The Financial Sector Is the Greatest Parasite in Human History | Hacker News Reader

The Financial Sector Is the Greatest Parasite in Human History

neweconomicperspectives.org

98 pointsTycho79 comments

The problem isn't the financial industry. Or, rather, the financial industry is only a special-case of the problem. The problem is middle-men. Specifically, it's the fact the Internet has made a certain class of people, whose job it was to take money from people and give it to people who need money (in exchange for a cut) obsolete.

The financial industry is the man-in-the-middle between lenders and borrowers. The recording industry is the man-in-the-middle between listeners and artists. Auto-dealerships are the man-in-the-middle between car companies and car buyers. Realtors are the man-in-the-middle between home buyers and home sellers. In every case, these used to be vital services in a pre-Internet, pre-cheap-communication world. But now, they all look like parasites, simply because we don't need their services any more. And, instead of refocusing their business around providing information and helping the market clear, all of these industries are trying to carve out regulatory havens that would allow them to continue business as usual whilst imposing higher costs on the rest of us. It is this rent-seeking behavior that makes them parasites.

It's funny how the Internet only become widespread about 20 years ago, yet we need people like you remembering us how it was like before.

It's amazing how fast we changed, and how fast we got used to it.

We need people like you.

What a parasite! Should we pay him?

They funny thing is that I'm only in my 20's :) It's not that I necessarily remember how times were before the Internet (I was but a child then), but I study a lot of history in my spare time.

So maybe everyone needs to sit down and read a few books and think about how different life was when you couldn't just look up whatever you wanted to know in a matter of minutes.

The idea that the Internet has removed middlemen is a persistent fantasy that has no basis in reality.

All the Internet has done is replace the middlemen. Tower Records is gone, but in its place is Apple, Google, Verizon, Comcast, AT&T, heck even the Pirate Bay.

And in case you hadn't noticed, big record labels are still doing just fine. They might make less on album sales due to piracy, but now they just require a cut of everything else before signing a new band.

The financial sector provides no services? What?

If I want to sell my company, the banks sure as hell provide a service. They provide a valuation, put together a pitch book, shop the company around and close the deal.

How is that not a service?

You can be a parasite and still provide a service, no?

The crux of the author's argument is that the financial services provides neither a good nor a service.

A tapeworm will help you lose weight, right?

"Rust- the racer's friend"

- me

Can you elaborate on this? I'm not seeing it.

If you have someone willing to provide a service, and someone else willing to buy the service that is offered, how is this a problem?

If the service provider doesn't provide the service that was agreed upon, the parties work to find a remedy, perhaps by going to court, or arbitration, etc.

Are you including more than the buyer and the seller in your analysis?

I think you are presenting a pristine idealization of a free market that doesn't exist in the world.

My current gig involves me selling services to my customer, and that customer paying the agreed upon rate for those services.

Yes, the government forces its way into every deal it can, and yes, this is something most people see as a good thing.

I don't still don't see what's parasitical about the original comment, however. Can you speak to that?

What about credit cards, debit cards, checking, savings, ATM, online banking, mortgages, heloc, etc?

"All right, but apart from the sanitation, the medicine, education, wine, public order, irrigation, roads, the fresh-water system, and public health, what have the Romans ever done for us?"

Exactly what I was thinking. I sit in a chair I purchased with a check, typing on a computer I purchased online with a credit card, inside a house I purchased on a mortgage...

All of those things (except the online part) existed 30 years ago when the sector in question represented a much smaller part of the overall economy. Many of those services have gotten much worse for the consumer at the same time as costs for providing have gone down.

Remember when we were supposed to appreciate having a "personal banker"?

They provide a valuation, put together a pitch book, shop the company around and close the deal.

I'd guess the author would argue that those services are not, strictly speaking, financial.

You could easily enough split up a deal like that between a pure financial institution and some sort of consultant/agency for corporate A&M, and it wouldn't really look or work any differently.

The consultant would provide you with an actual service and the bank would just move assets around. That's just twiddling some bits, these days; the bank's part of the job could be done by computer. The bank could just be a computer, really. As the author puts it, "it creates nothing."

I don't know if I agree with that point of view or not, but I think I understand where he's coming from.

What on earth is financial if providing a valuation for a company is not financial?

You can provide a service that is a net loss overall, but still a benefit to a few. It's the tragedy of the commons.

Let's make it simple and say there are two villages. Some people in village A decide to start raiding crops from village B, because they find they can steal crops more easily than growing them, so stealing is a net benefit to village A.

Village B, noticing the theft, decides to start paying some farmers to defend the village instead of farming. This is a positive outcome for Village B, because the cost of their new security force is less than the cost of the stolen crops.

Ostensibly there are two positive outcomes; both sides now maintain a security service and find themselves at an equilibrium.

But if you look at Village A and B together, you'd see that they'd both be better off if there were no raiders and no defenders and could concentrate on farming. The overall drain on society gets worse as the situation escalates.

Imagine that Village A decides to create more thieves to overwhelm B's security, and that turns out to be profitable.

Now imagine that this exact thing is taking place, at every scale, millions of times a day.

Let's say I'm competing with Dave to buy a house we both want. The only thing holding that price down is our collective willingness not to borrow huge sums of money to outbid each other. Let's say the bank starts to offer a 60 year mortgage, so that Dave can outbid me by shackling himself to a loan he probably won't pay off in his lifetime. Dave is a moron, so he does that. It's a free country.

Dave, in this circumstance, is acting like Village B, where he shoots himself and the rest of society in the foot by dedicating most of his future income to paying a bank in order to get a short term gain and win a house bid with me.

But the real winner in the scenario is the bank, not Dave.

Edit to add: I believe the article was talking about "service" in terms of the overall gain to society, not the individual services that a bank typically provides, many of which are completely legitimate like helping you sell a business.

Banks bear risk.

when you want to borrow, they lend. when companies raise capital, they put the issuance on their balance sheets first. when banks make markets, they hold inventory with no ready buyer/seller.

we pay them so that we avoid having to take on that risk.

in your scenario, what if Dave is buying the house to move to a new city to take a job paying twice what he was making before? if the bank never stepped in, he could never have realized that opportunity. the bank is, of course, indifferent to Dave's motivations. For all we know Dave could really be an idiot. the bank simply bears the risk of Dave defaulting and as a consequence makes money from doing so.

> Banks bear risk.

TBTF banks don't bear any risk. In 2008-9, they socialized their risk, forcing US taxpayers to bail them out, after making too many bad bets.

Yes, though taxpayers have now received back more than was given out: http://projects.propublica.org/bailout/

Smoke and mirrors aside, the taxpayers have actually taken a huge loss on these bailouts. The official figures say: $608.9B out; $621.4B in. Looks like a $12.5B profit. But looks can be deceiving. First, it neglects the fact that we had to borrow that $608.9B and pay it back with interest. Second, and more importantly, it ignores inflation-- If we computed inflation the way we used to, before Greenspan took the helm of the Fed, we've been running 8-9% inflation per year recently. So the money we taxpayers got paid back isn't worth as much as the money we paid out. This devaluation of currency is especially evident when you consider that Ben Bernake printed up $3T out of thin air, and used half of it to buy up worthless mortgage backed securities.

But there's an even bigger issue at stake: While the US pays a lot of lip service to capitalism, this is not the way capitalism is supposed to work. AIG, Goldman Sachs, Fannie/Freddie,... they should have all been allowed to go out of business in a real capitalist economy. And that $608.9B should have been put to more productive purposes.

Letting Banks fail is what the Fed did during the Great Depression. See http://www.stlouisfed.org/great-depression/qa.html.

"Many people criticized the Fed for its response to the Great Depression. How is the Fed's response to the current crisis different?"

"The key difference between the 1930s and today is how the Fed has reacted to the crisis. In the ‘30s, the Fed more or less let the banking system collapse, allowed the money supply to collapse and allowed the price level to fall."

I'd hardly call the Fed's response to the current crisis a success-- The U6 unemployment rate for the US is currently 12.6%; when we add back housing, healthcare, food, fuel, and education into the inflation statistics, its been running at 8-9%; and the Income Gini coefficient in the US is about 0.477. Meanwhile, the TBTF banks are even bigger, and the Fed's own balance sheet is a disaster waiting to happen.

Yes - you're right, it isn't a pretty picture. That being said, can you imagine the outcome of letting major institutions fail? It is likely things would be much worse. Otherwise healthy institutions may have been brought down in the process.

Letting the banks fail doesn't entail doing nothing and letting people suffer. Hank Paulson's bank bailout proposal got rammed through Congress by the Bush Administration without much consideration of any alternatives. Paulson's plan helped banks and bankers at the expense of everybody else. There were lots of other proposals that got ignored by the press. Here's three different approaches. While I personally favor the third approach, I think its very important to dispel the idea that we didn't have any choice but to bailout the banks, so I want to illustrate a variety of approaches:

(1) Steve Keen suggested a debt Jubilee: "monetary injections by the Federal Reserve not into the reserve accounts of banks, but into the bank accounts of the public--but on condition that its first function must be to pay debts down. This would reduce debt directly, but not advantage debtors over savers, and would reduce the profitability of the financial sector while not affecting its solvency" quoted from http://www.debtdeflation.com/blogs/2012/07/22/the-crisis-in-...

(2) Mortgage assistance: put a moratorium on foreclosures; freeze rate hikes in adjustable rate mortgages; help homeowners refinance their mortgages; or replace home borrowing with renting.

(3) Ron Paul proposed we abolish the Fed. While the Fed's profits belong to the federal government, the Fed itself is owned by the nationally chartered banks. Therefore, it's power to create money is used to benefit the banks, not the government or "we the people." Take that power away from the banks and put it back in the federal government, where the US Constitution says it belongs. This has many immediate advantages. Here three: (i) The federal government can tear-up the $1.6T of debt on the books of the Fed. (ii) The federal government no longer needs to borrow money. (iii) Eliminate the asset bubbles created by the Fed's artificially low interest rates and quantitative easing. See http://theeconomiccollapseblog.com/archives/14-reasons-why-w...

What is unjust or inefficient about your example with purchasing the house?

Should Dave not be allowed to borrow money to own a house? Should only the wealthy, with sufficient cash reserves, be permitted to buy a house, without financing?

If you don't value the house as much as Dave -- on a net present value of the future payments you have to make to own it -- why should you have it, instead of Dave?

Should real estate prices be capped, by a central planning board, so that Dave cannot borrow too much to own it? If so how does the seller choose who to sell to, between you and Dave? Who says the house is worth X, and not Y, when Dave is happy to pay Y?

Or is it unjust that Dave likes the house enough to commit much of his future income to it?

Why is Dave a moron? Because he disagrees with you on what to use his future income for? Should you be able to tell Dave what to spend money on, and what not, out of your view of what is socially efficient?

Perhaps not just you; you could get a few of your neighbors together and call a vote on what Dave can spend his money on. Based on social utility, of course.

But to go back to your example. Suppose you choose not to outbid Dave, because you are smarter, and instead opt to rent an efficiency studio and save up over your life and build a sizable amount of investment assets (because you did not spend frivolously on a large house). As you age, you look for your savings to work for you, because you were smart enough to defer consumption and now you feel you should be rewarded.

Where to put your assets? There are many choices. Should one of them not be the option to lend Dave's son, Dave Jr., money for his own house, in return for a level of interest to compensate you for use of your capital? But that's a pain to find the borrower and vet him, and risky if it's just relying on Dave Jr (who may be a moron like his father).

What if there was an agent you could pay, who would originate the loan, check that the title was valid, check Dave Jr.'s credit, author the loan documents, and then provide it to investors like you -- or even bundle them together, so that you could spread risk of default over a few different mortgages, instead of just one?

That would be great -- you could earn a return on your saved capital, and Dave Jr. would get what he wants too (even if you disagree with what he should want)!

Ah, but of course, agents like that are just parasites. So instead of reinvesting your saved capital with someone willing to borrow the money, you stuff it in your mattress.

To make society more efficient.

The prices of things are not what they are worth, but what the market will bear.

The 30 year mortgage allows a rich man to outbid you on the home that you want to buy to live in, a property that he has no personal interest in, so that you can pay interest on the money you only had to borrow so that it could not be loaned to someone else, such that they could afford to pay more than you. That money pumped into the market only serves to raise prices. Houses are built larger and more expensively than they otherwise would be because the buyers are able to pay more.

If there were no mortgage loans available, the market would be producing a greater number of cheaper homes for sale, and a greater number of rental homes for investors, with more economic separation between those markets. The rich man outbidding you for property would have to actually assume ownership of it, and would shoulder some risk of carrying vacant rental units. Venturing into property-owner-land as a rentals investor would evoke a nasty NIMBY response.

Believe me when I say that it is possible for every person in America to own their own home, even with just a single minimum wage job for the whole household. But it isn't bloody likely, thanks to mortgage lending, zoning laws, and building and occupancy codes that completely eliminate entire classes of low-cost housing as either unprofitable for developers or outright illegal.

This same phenomenon is now occurring in higher education, wherein loans inflate the price, the product remains essentially the same, and the buyer is saddled with an enormous burden of debt. Debt is a trap laid by the wily for the foolish. But it persists because the practice nestles snugly into a Nash equilibrium. The practice is not at an absolute maximum, but neither player alone can improve his position by making a different move.

The only way for the erstwhile borrower to win is to form a cartel able to punish anyone who takes a loan to pay for a good or service too scarce to supply everyone in the cartel. In other words, non-rich folks win by regulating the hell out of lending, to reduce the number and amount of loans available.

Precisely. Now the real question is, why isn't everyone outraged over this practice? Why is none of this taught in junior high school? Why are we told that personal debt is a fact of life, and makes the world go around?

The answer lies within another question: Cui bono?

OK, so loans taken for purposes of speculation on scarce goods are a Bad Thing. But loans taken to build up real infrastructure and support innovation still seem to be a very valuable service that the financial industry provides.

And they have leveraged this one valuable service into a massive industry that, while still engaged in the valuable service, has also branched out into destructive parasitic services. One cannot remove the parasite, because no effective alternative exists for the necessary and valuable function.

So what is to be done? The only plan likely to work even a little bit would be to establish a government bureau of capital and infrastructure investment, such that if the financial industry vanished overnight, the small businesses engine would not putter out. But such an agency would be an obvious target for lobbying, regulatory capture, and personnel rotation to and from the financial industry.

They have us over a barrel, and they know it.

If lending were abolished entirely, people who would otherwise lend would be forced to buy shares, with all the associated risks of ownership.

Bigger than government? Arguably at least the military and internal-to-government overhead is a direct parasite on everyone else, and its only value is fighting other parasites (other governments). Some parts of government seem to be very useful, but it's a big enough sector that just the parasite parts are probably the biggest parasite.

yes. why even bother to argue your point? while a lot of government spending might not benefit you directly, the odds are that someone out there is getting some kind of service from it. Also, a sizable fraction of government money is going to salaries of middle-class workers. They, in turn, are likely to spend that money on things you might consider useful or neat, thereby helping the overall economy. The process might be inefficient (or less efficient than a perfectly executed and fictitious counterpart) but that doesn't make it a parasite.

The military part is negative-sum for the world.

A competent engineer designing weapons, even if he makes $150k to spend on food/cars/etc. and support those people, is still depriving humanity of the $100k to near-infinity of positive contribution ("consumer surplus") he could be making, some of which he'd capture as additional expected income, if he worked on something genuinely useful to humanity.

The only reason we have a military is to protect from other militaries; therefore, militarism is a parasite.

What has DARPA done for me lately?

Money seems to be an excellent motivator, but when death is on the line people seem to embrace a little more out of the box thinking. Rent seeking and collusion to avoid innovation seem to be problems with both the money and violence types of power.

"What has DARPA done for me lately?"

How about the internet?

If that's too last-century for you, you can look forward to the benefits of DARPA funding the development of the basic tech and Open Source software that's driving the rapid development of robots right now.

Easy tiger. The point was not all military spending is a waste.

Useful side effects for sure, but even if you took away the direct non-financial costs of the military (non-zero chance of nuclear armageddon...), I think there are things we as a species could work on which would produce the same kind of competitive, focused effort. The "space race" accomplished a lot, and consumer IT tech (say, mobile phones) has progressed even faster than military tech (outside maybe an existential war like WW2).

I don't disagree with your wider point that their are other useful motivators out there but it's worth noting that the space race was militarily motivated. Sputnik flying overhead effectively showed the soviets had/would have the ability to drop bombs anywhere in the world. Even the space shuttle was influenced in design by militaristic influence.

OK, sorry. My sarcasm detector failed me.

And what would we not have if it wasn't for militaries ... and even war. Where to begin ?

the Internet - hacker news, and of course your own comment

Rockets - and of course space travel

Nuclear power

GPS

Night vision

Duct tape

Jet engines - international aviation

Radar

Microwaves

Walkie talkies (and the follow ups to this technology, including cell phones)

Medical advances by Soviets and Nazis

I would argue that the military is negative sum only in theory.

It's debatable how much of this we can honestly attribute to the military--

Leó Szilárd and Enrico Fermi patented the idea of a nuclear reactor in 1933. The military didn't invent it.

Christian Hülsmeyer was a German inventor and entrepreneur. He was the first to use radio waves to detect "the presence of distant metallic objects"; he got a patent for his "Telemobiloscope" in 1904. The military didn't invent it.

The first patent for using a gas turbine to power an aircraft was filed in 1921 by Frenchman Maxime Guillaume. This predates the RAF's patent by 11 years.

Richard Drew invented Scotch tape and masking tape in the 1920s. In 1927, J&J invented cloth tape for medical uses. So far no military involvement. Then in 1943, Vesta Stoudt, an ordnance factory worker, thought to add waterproof plastic to J&J's cloth tape, making the first duct tape, and that's the extent of the military involvement. Duct tape was later improved in 1960 by an HVAC engineer by making it flame resistant. Seems that the military role in developing duct tape was rather minimal, and would have been made eventually by the free market.

There are serious issues trying to pin down who invented the first gunpowder rockets and for what purpose. Seems likely gunpowder was invented by Taoist alchemists seeking an elixir for immortality, and that the very first application of gunpowder rockets was fireworks for entertainment.

Writing for the WSJ in July 2012, Gordon Crovitz questioned "Who Really Invented the Internet?" at http://online.wsj.com/news/articles/SB1000087239639044446430...

Without funding these projects would not have happened, and the inventions would have died. Or at the very least would only have happened much, much slower.

An example of this is that however one designs a working fusion reactior, one thing you can be near sure of : the design is in the US patent database (and publicly accessible). Yes, really. Of course, most of them are not getting built (the US is the only country that's even considering anything but a tokamak approach at all).

Would humanity never ever have invented these technologies without war ? Probably we'd have found them eventually. Would we have them today ? No way in hell.

> Would humanity never ever have invented these technologies without war ?

Not all economic growth is good growth. There's bad growth too. Like anything else, war has costs:

(1) Price tag. For example, "The U.S. wars in Afghanistan and Iraq will cost taxpayers $4 trillion to $6 trillion, taking into account the medical care of wounded veterans and expensive repairs to a force depleted by more than a decade of fighting," quoted from The Washington Post (March 28, 2013): http://www.washingtonpost.com/world/national-security/study-...

(2) Harms/damages. For example, in the Afghan and Iraq wars, we have 6,600 dead Americans. Of the 1.6M veterans of these wars, 670,000 have been awarded disability, and another 100,000 are pending. Source: McClatchy DC (March 14, 2013): http://www.mcclatchydc.com/2013/03/14/185880/millions-went-t...

Harms inflicted on US troops include: amputations, traumatic brain injuries, mental illness, suicide, rape, sexual assault, and sexual harassment.

Harms inflicted on Iraq include: 150,000 to 400,000 dead, 600,000 orphans living in the streets, 1.3 million internally displaced, 1 million displaced to Syria, 100,000 imprisoned and tortured with no due process, 25% without clean water, 30% unemployment, etc., etc.

(3) Opportunity costs: I think President Dwight D. Eisenhower said it best in 1953--

"Every gun that is made, every warship launched, every rocket fired signifies, in the final sense, a theft from those who hunger and are not fed, those who are cold and are not clothed. This world in arms is not spending money alone.

"It is spending the sweat of its laborers, the genius of its scientists, the hopes of its children.

"The cost of one modern heavy bomber is this: a modern brick school in more than 30 cities.

"It is two electric power plants, each serving a town of 60,000 population.

"It is two fine, fully equipped hospitals. It is some 50 miles of concrete highway.

"We pay for a single fighter plane with a half million bushels of wheat.

"We pay for a single destroyer with new homes that could have housed more than 8,000 people.

"This, I repeat, is the best way of life to be found on the road the world has been taking.

"This is not a way of life at all, in any true sense. Under the cloud of threatening war, it is humanity hanging from a cross of iron."

You lost me at the broken-window fallacy. If you want to give people handouts, call them handouts. Don't give them a bunch of bullshit to do and pretend it's constructive.

Government is worse and it enables a lot of the ills of banking, not a popular opinion on largely state-apologist HN though.

I wasn't even making a general anti-government argument, but the much weaker argument against parts of the government which exist only because government, not because of any actual purpose external to government.

Who keeps pushing this meme? If anything, the worst parasites are lobby groups and politicians.

It's a populist call to arms. You'll be seeing a lot more of it over the next few years, expanding ever more loudly toward the rich, wall street, bankers, and corporations, with calls for much higher tax levels and minimum wage. The Fed's asset bubble-based fake recovery did absolutely nothing for the bottom 50%, but has vastly increased the wealth of the top 10%, the future social consequences of that are obvious.

Indeed. If you take a populist rant like this, and replace keywords like '1%', 'rich', 'banker' with words like 'Jew','Semitic' and 'Zionists' - you start to get an appreciation for how ugly these latest movements really are through the lens of history.

Do I mean that some of the public policy choices of the last decade are beyond criticism? No, definitely not. 'Too big to fail' is a terrible phrase because it calcifies economies and entrenches bad practice.

But the latest meme of 'if you're rich you're a parasite and should be stripped of your property' is disturbing for me. It lumps a class of people into a 'generally bad' category without looking at specific problems. There are angry young people out there who have been fed a simplified story and are running around with 'eat the rich' style placards. That is worrying to any ordered society.

To be fair, the actions of many (not all) of the rich in this country have brought it on themselves. When the middle class is stagnant or declining, and the wealthy keep getting richer and richer, then the populist rhetoric will take root.

And who can blame them exactly? When wages are stagnant, income inequality is rising, most companies have little-to-no loyalty to their employees and discard them at will, and many of the rich and comfortable push relentlessly towards eliminating the safety net, then those at the bottom are going to feel more than a little resentful. They feel ignored and powerless, which is a correct assessment of their position.

While not all the rich are bad, it's very hard in the current climate to have the slightest bit of sympathy for them. They, as a class, have the power to change things and avoid the coming storms, but, they've already shown they're not the least bit interested in addressing the immense financial inequalities and the problems to an ordered society caused by such divisions.

If the rules of the game seem rigged against you, there is a great incentive to either stop playing or to cheat. Some people don't seem to realize that a gigantic portion of everybody's wealth in developed nations is the ability to go out in public without fearing for the loss of your life, liberty, or property.

When you intentionally cultivate a class of people with little to lose and much to gain by brutal and violent action practically on your own doorstep, you are very likely to be hoist by your own petard. If I were a billionaire, I would be quite certain to conspicuously make myself an obvious asset to the whole community, particularly with respect to the folks that might be thinking of me as they rescue mostly-edible food from garbage containers. Public relations are important, if you wish to be a man that is not an island unto himself.

You may want to consider re-reading this article as you seem to be misinterpreting it. The author:

a) is a wealth manager b) is not advocating a populist eat-the-rich" revolution c) doesn't use the keywords "1%", "rich", or "banker" as you imply (I fail to see why you want to bring Judaism into this?) d) does not imply "if you're rich you're a parasite and should be stripped of your property's wealth"

Here, for your convenience, is the author's thesis:

"A bloated and out-of-control financial sector does not add any value to society. Society benefits when the financial sector is kept as small as possible."

The author is ranting on the size of financial institutions, not the rich. Hope this clarifies things for you.

My reply was to the parent and a general comment, not specifically referring to the article.

Just like the transportation industry parasites, all the finance industry does is move things around. Neither makes anything. /s

Warren Buffett's Gotrocks anecdote is an interesting take on this: http://money.cnn.com/2006/03/05/news/newsmakers/buffett_fort...

The military has been worse historically surely? At least the financial sector has some function you'd miss if they didn't exist - banks, insurers etc are useful although I'll give you that about half their activities are parasite like. I'm basing that number on Krugman http://www.nytimes.com/2009/03/27/opinion/27krugman.html?_r=...

The military? Ask Hawaiians over the age of 80 how useful the military is.

"The military has been worse historically surely?"

Ask Ukraine about the consequences of getting rid of your military.

"Military costs too much until you get invaded" is a common thread throughout history.

Recent history has shown that nigh-universal private ownership of small arms is, if not an absolute deterrent to invasion, a great multiplier for the costs of an occupation. A rifle behind every blade of grass and 96 nuclear warheads in every submarine would seem to be as much as you need to prevent an overt invasion.

Projecting your power into other countries, on the other hand--that will cost you quite a lot more.

Switzerland seems to have a decent anti-invasion model. Arm everyone able to lift a rifle and make almost your entire country into a giant fortress, and you won't get invaded until well after your neighbors are overrun. They don't spend a lot on their military, relative to more militaristic nations, but it is clear that anyone wishing to take the country would have to spend a lot more than the defenders.

You can hold folks off with nuclear weapons, but I don't think Russia would act any differently towards Ukraine if every citizen was armed. I don't think they count the cost.

Switzerland is well defended and would be last on the conquer list for Europe, but it would still be on the list. Without nukes, they cannot really keep a determined invader out. Particularly if the invader had nukes themselves.

It really depends. Traditionally, the US navy was to stop pirates from screwing with US exports. IMHO it was a pretty effective policy. we pay taxes, our stuff gets to new markets.

Iraqi oil is apparently doing nice things for XOM, not sure if they payoff will be worth the price. Afghanistan seems like a loser. There's nothing there we can take to pay for the war.

Reviewing the history of the US's first six frigates is a very interesting take on a lot of sides of this issue.

Can you elaborate?

The conflict between the desire not to have a Navy and the problems being caused by pirates presented interesting arguments for both sides. The conflict generated the conditions to build the 6 frigates.

http://www.amazon.com/Six-Frigates-Epic-History-Founding/dp/...

If the scandals described in this article and Taibi's articles are the result of a few bad actors, and if the result of these scandals is a broad perception on the part of the public that the entire financial sector is corrupt, then Goldman Sachs should be interested in policing its own.

I wonder if G.S. feels unable to police itself, or maybe they feel the aluminum story is not a problem, or that what they did was harmless. I don't know what they think about what they do. I can't really blame below average people for cheating -- they're not good enough to win playing by the same rules as everyone else.

But if I'm to draw a circle around the corrupt people should I draw it around a piece of G.S., or around the whole company. It seems like the scandals keep happening, and that market manipulation such as laddering and hoarding are considered by the financial industry as another way to make money.

If the financial industry isn't greased entirely on deception, then I'd like to know what percentage is deceptive and what percentage is figuring out a hedge plan for e.g. BMW's exchange rate risk. I can see how billions can be made one way, but I don't see how billions can be made the other way.

Maybe it's just me, but the maths seems strange.

I just quickly glanced at some figures, like "Have they earned it?", and it seemed wrong.

The author says the total return for say Barclay was 12.61%.

bc -l running in a terminal disagree

Taking 100 as the base value to ease our math:

100x1.112x1.0825x0.9452x1.1088=126.156497322240000

That's a 26% something cumulative return in 4 years. What is this 12.61% meant to represent?? The average per year was closer to 6.5% if that's what he meant.

(Edit- replaced the * by x and added an =)

>The rule of thumb is that hedge funds charge a 2% per year management fee and keep 20% of all profits,

>All returns shown are net of fees

So, subtract 20% from the 3 positive numbers, and that's about 6% in fees (this may be off by a bit, I'm quickly approximating the math in my head). Subtract another ~8% for 4 years of fees, and that's about 14% combined fees. 26% - 14% = 12%. Seems to be about right.

The author could have made the way he calculated the fees more clear, but his point stands that a huge % of hedge fund profits go to fees.

The article doesn't address the question: Why has the GDP share of the FIRE sector recently grown so much so fast?

If its growth were the result of increasing authentic demand for financial services, or increasing efficiency in the supply of financial services, then that would be OK. However, I see three main bad reasons for the recent explosive growth in the FIRE sector:

1. Their cost of borrowing is artificially low. They don't need depositors anymore. They can borrow limitless funds from the Federal Reserve now at 0.25%. Their real borrowing rate is actually negative if we're honest about inflation, rather than relying on fabricated government numbers that leave out housing, healthcare, food, fuel and education.

2. The Fed is creating artificial demand for financial products. After the 2008-9 crisis, the Fed has created $3T out of thin air and used half of it to buy mortgage backed securities.

3. Over the last 30 years, the federal government has shown its willingness to bailout failed financial institutions that took on too much risk-- We saw it with the S&L crisis of the 1980s and 1990s; we saw it with the 1998 bailout of LTCM; and we saw it again with the $700B TARP in 2008.

If we would simply allow the free market (rather than The Fed and federal government) to determine interest rates, and the demand for securities, and the appropriate level of risk appetite, then we'd see the FIRE sector shrink back to its historically low share of GDP. Page 37 of this paper by Thomas Philippon charts the growth of the US Financial Industry as a share of GDP from 1860 to 2007: http://pages.stern.nyu.edu/~tphilipp/papers/finsize_old.pdf

Thanks HN! Although, there is an element of overcompensation in finance, as well as a lot of overconfident people with more testosterone than knowledge, it still does provide hell of a lot of services. I'm happy to see that the HN crowd doesn't really "just believe" whatever is said in that article. True, I agree the management fees are high. However, the argument about HFT is basically "kitchen level" of someone who doesn't know a thing about it and just read some blogs and watched something on TV. HFT firms get paid for providing liquidity in the market. How exact that happens is actually easy to understand, but not many people bother. All these stories about front running "fair investors" are almost a complete fake (there was some issue about flash trading but that has gone away now).

"The Financial Sector" is too broad to make a statement like that.

That brush is so broad it's blocking out the sun.

“The few who understand the system will either be so interested in its profits or be so dependent upon its favours that there will be no opposition from that class, while on the other hand, the great body of people, mentally incapable of comprehending the tremendous advantage that capital derives from the system, will bear its burdens without complaint, and perhaps without even suspecting that the system is inimical to their interests” .- Self

Fake, according to http://en.wikiquote.org/wiki/Conspiracy.

Updated.

Not fake anymore.

Even if it is a fake quote, the point it makes is true.

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