremely popular with consumers, the capital that invested in it will receive large returns.
Another possibility is that there are network effects that make it impossible to make the excess returns from these sectors unless the rest of the financial sector decides to invest in these sectors as well. But it's very difficult to see what those network effects might be, and it's even more difficult to imagine that they are present for all productive investments in these sectors.
Unpredictability of asset returns is the primary testable prediction of the EMH. On the other hand, it is difficult to construct a reasonable anti-EMH position that incorporates the observed unpredictability of asset returns.
Finally, if the claim that the market is ignoring great opportunities because of stupidity or irrationality does not imply that there are excess returns available on investments in those great opportunities, it's frankly difficult to see what the claim means. If I say "you should invest in my startup, because it's a more intelligent allocation of your capital than real estate--but no, I do not expect that you'll earn higher returns from my startup than you would from another investment," it's pretty difficult to understand what I actually mean by "more intelligent allocation."
People can and do beat markets by all sorts of means. People earn 40% annual returns by operating laundromats!
The market is only smart when you're selling goods that have well-defined characteristics and retain value irregardless of time and place. Cold water is worth about $0.003 a cup from my tap, but $5 in a bottle at a major league baseball game.
The water vendors at baseball games are actually a counter-example to what you are trying to show. Though the water bottles are expensive, no one in the supply chain is able to make very much money (at most stadiums) without government intervention.
The water vendors are forced to either work for the stadium at a low wage, buy the water at a high price from the stadium, or pay a hefty rent to the venue. The stadium is in turn not making much (if any) money at all without government intervention; this is why they are always lobbying for special tax breaks, zoning laws, and government-subsidized loans. The water bottle suppliers and producers are in turn competing against each other in a cut-throat business, with razor thin margins.
A pure commodity like gravel or dirt is different, the price of a particular grade of the commodity is purely based on demand and shipping.
markets can stay irrational longer than you can stay solvent
- Warren Buffet
http://faculty.chicagobooth.edu/john.cochrane/teaching/35150...
> To me, this is absurdly good evidence that the market is not "stupid," even when I think it is.
Or it could be evidence that the game is essentially random, and that intelligence is not a differentiating factor.
Isn't this the role of of venture capitalists to understand those things(with regards to science and tech), and they build specific expertise to understand those things(including hiring top notch entrepreneurs )? But venture returns are not that great(average 7% annual) which explains the little money invested in them(less than $15 billion in 2013).
Finance will always rule ; however society should make an effort to discriminate between different sub-sectors of finance industry. Short term trading is not as valuable to society as giving $100mm loan to a businesses.
That was not nearly as true today as it was before 1980. Things don't have to be this way.
Whoever holds the bread and the knife, will cut a bigger slice for himself.
Having said, that I send about 5-10% of my income every month to my financial advisor for him to invest because I don't know of any better option. Can anyone tell me a way to save for retirement that produces similar results and isn't funding criminals?
See: http://www.pbs.org/wgbh/pages/frontline/to-catch-a-trader/
The financial sector did not want to make bad investments that caused a recession. In fact, the financial sector (mainly investments) was undoubtedly, like all recessions, hurt most. Who wants to invest when companies are failing left and right? This is the reason the fed makes interest rates so low, to encourage investing since no one wants to invest.
But bad investments do happen, and so did the rescission. Unfortunately the problem here was that we had put too much faith in one market, the housing market. There was not enough diversification when things started to fail.
The financial sector did not steal their bailouts, we gave it to them. Just like we gave them our investment money in the first place.
And while financial companies certainly failed and folded up, did their high-level employees care in the slightest, as they move on to the surviving companies? Did they cry themselves to sleep in their personal wealth, accrued from the falacious business deals that bankrupted their companies (little more than temporary vessels for their greed) and also bankrupted the country?
They were forced to knowingly make hundreds of thousands of fraudulent loans? (Loans on which they profited mightily, personally and corporately)
As far as the bailouts go, look at the players in the decisions to give them. It looks a hell of a lot like the finance industry gave itself the bailout, out of the national treasury.
Yes. Why do you think everyone was so keen to sell the mortgages they had written on? Because everyone knew they were bad of course! But they were compelled to write them by the Community Reinvestment Act passed by Clinton.
That's directly contrary to the conclusion of a bipartisan government commission that investigated the subprime mortgage crisis: "...the CRA was not a significant factor in subprime lending or the crisis. Many subprime lenders were not subject to the CRA. Research indicates only 6% of high-cost loans—a proxy for subprime loans—had any connection to the law." [1]
Indeed, CRA-induced loans had a far-lower default rate: "Loans made by CRA-regulated lenders in the neighborhoods in which they were required to lend were half as likely to default as similar loans made in the same neighborhoods by independent mortgage originators not subject to the law." [1]
Even the dissent by three Republican commission members agreed, "Neither the Community Reinvestment Act nor removal of the Glass-Steagall firewall was a significant cause. The crisis can be explained without resorting to these factors." [1]
[1] http://en.wikipedia.org/wiki/Government_policies_and_the_sub...
That describes the entire service sector (doctors, lawyers, restaurant workers, cleaners, etc).
You were trying to expand the GP's statement in a way that wasn't implied. The argument that parts of the financial sector doesn't really make products is somewhat valid, and can be argued either way. The argument that all service industries don't make products is wrong.
> If you are making money, but not a product then you are stealing from someone.
Which is just plain wrong for at least two reasons already mentioned. Since then you've just been nitpicking at people pointing out the wrongness.
And etc.
Index Funds & Apartment is the path of least resistance.
I am sure that there are honest advisers that TRY to beat index. I really do mean try here.
The financial sector provides the service of matching your savings up with people and companies that want to borrow them, and vice versa. Optionally, they also provide the service of advising you about who best to lend to, or doing all the work and just sending you the proceeds (ie, mutual funds, hedge funds, private equity funds).
But if you really want to avoid them, then you could try...
* Peer to peer lending
* Hard money lending
* Angel investing
* Buying real estate and/or rental properties (but don't use mortgages - that's a product of the useless financial sector)
Of course, those tend to require a lot more work, more capital and potentially more risk because you don't have that useless financial services industry to make it easier.
But as someone in the midst of buying a house with some "interesting" zoning, I currently hate finance because I do understand it. :)
One strategy is to use a target-date mutual fund. Another is to pick an asset allocation model that makes sense to you and buy no-load index funds or ETFs.
Paying some dude 5-10% is buying a shoulder to cry on and maybe some tax prep help.
Then, why do you use their services?
If your financial advisor does not provide value to you you could fire him.
"Can anyone tell me a way to save for retirement that produces similar results and isn't funding criminals?"
Is called: Investing in yourself. You should probably do it as early as possible, you will probably lose all your money(like most people do first time they try). Then you will either go back to your financial advisor(but with some respect from what he does, as you show how it was not as easy as it looked) or you will learn and do well.
Personally I don't like lots of financial institutions, mainly because the tricks of simulating value created in order to justify outrageous incomes. Then the trick is revealed and society has to pay the party.
Having said that, investing well is a profession or value creation activity like any other. It takes skill to know what is going to work and what not, where to risk wealth and where not, and facing responsibility and accountabilty.
The problem is not the financial services, like people like communist(much worse system) want make people to believe.
The problem are monopolies, big institutions without real competition married with politicians.
> you will probably lose all your money(like most people do first time they try) That is the problem.
If you don't want to do the work of researching this yourself (and I don't want to sound judgmental, it's absolutely hard and overwhelming to start with), put money in a set date retirement fund. Basically, pick the year closest to when you want to retire, dump money in the fund, and it will diversify your assets for you, becoming more conservative as you get older.
https://investor.vanguard.com/mutual-funds/target-retirement...
I tuned out after the comment about diamond scarcity. Diamonds are their own example of economic rent extraction through monopoly/artificial supply.
Might be more interesting to explore the parallels between diamond cartels and banking cartels.
Once concept that is largely dead in American thinking is "anti trust" - the idea that powerful companies might act in mutually beneficial ways. The recent consolidation of mega-financial institutions is a fairly obvious case, but america is either willfully obtuse (or deliberately) in not seeing this as a problem to address. Sure, let one company have larger notional derivatives exposure than the entire world economy (JP Morgan) - what could possibly go wrong? What are you, a communist??
It's hard to do commentary well, referencing a wide range of subjects and facts. Details need to be right.
That big spike that starts in 80 was right after the 1977 decision to allow commercial paper from private banks, and the 1982 decision to allow subsidiaries that could deal in securities. Banks and their lobbyists fought this from nearly the day of inception (Glass himself fought it) right up until the repeal in 1999 when it was pretty much dead. Why? It stops them from doing exactly what they're doing right now. Unfortunately, now all we get is Dodd-Frank, which is all the bureaucracy with none of the bite.
They tell us, that they are needed (as the aristocrats did in the middle ages to the farmers), since we can not go without (system relevant). But the thing is, that by manipulating our democratic systems, they made them self system relevant and they hinder that things can change. What they do is, they take the wealth of the earth away from the 99% and give it to themselves and the other riches. This system will one day kill of any creativity and any living resources of the earth.
They are the real anti-socials of the world.
"Are"? Yes, I'm afraid. "Will be"? It depends.
> They tell us, that they are needed (as the aristocrats did in the middle ages to the farmers), since we can not go without
An argument echoed by Ayn Rand BTW.
Not that I'm a Rand fanatic per se, but she is often misquoted and completely misunderstood. Some of her supposed fans misunderstand her as much as her opponents.
And: The financial sector are our new rulers, even when you are not afraid. Ignorance does not save from the truth.
Just look into the news. The Occupy movement was suppressed by the police, because the finance sector paid for it. The political system in most western countries is totally under control of the finance sector.
We are slaves, but we don't know it (yet).
Edit: In second reading your answer, I see that I misinterpreted your statements ... sorry! But for arguments sake, I leave the comment intact.
In an efficient market without monopolies there's no such thing as rent seeking. Anyway, the biggest problem with this article is it's naievity and blaming rich people in a populistic fashion. Advocating for nationalization of banking? Come on.
*not created by the government or by government regulations.
The most monopolistic sectors of the economy (FIRE, healthcare, energy, defense) are also the most regulated.
You anti-regulation people have it nearly right but stop short of the deeper truth. The problem is not the concept of regulations, the problem is a corrupt-by-design government that accepts cash payments to create unfair regulations.
That's a variation on the assume-a-can-opener fallacy [1].
Those with capital are extracting rent for the use of their capital, much like a landlord with property charges rent for the use of the property. Rentiers (there's a term you can look up on Wikipedia for lots more) as a class are parasitical on actual producers. That's what's meant by the title - "the rent is too damn high". Not that the use of capital or property is worthless, but that the rent charged for its use is brutal and immoral.
Seriously, read Zombie Economics (http://press.princeton.edu/titles/9270.html)
It's like being outraged at my annual grocery bill compared to the value of the food in my cupboard (ignoring the cost of all the food I ate).
I agree, but these salaries are set by markets and I have to respect the market
Diamonds are actually a great metaphor for overpriced executive "talent". Why? First, diamonds are not fucking rare. The price has been heavily manipulated. In executives, the manipulation pertains to the closed social network of entrenched parasites who can get those jobs: a similar cartel over high-echelon relationships (and owed favors, and extortions). The scarcity is illusory; there are a hundred times more people who are competent to fill their shoes. Second, many diamonds are junk. Third, diamonds are not really natural. Diamonds from the earth must be carved into a man-made shape through technical means, and (anyway) artificial diamonds are often superior in quantity. Similarly, "executive talent" is an artificial artifact, not some genetically-ordained rarity. Fourth, there's a lot of negativity and violence, even, involved in keeping this phony scarcity intact.
I guess the major difference is that few diamonds have negative value, while most corporate executives do.
The greatest trick these assholes (the upper class) ever played on society is convincing us that we need them, and that they are somehow so special that having connections to their stupid little club should be the #1 dominating factor in who makes the most money, gets to make important decisions, and works in the highest-level jobs.
True, but jewel-grade diamonds are rare. Likewise, run-of-the-mill executive talent isn't rare... but top quality talent is.
http://www.straightdope.com/columns/read/2524/is-a-diamonds-...
http://www.barnesandnoble.com/w/the-rise-and-fall-of-diamond...
> On the marketing side, De Beers hired advertising firms, starting with N.W. Ayer in the late 1930s, to render axiomatic the idea that diamonds = true love."
Irrelevant to anyone except history buffs. Want to learn how Christmas started?
Bank / broker employees take clients (who are senior employees of pension funds for instance) out for food and drinks. Maintaining the relationship by going out drinking on the company credit card many nights a week is an important part of the job.
My company mostly deals with governments. Bribery legislation says that every time we provide a cup of coffee to them at a meeting, that has to be declared. It is weird that this hospitality game isn't regarded as cooperate corruption (i.e. the clients agent gets fired for making investment decisions based on who bought him the most expensive dinner).
Anyone with experience of this care to correct my understanding of what is happening here?