This doesn’t really speak much to the “master” thing, but over the last few generations we have “financialized” (like securitised, but bigger) huge parts of the economy, and a lot of stuff that wasn’t really part of the economy in the past.
For example, health services are largely financialized via insurance. IE, you don’t directly buy health services, you buy insurance which buys health services. You don’t buy a house, you get a mortgage. You don’t support your parents (or colleagues) in their old age, you pay into pension or superannuation schemes. Education via student loans. Monthly expenses via credit card debt. Large ticket items via dealer finance. Public services via national debt…….Companies via private equity. Everything has a financial layer between payment and consumption.
Underlying a lot of this is a relatively simple fact that if debt is available, consumers (from 18 year olds to Finance Ministers) will take it. If loans are available for certain products, more of those products will be consumed.
Another (possibly evil) driver is that governments have chosen financialization as instruments for promoting stuff they want to promote. Need more corn? Crop insurance subsidies. Educate the masses? Subsidise student loans. Promote home ownership? Implicitly guarantee retail banks’ losses. Medical care for all? Tax free(subsidy) insurance. Flood problems? Flood insurance. Poverty? Microfinance.
So, banks got big. This has all sorts of weird effects.
One of the biggest problems in my opinion is the inflationary effect of this process. Real estate prices in many places are simply the amount that a bank is willing to lend buyers. If banks increase the amount a buyer can loan, house prices increase proportionally. IMO, the American healthcare saga is not really about ideology or competence or any of the stuff they talk about. The problem is that after 2-3 generations of wide scale subsidised financialization, prices & costs are so high.
My final thought is that part of the problem is the prominence of finance people in pubic decision making. They know finance. They believe in it. They use it to solve problems. They don’t see baks getting bigger as a problem. It’s kind of like the lawyer problem, who also have a lot of presence in politics. That means the legal field gets bigger all the time.
> My final thought is that part of the problem is the prominence of finance people in pubic decision making.
Indeed, I've read a few articles in NYTimes/WSJ now on the sale of public services in the US such as fire and water services to private equity firms. And the whole thing is told as a cautionary tale about banks and capitalism, which misses the bigger picture in how these things always start.
Typically the problems start because the government was overleveraged from taking on too much debt, typically due to poor financial management fueled by initially cheap capital from bankers operating in and out of government. Then when hard times come they continue to seek the easy answers from the bankers (instead of making hard choices like spending less) and end up selling off public resources giftwrapped in pseudo-market sounding language with very little of the actual benefits of markets: competition, private salaries, flexibility, etc.
These "banks" are famously like an octopus wrapping their tentacles around everything. We have some old effective methods for handling this type of behaviour when it's used improperly in the private sector, and there the harm is limited to a few usually wealthy parties. But it starts to get dangerous when these half-baked financial schemes that have worked in private markets get pigeonholed into government. Critical services like emergency services or drinking water are often ill-suited (and more importantly ill-prepared) to handle the potential downside.
Hopefully one day politicians will learn this lesson and learn to keep things simple in the public sector. Governments everywhere have a consistent track record of not managing money well and have a high-turnover of executives by design, so any complex financial instruments are just setting them up for failure and exploitation. Anything to do with government should be made dummy proof and straightforward. Public services should be run like public services. Mixing of private/public should be the exception, not the standard. And I say that as someone biased towards the private sector.
Sometimes I feel like this "extra layer"/middleman-adding is not only just to enable government interventions but is just fluff added so we could create jobs for those whose skills don't go beyond the typical white-collar worker. I might be wrong, but the image of extraneous University administrators and "not-enough" skilled labor kinda paints this picture.
The financialization you're talking about doesn't seem bad per se; it streamlines and "purifies" the exchange you actually want to do.
For example, if I have extra money, and I know someone who could ramp up his productivity if only he could make a one-time investment (say, a cow for his farm), then I buy him a cow in return for a share of its milk. Then, to diversify, I can find thirty such people. Then I find someone who can sell the milk for a cut...[1]
Instead of all of that, we have banks, where I just give them the money, and they make the loans (and do screening, credit reporting, foreclosure, etc) and pass me a cut of the returns.
Nothing is wrong with that. The problem is when you have perverse incentives to start with (e.g. in fields like health care, or with lenders who have asymmetric information about the loans in a portfolio there's excessive trust in the vetting), where financialization just puts the same problem on steroids.
[1] Late edit: a better example of the "impure exchange" might be if I wanted to save for my retirement so I raised one more cow than I usually would with the intent to lend it out to others who are still working in return for milk, with the usual frictions like needing to convert to non-milk.
one of the things that irks me about (consumer) banks is that they've somehow convinced consumers that they should pay for banking services, instead of the receiving returns for loaning the banks money (which is what a checking or savings account is).
some of this is due to a lack of financial literacy on the part of consumers (financiers know that loans should come with an interest rate, not a charge for the privilege of loaning the money in the first place, but consumers on the whole apparently don't).
but there is also a regulatory mechanism exploited by consumer banks: FDIC insurance. without insurance, people are understandably reluctant to loan money to banks since they don't know if they'll get the money back. so the government (again, understandably) steps in and guarantees with tax dollars that you'll get that money back, even if the bankers are crooks. but of course, that means the government must try to tease out the crooks with a stringent set of tests and regulations around who they'll insure. and just like that, you have an anti-competitive choke point where incumbent banks use the regulations to guard against future competitors by keeping the regulatory barrier high.
(this is just another example of the financialization via insurance that you elucidate)
also, use cash. it's transaction-cost free, anonymous and universally accepted.
And it is based on the simple assumption that we can accumulate debt at any pace forever. Unfortunately I am not convinced it is the case. There is a debt to GDP ratio where the system will break.
The problem with financial services is customers are greedy - not banks
2. The challenge in building any business - is that they always start by trying to solve a problem - but power always corrupts
1. If google’s aim was to truly organise the worlds information or xxx would it behave like thsi
2. We say capitalism is good as through the pursuit of capital appreciation - these kinds of problems aggressively get solved but we reward financially - the creation of monopolies
3. This then leads to all kinds of things: styling of innovation; but also pronounces the accumulation of capital
4. The solution is whether you can construct a company in another way
5. I think its now clear that you strive to be too greedy - that power / money will eventually corrupt
1. Google search results
2. Uber vs lyft
3. Microsoft
6. But this process takes years
There are 2 sides to the economy, supply and demand.
Yes, the policies you describe do boost demand and that does cause inflation, but the supply side is not irrelevant. Less NIMBYism will help with housing costs, and maybe some reform could help with education supply. If demand is increasing (for example due to population growth and finance), ideally supply should also be able to increase.
This is a very well written argument. Any time government makes borrowing some asset easier, it gets abused. Subsidies, barring few exceptions are bad for the economy and now-a-days there seems to fairly unanimous agreement among economists about the same.
Countries like The Netherlands or Germany are considered so stable by the financial sector that they can get loans at negative interest rates. At that point, why not get the loan?
This article doesn't even answer its own question of "how".
For those interested in the topic, I highly recommend Connie Bruick's Predators' Ball and Liar's Poker by Michael Lewis.
> Adam Smith, the father of modern capitalism
I hope we can stop conflating free markets for capitalism. Capitalism is to free markets what communism is to socialism. Adam Smith was very much focused on free markets, not capitalism. The author of the article, makes it clear later with
> Adam Smith, who believed that for markets to work, all players must have equal access to information, transparent prices and a shared moral framework
Capitalism often means different things to different people and it's often to an authors rhetorical benefit to leave it so.
When people say capitalism they typically mean one or more of the following:
* Free markets
* Free trade
* Private ownership of the factors of production
* A form of economic organization characterized by tradable claims of ownership, & ownership separate from management.
* A form of economic organization where the primary driver of the firm is profit.
* A counterpoint to socialism.
* A counterpoint to centrally planned/managed economies.
By never being clear about what one means, and just saying 'capitalism' a skilled rhetorician can convince you one thing is good (or bad) and then lump others in as part and parcel.
As you point out profit seeking businesses do not like free markets.
I can't help but wonder how much of this would have been fixed by letting them fail. This is way out of my ballpark, but it still bothers me a lot that they don't face the same consequences I do for making mistakes.
Iceland let its banks fail and protected the taxpayers, and a few years later the economy recovered just fine. It's at a much smaller scale than the US or EU economy though, but still.
Or, bail them out (emergency liquidity, QE1, etc) but also nationalize them at least on a temporary basis so that as they recover, the profits do not go to private pockets but rather are socialized.
Exactly right. There has to be real consequences or else you get what we have right now which are these entities that are so powerful they can shift accountability away from themselves and thereby socialize all their losses while profiting to the tune of hundreds of billions of dollars.
The sad thing about this is that it seems like we haven't learned from the past. One of the hottest things in my local community right now is flipping houses. You have people levereged to the hilt with hard money loans, flippers teaching classes (and providing hard money loans), and home prices at or exceeding 2008 levels.
No no no, you aren’t understanding, let me aid you in doing so.
The people in 2008 just timed the market poorly. This time around, we’ll see all the tell-tale signs of a housing crash and get out right before it does so, all cash. Then, when all the stocks (Because, of course, banks will lose out on the highly leveraged positions of our non-fortuitous peers) have tanked, we’ll simply buy them at rock bottom prices, riding a wave of financial security into the nursing home.
Banks were supposed to be stable and boring. The quest for 'financial innovation' in the heady 80s accompanied by rocketing bonuses and compensation has led to highly unstable economies with risk and reward mixed up with government intervention, too big to fail, regulatory capture and lobbying and now basically stand isolated.
During the asian financial crisis the IMF and WB were gung ho about free markets, austerity and enforcing failure without exception but as soon as it hit western economies the whole field of economics changed with words like 'too big to fail' and 'systemic risk' entering the economic vocabulary.
How does one explain oil being at $40 and $140 with supply and demand and free markets. There is a lot more going on that is often hidden behind jargon that obfuscates than informs.
Isn't oil a commodity with a variable supply but relatively fixed demand? Big price swings are what you would expect in a situation like that.
One can argue that some suppliers act "irrationally" when they artificially restrict their output to drive up prices (OPEC), but this is what you would expect to see in that situation.
I'm not sure how the author can assert with a straight face that Dodd-Frank is essentially sacred, a lack of community banks is hurting the economy, and that it's all the big banks' fault.
A loan to your your local mom-and-pop shop is a much riskier investment than a bond to a large corporation. DFA discourages risk-taking with the new capital requirement rules. Thus, community banks are fighting over a small pool of profitable loan opportunities and their numbers shrink. On the other side, small businesses have a harder time getting loans.
Regulatory compliance overhead from DFA hits community banks harder than big banks as well, so they're consolidating and leaving fewer true community banks.
None of this is has much to do with the actions of big banks. It's the natural consequence of DFA. If you don't like the status quo, you need to change DFA. Not necessarily to pre-2007 rules, but some small changes could provide a big boost to community banks.
Embracing technology could be a better solution. Government should fund open technology development as necessary to ease the burden of financial regulatory compliance. Technology could and should make it possible for smaller banks to comply with federal regulations with the same efficiency as big banks -- at the same time, federal regulations should be allowed to become as complex as necessary to surface and discourage fraud and systemically risky behavior.
Free markets are all good until the government fail to regulate them. Decentralization from state and political influence is good, until nobody is in control anymore. Then it's chaos.
To be frank I think that US banks might be influenced by foreign powers just like it happened for the last election.
I think that finance will damage sovereignty in the long run. It really looks like common citizens don't really have a say on how finance work in terms of politics.
The problem is, that we let banks become so big and important for our economies, that they can make the rules, if we want it or not.
The rules that Obama made, where hardly enough to prevent the biggest problems, of the system. But even those are abolished by the new president, since they might limit the possible profits, rich people can make.
And so we live on in the land of unlimited profits for the 0,1% and the unlimited losses for society.
1. The problem with financial services is customers are greedy - not banks
2. The challenge in building any business - is that they always start by trying to solve a problem - but power always corrupts
1. If google’s aim was to truly organise the worlds information or xxx would it behave like thsi
2. We say capitalism is good as through the pursuit of capital appreciation - these kinds of problems aggressively get solved but we reward financially - the creation of monopolies
3. This then leads to all kinds of things: styling of innovation; but also pronounces the accumulation of capital
4. The solution is whether you can construct a company in another way
5. I think its now clear that you strive to be too greedy - that power / money will eventually corrupt
1. Google search results
2. Uber vs lyft
3. Microsoft
6. But this process takes years
Building financial services in a way that doesn't corrupt is as hard / harder than building a serach engine / browser / car sharing company that will last for 1000s of years rather than decards
[+] [-] dalbasal|8 years ago|reply
For example, health services are largely financialized via insurance. IE, you don’t directly buy health services, you buy insurance which buys health services. You don’t buy a house, you get a mortgage. You don’t support your parents (or colleagues) in their old age, you pay into pension or superannuation schemes. Education via student loans. Monthly expenses via credit card debt. Large ticket items via dealer finance. Public services via national debt…….Companies via private equity. Everything has a financial layer between payment and consumption.
Underlying a lot of this is a relatively simple fact that if debt is available, consumers (from 18 year olds to Finance Ministers) will take it. If loans are available for certain products, more of those products will be consumed.
Another (possibly evil) driver is that governments have chosen financialization as instruments for promoting stuff they want to promote. Need more corn? Crop insurance subsidies. Educate the masses? Subsidise student loans. Promote home ownership? Implicitly guarantee retail banks’ losses. Medical care for all? Tax free(subsidy) insurance. Flood problems? Flood insurance. Poverty? Microfinance.
So, banks got big. This has all sorts of weird effects.
One of the biggest problems in my opinion is the inflationary effect of this process. Real estate prices in many places are simply the amount that a bank is willing to lend buyers. If banks increase the amount a buyer can loan, house prices increase proportionally. IMO, the American healthcare saga is not really about ideology or competence or any of the stuff they talk about. The problem is that after 2-3 generations of wide scale subsidised financialization, prices & costs are so high.
My final thought is that part of the problem is the prominence of finance people in pubic decision making. They know finance. They believe in it. They use it to solve problems. They don’t see baks getting bigger as a problem. It’s kind of like the lawyer problem, who also have a lot of presence in politics. That means the legal field gets bigger all the time.
[+] [-] dmix|8 years ago|reply
Indeed, I've read a few articles in NYTimes/WSJ now on the sale of public services in the US such as fire and water services to private equity firms. And the whole thing is told as a cautionary tale about banks and capitalism, which misses the bigger picture in how these things always start.
Typically the problems start because the government was overleveraged from taking on too much debt, typically due to poor financial management fueled by initially cheap capital from bankers operating in and out of government. Then when hard times come they continue to seek the easy answers from the bankers (instead of making hard choices like spending less) and end up selling off public resources giftwrapped in pseudo-market sounding language with very little of the actual benefits of markets: competition, private salaries, flexibility, etc.
These "banks" are famously like an octopus wrapping their tentacles around everything. We have some old effective methods for handling this type of behaviour when it's used improperly in the private sector, and there the harm is limited to a few usually wealthy parties. But it starts to get dangerous when these half-baked financial schemes that have worked in private markets get pigeonholed into government. Critical services like emergency services or drinking water are often ill-suited (and more importantly ill-prepared) to handle the potential downside.
Hopefully one day politicians will learn this lesson and learn to keep things simple in the public sector. Governments everywhere have a consistent track record of not managing money well and have a high-turnover of executives by design, so any complex financial instruments are just setting them up for failure and exploitation. Anything to do with government should be made dummy proof and straightforward. Public services should be run like public services. Mixing of private/public should be the exception, not the standard. And I say that as someone biased towards the private sector.
[+] [-] vtange|8 years ago|reply
Sometimes I feel like this "extra layer"/middleman-adding is not only just to enable government interventions but is just fluff added so we could create jobs for those whose skills don't go beyond the typical white-collar worker. I might be wrong, but the image of extraneous University administrators and "not-enough" skilled labor kinda paints this picture.
[+] [-] SilasX|8 years ago|reply
For example, if I have extra money, and I know someone who could ramp up his productivity if only he could make a one-time investment (say, a cow for his farm), then I buy him a cow in return for a share of its milk. Then, to diversify, I can find thirty such people. Then I find someone who can sell the milk for a cut...[1]
Instead of all of that, we have banks, where I just give them the money, and they make the loans (and do screening, credit reporting, foreclosure, etc) and pass me a cut of the returns.
Nothing is wrong with that. The problem is when you have perverse incentives to start with (e.g. in fields like health care, or with lenders who have asymmetric information about the loans in a portfolio there's excessive trust in the vetting), where financialization just puts the same problem on steroids.
[1] Late edit: a better example of the "impure exchange" might be if I wanted to save for my retirement so I raised one more cow than I usually would with the intent to lend it out to others who are still working in return for milk, with the usual frictions like needing to convert to non-milk.
[+] [-] clairity|8 years ago|reply
some of this is due to a lack of financial literacy on the part of consumers (financiers know that loans should come with an interest rate, not a charge for the privilege of loaning the money in the first place, but consumers on the whole apparently don't).
but there is also a regulatory mechanism exploited by consumer banks: FDIC insurance. without insurance, people are understandably reluctant to loan money to banks since they don't know if they'll get the money back. so the government (again, understandably) steps in and guarantees with tax dollars that you'll get that money back, even if the bankers are crooks. but of course, that means the government must try to tease out the crooks with a stringent set of tests and regulations around who they'll insure. and just like that, you have an anti-competitive choke point where incumbent banks use the regulations to guard against future competitors by keeping the regulatory barrier high.
(this is just another example of the financialization via insurance that you elucidate)
also, use cash. it's transaction-cost free, anonymous and universally accepted.
[+] [-] cm2187|8 years ago|reply
[+] [-] nilanp|8 years ago|reply
[+] [-] Ilverin|8 years ago|reply
Yes, the policies you describe do boost demand and that does cause inflation, but the supply side is not irrelevant. Less NIMBYism will help with housing costs, and maybe some reform could help with education supply. If demand is increasing (for example due to population growth and finance), ideally supply should also be able to increase.
[+] [-] abhinavkulkarni|8 years ago|reply
Economist has presented a well written argument here: https://www.economist.com/news/briefing/21651220-most-wester...
[+] [-] jorvi|8 years ago|reply
[+] [-] specialist|8 years ago|reply
[+] [-] golergka|8 years ago|reply
[+] [-] branchless|8 years ago|reply
We have a total disaster mid-way through. This has to change.
[+] [-] snomad|8 years ago|reply
For those interested in the topic, I highly recommend Connie Bruick's Predators' Ball and Liar's Poker by Michael Lewis.
> Adam Smith, the father of modern capitalism
I hope we can stop conflating free markets for capitalism. Capitalism is to free markets what communism is to socialism. Adam Smith was very much focused on free markets, not capitalism. The author of the article, makes it clear later with
> Adam Smith, who believed that for markets to work, all players must have equal access to information, transparent prices and a shared moral framework
[+] [-] JackFr|8 years ago|reply
When people say capitalism they typically mean one or more of the following:
* Free markets
* Free trade
* Private ownership of the factors of production
* A form of economic organization characterized by tradable claims of ownership, & ownership separate from management.
* A form of economic organization where the primary driver of the firm is profit.
* A counterpoint to socialism.
* A counterpoint to centrally planned/managed economies.
By never being clear about what one means, and just saying 'capitalism' a skilled rhetorician can convince you one thing is good (or bad) and then lump others in as part and parcel.
As you point out profit seeking businesses do not like free markets.
[+] [-] triplesec|8 years ago|reply
[+] [-] blfr|8 years ago|reply
[+] [-] johndevor|8 years ago|reply
Would you explain this a bit more?
[+] [-] specialist|8 years ago|reply
[+] [-] Pigo|8 years ago|reply
[+] [-] laurent123456|8 years ago|reply
[+] [-] graedus|8 years ago|reply
[+] [-] turk184|8 years ago|reply
[+] [-] southphillyman|8 years ago|reply
[+] [-] alextheparrot|8 years ago|reply
The people in 2008 just timed the market poorly. This time around, we’ll see all the tell-tale signs of a housing crash and get out right before it does so, all cash. Then, when all the stocks (Because, of course, banks will lose out on the highly leveraged positions of our non-fortuitous peers) have tanked, we’ll simply buy them at rock bottom prices, riding a wave of financial security into the nursing home.
[+] [-] throw2016|8 years ago|reply
During the asian financial crisis the IMF and WB were gung ho about free markets, austerity and enforcing failure without exception but as soon as it hit western economies the whole field of economics changed with words like 'too big to fail' and 'systemic risk' entering the economic vocabulary.
How does one explain oil being at $40 and $140 with supply and demand and free markets. There is a lot more going on that is often hidden behind jargon that obfuscates than informs.
[+] [-] jandrese|8 years ago|reply
One can argue that some suppliers act "irrationally" when they artificially restrict their output to drive up prices (OPEC), but this is what you would expect to see in that situation.
[+] [-] chibg10|8 years ago|reply
A loan to your your local mom-and-pop shop is a much riskier investment than a bond to a large corporation. DFA discourages risk-taking with the new capital requirement rules. Thus, community banks are fighting over a small pool of profitable loan opportunities and their numbers shrink. On the other side, small businesses have a harder time getting loans.
Regulatory compliance overhead from DFA hits community banks harder than big banks as well, so they're consolidating and leaving fewer true community banks.
None of this is has much to do with the actions of big banks. It's the natural consequence of DFA. If you don't like the status quo, you need to change DFA. Not necessarily to pre-2007 rules, but some small changes could provide a big boost to community banks.
[+] [-] breatheoften|8 years ago|reply
[+] [-] specialist|8 years ago|reply
[+] [-] jokoon|8 years ago|reply
To be frank I think that US banks might be influenced by foreign powers just like it happened for the last election.
I think that finance will damage sovereignty in the long run. It really looks like common citizens don't really have a say on how finance work in terms of politics.
[+] [-] PythonicAlpha|8 years ago|reply
The rules that Obama made, where hardly enough to prevent the biggest problems, of the system. But even those are abolished by the new president, since they might limit the possible profits, rich people can make.
And so we live on in the land of unlimited profits for the 0,1% and the unlimited losses for society.
[+] [-] nilanp|8 years ago|reply
Building financial services in a way that doesn't corrupt is as hard / harder than building a serach engine / browser / car sharing company that will last for 1000s of years rather than decards
[+] [-] pjkundert|8 years ago|reply
https://www.youtube.com/watch?v=ZUXd3LJZ3hg
[+] [-] mainframer|8 years ago|reply
[+] [-] sandstrom|8 years ago|reply
It explains the history of banking, why banks are useful and also why many banks today are dysfunctional and harmful.
[+] [-] acty1|8 years ago|reply
They will not be our masters much longer now that they will lose their monopoly on trust.
[+] [-] rb808|8 years ago|reply
[+] [-] wu-ikkyu|8 years ago|reply
If you work for money, then by extension you work for the bank, because that is where money is apparated.
The bank is the one who decides how much money is to be created, and who gets it first.
[+] [-] turk184|8 years ago|reply
[deleted]
[+] [-] eternalban|8 years ago|reply
"Mainstreet vs Wallstreet". <expletive deleted>