These are the kinds of questions we all should have so much of and over which we can disagree and learn so much from.
This is what I think, but the answers fall in to a kind of 'what is your taste for living' sphere which is not strictly a fact thing.
Money in paper or electronic form is inherently worth nothing. It's vapour. It has no value on its own. It only has value because we agree that it does. Seashells and gold (for the most part) are the same. Our agreement that it has some value is buttressed by the law and societies ability and desire to enforce that law.
Agree with all of the above.
There are obviously a few different ‘lens’ or ‘systems’ from which you can approach these questions – both from inside the current system (Capitalism/Democracy) or from outside it (for instance Marxist approaches).
For the sake of simplicity, I’ll mainly reply from a perspective that fits into the current system of Capitalism and Democracy.
The monetary system was much simpler, but perhaps it was as complicated/sophisticated as could have been handled at the time. The nature and uses of money grew because there was some sort of demand for it. The number if ways to store wealth and obtain credit is enormously more varied. The way is which risk is managed is so much more flexible.
This is also agreeable.
You may be referring to the over-financialisation of the economy. There is a very strong argument for that.
Thanks, that’s a good way of putting it.
Many of us who look into these things, care about societal outcomes and work in the industry rub our eyes at how much of the economy is made up of 'financial services'. Now some of those are very primary to basic civic function. You need a bank to make basic transactions like payroll and you need to make loans and supervise them. Others are things like accounting and tax services... very core financial services.
I don’t think there is anything disagreeable here – it is pretty much impossible to imagine the current system being viable without some kind of banking and financial service apparatus.
Now, there are many other ways to store and transfer wealth. Having a secondary market is very useful to improve resource allocation. But exactly how many people do you need in this field? Exactly how much value is being created via price discovery? Do you really need 20x synthetic CDO over the actual base one?
How much leverage is reasonable to take? By the way, debt is not all about bringing future consumption forward. It's greatest productive use is to allow investment in productive assets including the development of intellectual property. Without debt, great stuff doesn't get built without force.
Who actually wears the risk?
In my view, there is far too much greed at all levels. From the stripper in Las Vegas who somehow things she really can afford 5 houses, to the retiree who wants to believe the commission backed financial adviser that this latest hot hedge fund can double or triple their wealth in four years. To the hedge fund manager who gets all the upside and little of the downside with the assets they have and act in accordance with their incentives.
The incentives we all have aren't so much focused on the absolute (that we may be making $100k and that's great), but on the relative (that the lady next to me is making $120k and now I'm really pissed off). It's how we're built. We live comparatively. This leads to greed and motivation to improve and take more risk.
The tinderbox.
It is a reasonable question as to how to manage this seething mix of potency and flawed mix of incentives. Hence cycles of boom and bust. Regulation and deregulation.
Is this somehow the fault of the financial services (investment/banking) industry? I can understand that it seems like an amorphous unit where some very big wealth is created without producing a single widget. The inequality is out of whack with value. But when I look at society, how the heck does Justin Beiber earn what he does? We place a lot of value on hope and entertainment. No-one forces anyone to borrow to buy a house or to invest in BrownSkyMining Hedge Fund any more than shell out to see Taylor Swift (yes, I thought it was a great concert). How is it that Bruce Springstein gets a Congressional Medal of Honour?
The values of society create a desire for excessive risk taking. The financial services community springs up to service that need. Within that, there are also huge conflicts of interest. The CEO who has options does not necessarily have an incentive to protect the financial integrity of the community. Greenspan's 'flaw' was that the loan officers acted in their own best interests, rather than those of the bank they worked for.
This misalignment is everywhere. It creates complexity and pushes things to the max. It breaks because someone is always going to push it over. The behaviour of the financial function can be expected to do this all day long because of its incentives.
Hence there is a role for regulation. But it has to be competent and in the interests of society. And therein lies the problem.
This is good. And I agree, this is the crux of the issue.
There’s probably two main issues here that I’d like to bring up. (As an aside, it probably goes without saying that this applies to any industry, it just happens that the finance industry is extremely topical and arguably very dominant in the world today).
The first, as we’ve both touched on, is to what extent and scope the finance industry should be allowed to operate.
What is its function to be: is it there to support other industries, that is, to help facilitate the transactions between corporations or individuals, and to assist in storing their wealth? Obviously, this function should entitle it to some profit on the capital or labour it has invested if we are indeed within a system of capitalism.
However, one must ask, as you also have, how far should this be allowed to go?
Should it also be permitted to go further than this and have an entirely new role in its own right with the sole objective of creating more value (wealth/money) for itself?
Secondly how profitable should the finance industry be (both in terms of return on capital and also in magnitude in comparison to the economy as a whole).
For both of these questions a good example is participation in financial markets by big players in the finance industry. I do accept that this is a grey area, because as you said, some of this participation is assist with managing risk, storing wealth or transactional purposes. However, in other cases, the sole purpose is to create profit, and in turn these actions create new risk (for instance by use of massive leverage), and because of the massive size of the finance industry as a whole, this risk has consequences that go well beyond the industry itself.
It's hard to make a decent argument as to why this should be allowed to occur, given the inherent systematic risks (as you said, the GFC was close to causing the ‘Great Depression’ all over again).
Obviously the cost to society is massive. It’s hard to find risks created by other industries that are anywhere near the same magnitude.
If I was an alien looking down on earth, this would be a strange concept to witness, men creating money out of nothing but more money! And for what end? It’s really hard for me, as an outsider to the finance industry, to see what benefit this has to the rest of society. As you eloquently say below they don’t produce a single widget. Nothing but numbers on a screen, formerly figures on pieces of paper.
By default a lot of the discussion around this, but not limited to just this facet, has to do with how much ‘surplus value’ is created and how this is distributed in society (whether it’s to the capital owners, paid in government as taxes for re-distribution, to stakeholders such as employers etc.).
There obviously needs to be a trade-off between the risks created (to society at large) and the benefits shared. But how can these be measured? Certainly not objectively! How do you make someone accept something when they will just argue it’s not objective?
A lot of people are upset because they, whether rightly or wrongly, although they can see a large quantum of profits created by risk taking activities in the finance industry, there is a perceived lack of consequences to the individuals involved when it all goes wrong and these risks become reality.
We don’t tax corporations (of any kind) or individuals on the basis of the risks that they create for society at large, but only on the basis of profit. This is a pretty hard discussion, and it’s really hard to have, because everything in capitalism is predominately measured on a monetary basis. So it’s hard to quantify said risks because a) probability isn’t objective, b) you don’t know the costs of actions until risks become actual outcomes and c) even then there are unidentifiable costs, including those that are non-monetary (emotional, psychological). God help us with this discussion, the carbon tax / climate change debate is a really good example of how this works in practice.
As for society as a whole you make some prescient points, especially on the culture of greed, and the fact that this creates a society that can be separated into winners and losers.
(As an aside I actually like the word ‘desire’ better than ‘greed.’ But beware that itself opens a can of worms: what is desire? What causes it? The individual or an ‘Other’ amongst other deeply philosophic concerns)
Therefore I agree, the finance industry is a microcosm of society as a whole and alone it isn’t the only issue and maybe not the biggest, but the problem is as I think we’ve both kind of said, it’s magnitude is way out of whack, so it’s a pretty obvious one for which to take aim towards.
We could have a massive discussion around this. There is no end to where it could go.
Before someone laments too much about the problems with the world today, we need to imagine a counterfactual of the world without credit. I for one favour typing to you right now to farming pigs and wondering where I should take my next dump.
The key problem is the juncture of too much greed all the way from grass roots, too much misalignment in incentive all over the place and too much risk (credit). However, finance remains utterly vital. When you dig through it, there is so much that is amazing. So little could get done without it.
These issues are appreciated by people in the position to do something about it.
So, here's some of what is being done:
- increased capital required to support lending at banks
- increased supervision of the banks
- stronger financial regulation and financial stability focus
- legislation and incentives to act as a fiduciary
- smaller banks
- central clearing for OTC derivatives
- demand for better corporate governance
- Volcker Rule (remove casino banking from deposits)
It's all serious stuff. They are generally moves in the right direction, but some parts actually go too far.
Without the bail-outs, we would have gone back to the Great Depression. It would be utterly devastating. The extent of the rise in inequality is definitely wrong and that is an outcome of regulatory capture. It's ridiculous. Democracy will be tested. Capitalism and Democracy are supposed to balance each other out. What we have is a dominant capitalist system which has usurped the Republicans in the US (and other stuff too). And it affects all of us.
Thanks, that’s a pretty good way to end your post. Main takeaway is that there isn’t some magical solution, it be could be worse (a lot of us are on a good ‘wicket’ relative to history), but that being said we need to keep having discussions and finding ways to improve the lot of everyone.
Apologies in advance, my post probably has way more unanswered questions than answers.
PS: There is a whole other (related) discussion around money and the focus on obtaining it, what is gained by this approach to life, but also just as importantly what is lost. But I fear it's probably a bit beyond the scope of this discussion at this point.