tag:blogger.com,1999:blog-17232051.post2129965788819025186..comments2024-03-18T22:32:52.802-04:00Comments on Noahpinion: How much value does the finance industry create?Noah Smithhttp://www.blogger.com/profile/09093917601641588575noreply@blogger.comBlogger120125tag:blogger.com,1999:blog-17232051.post-37391051211660828402013-06-04T09:44:38.964-04:002013-06-04T09:44:38.964-04:00"The bar for policy intervention to" _pr..."The bar for policy intervention to" _preserve_ "value-destroying industries should be" even higher. "Eventually, swindlers, hucksters, and useless rentiers will" find that they can get a very good return on their investment in government power to prevent themselves from being "driven from the market". That's been a bigger problem than excessive regulation during the past few years. MikeW_CAnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-44142120288752146172013-06-01T07:31:54.880-04:002013-06-01T07:31:54.880-04:00""We know that the free market is always...""We know that the free market is always perfect and good and that policy can't help." (That is something that ideological libertarians often say, and I think it's extremely unhelpful for the econ profession when they say it.)"<br /><br />This is wrong. Ideological libertarians understand that markets are not perfect. Nice straw man. Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-40481694883597829012013-02-20T23:59:21.903-05:002013-02-20T23:59:21.903-05:00Both should be required reading for any introducto...Both should be required reading for any introductory finance class. There is so much in these essays that one blog post couldn't hope to adequately cover the topic, so don't expect this to be anything resembling a complete response.<br /><a href="http://www.goldiraaccounts.com/" rel="nofollow">gold ira investing</a>Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-70293655582993578142013-02-02T07:30:14.477-05:002013-02-02T07:30:14.477-05:00"Similarly, it would be foolish to say "..."Similarly, it would be foolish to say "I don't see how this finance industry is adding value, so let's regulate the heck out of it."<br /><br /><br />Yes it would be foolish to say that....... but no one who is suggesting regulations IS saying that! What we have are people who DO understand the industry as well as anyone, people like Bill Black, Yves Smith, Warren Mosler to name just a few, saying that banking is running amok. Private debt created finance is inherently unstable, that is why Central Banking evolved. Central Banks stand to be lenders and buyers of last resort and are tools of the finance industry to keep their prices from wildly fluctuating in a pure market. Unfortunately, too often recently they are becoming buyers and lenders of FIRST resort throughout the western world.<br /><br />While all the VSP wail about govt debt levels which approach 100% of GDP the private debt levels are almost four times that if one includes the shadow banking debts........ and every last cent of this private debt was created BY the financial sector(and then sent to govt balance sheets during crisis so their institutions can "appear" solvent). It is what the financial sector does, it creates debt.<br /><br />Greghttps://www.blogger.com/profile/03139782404004492965noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-42718731179324044052013-02-01T04:24:47.487-05:002013-02-01T04:24:47.487-05:00Financial services are the economic services provi...Financial services are the economic services provided by the financial firms which constitutes of a group of accountants Ireland. <a href="http://www.odonoghueandcoaccountants.com/about-us" rel="nofollow">O'Donoghue Accountants</a> provides a broad range of services to manage money, including tax consultation and tax relief, audit services to companies or individuals, business advisory services and related service.Anonymoushttps://www.blogger.com/profile/06570556839560568896noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-18083950583962627502013-01-28T02:08:00.808-05:002013-01-28T02:08:00.808-05:00Excellent information,this blog is really source o...Excellent information,this blog is really source of many many information.please keep it up.<br /><a href="http://www.aonlinecasino.co.uk/" rel="nofollow">gaming casino</a><br /><br />Anonymoushttps://www.blogger.com/profile/07718920012923235588noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-62637244769354530622013-01-27T21:39:09.812-05:002013-01-27T21:39:09.812-05:00I stopped reading at "We start with the first...I stopped reading at "We start with the first welfare theorem: loosely, supply, demand and competition lead to socially beneficial arrangements."<br /><br />Wrong. He left out "in the absence of externalities..." And that's the "assume we have a can opener"/"then a miracle occurs" part of economics. If wishes were horses...<br /><br />Joan Martinez-Alier said it best, "Externalities are not so much market failures as cost-shifting 'successes'." <br /><br />Every single word Mr. Cochrane wrote after "loosely" is a lie.Sandwichmanhttps://www.blogger.com/profile/11159060882083015637noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-51453749150057428002013-01-25T10:06:36.192-05:002013-01-25T10:06:36.192-05:00""This highlights an interesting point t...""This highlights an interesting point that often gets lost in discussions like this: Value-destroying activities often get naturally eliminated over time. This is evolution at work."<br /><br />This evolution can't occur without consumer choice..."<br /><br />Of course it can - and it often does. Inside every single firm and organisation.<br /><br />reasonhttps://www.blogger.com/profile/10958786975015285323noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-14814877157064542012013-01-24T14:25:05.657-05:002013-01-24T14:25:05.657-05:00Yes - but why is the spread not competed away?
Th...<i>Yes - but why is the spread not competed away?</i><br /><br />That's a good question. <br /><br />One possible reason is that finance companies are paid to gather information. Gathering costly information = being able to make money on a spread.<br /><br />For banks, the spread comes from liquidity transformation. This of course carries the risk of bank runs.<br /><br />Some finance companies just make a spread by finding a way to extract rents from markets, by guessing what people are going to do before they do it, and "winning the tournament".<br /><br />There are other ways too.<br /><br />Note that the question of "why is there a spread" is just as good a question when rates of return are very high overall as when they are low...<br /><br /><i>And yes I agree the bank deposits become riskier - but they are insured</i><br /><br />Yes, but in exchange for deposit insurance (FDIC), banks agree to limit their risk-taking.<br /><br />Of course, you have shadow banks and quasi-banks, who have de facto insurance through implicit bailout guarantees and then take lots of risk, but that is a somewhat different issue...<br /><br /><i>And perhaps the risk is not so easy to measure or perceive as the risks would have been with direct investment. So it is not so much a case of sweet talking as pulling the wool over the eyes. If that is de-facto a good thing or not - I'm not sure, but it sure goes against the grain if you think transparency is a good thing.</i><br /><br />Agreed. The flip side of the "money doctors" idea is that money managers - or banks! - might be <i>bad</i> money doctors, encouraging people to take too much risk, much like a doctor who over-prescribes treatments.Noah Smithhttps://www.blogger.com/profile/09093917601641588575noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-56504935436531851112013-01-24T03:33:10.818-05:002013-01-24T03:33:10.818-05:00"Finance companies make money on the spread.&..."Finance companies make money on the spread."<br /><br />Yes - but why is the spread not competed away? And yes I agree the bank deposits become riskier - but they are insured - so now we come to the real point - or do we? And perhaps the risk is not so easy to measure or perceive as the risks would have been with direct investment. So it is not so much a case of sweet talking as pulling the wool over the eyes. If that is de-facto a good thing or not - I'm not sure, but it sure goes against the grain if you think transparency is a good thing.<br />reasonhttps://www.blogger.com/profile/10958786975015285323noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-47411064855717676172013-01-23T13:39:47.664-05:002013-01-23T13:39:47.664-05:00And in the current situation with both:
a. Financi...<i>And in the current situation with both:<br />a. Financial profits very high<br />b. rates of return very low<br />I don't understand how that matches with the story. Why aren't these profits being competed away? How can be people be happy taking risks for little return?</i><br /><br />Rates of return are low historically, but not compared to "safe" assets like Treasuries. Finance companies make money on the spread.Noah Smithhttps://www.blogger.com/profile/09093917601641588575noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-19953479182480496512013-01-23T13:37:49.822-05:002013-01-23T13:37:49.822-05:00Sorry, I missed your reply - OK I sort of see what...<i>Sorry, I missed your reply - OK I sort of see what you are getting at, but I don't think that is actually what happens. I think what banks do is take money from risk averse people and give it to gamblers. The people are actually different people.</i><br /><br />Well, the more risks the banks take, the more risky your bank deposits become...Noah Smithhttps://www.blogger.com/profile/09093917601641588575noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-70973939045532970522013-01-23T11:35:36.817-05:002013-01-23T11:35:36.817-05:00And in the current situation with both:
a. Financi...And in the current situation with both:<br />a. Financial profits very high<br />b. rates of return very low<br />I don't understand how that matches with the story. Why aren't these profits being competed away? How can be people be happy taking risks for little return?<br /><br /> Personally, I think financial enterprises de facto (if not necessarily on paper - but via leverage) OWN an increasing amount of th economy and are extracting rents from it.reasonhttps://www.blogger.com/profile/10958786975015285323noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-80828418503952562372013-01-23T11:23:59.775-05:002013-01-23T11:23:59.775-05:00Sorry, I missed your reply - OK I sort of see what...Sorry, I missed your reply - OK I sort of see what you are getting at, but I don't think that is actually what happens. I think what banks do is take money from risk averse people and give it to gamblers. The people are actually different people.reasonhttps://www.blogger.com/profile/10958786975015285323noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-37672292651534856732013-01-23T11:19:29.209-05:002013-01-23T11:19:29.209-05:00Instead of talking about gold - let's talk abo...Instead of talking about gold - let's talk about something similar - ranches in Arizona. It's desert - not much use to anyone (like gold), but the rich like riding their horses or motorbikes on big stretches of spectatular looking countryside. And it is endowment - fixed amount, nobody made it. Let them invest in ranches in Arizona instead of gold. Now do your conclusions change? If so why?reasonhttps://www.blogger.com/profile/10958786975015285323noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-59677562655235668842013-01-23T11:04:32.607-05:002013-01-23T11:04:32.607-05:00OK OK, that was mean. Sorry.
Instead of trying to...OK OK, that was mean. Sorry.<br /><br />Instead of trying to harp on this example I was making (which is a perfectly good one, but we can go over that some other time), let me make my point a different way.<br /><br />Suppose there is some amount of risk that people would choose to take.<br /><br />However, suppose that some emotion prevents them from actually pulling the trigger and taking that risk, even though they'd be happier if they just went ahead and did it (imagine someone who would like to be in the pool but is too afraid of the cold to jump in).<br /><br />If this happens, the amount of risk taken by society as a whole will be sub-optimal.<br /><br />Of course, the government could just induce people to take more risk. But doing this would raise not just the level of risk actually taken, but also the desired level of risk. so the gap between desired and actual would still exist.<br /><br />And "money doctors" may help the situation by holding people's hand and helping them take the risks they want to take. In a way that an impersonal institution, including a central bank, government, etc., fundamentally cannot.<br /><br />Does this make sense?Noah Smithhttps://www.blogger.com/profile/09093917601641588575noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-16126145377570014132013-01-23T10:58:59.333-05:002013-01-23T10:58:59.333-05:00Sigh - this is not getting very far is it. There b...<i>Sigh - this is not getting very far is it. There being a fixed amount of gold makes it worse. SOMEBODY has to own the gold - so if it is not rich people owning it to store in the basement - who will it be? A central bank - a depository bank as reserve - a government? I'm seriously puzzled</i><br /><br />No, the rich people will still own it. In one scenario, that's all they own. In the other scenario, they own all of that gold plus stock as well; there is more total wealth to own, so they hold all that gold, plus stocks too.<br /><br /><i>I offered you a way out with imported gold</i><br /><br />A way out of what...the crushing grip of your inability to understand my simple example? ;-)Noah Smithhttps://www.blogger.com/profile/09093917601641588575noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-19614385439417381322013-01-23T10:54:22.883-05:002013-01-23T10:54:22.883-05:00Sigh - this is not getting very far is it. There b...Sigh - this is not getting very far is it. There being a fixed amount of gold makes it worse. SOMEBODY has to own the gold - so if it is not rich people owning it to store in the basement - who will it be? A central bank - a depository bank as reserve - a government? I'm seriously puzzled - endowment gold seems to me to be just a red herring - except for the effect caused by a wealth effect related to it's price that Nick Rowe pointed to. I still don't understand your point. I offered you a way out with imported gold - and a terms of trade effect, but you didn't take route. Are you saying that only rich people invest - and if rich people are keen on hoarding gold then no investment can be done? I thought the joint stock company solved that one.reasonhttps://www.blogger.com/profile/10958786975015285323noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-7742332229387570072013-01-23T03:45:11.541-05:002013-01-23T03:45:11.541-05:00Another way to think about it - is with a mortgage...Another way to think about it - is with a mortgage, ownership changes discretely. With this arrangement it changes proportionally. (The thrown out "renter" would recieve a share of the income when somebody else rents the place).reasonhttps://www.blogger.com/profile/10958786975015285323noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-62345420559903520682013-01-23T03:41:12.656-05:002013-01-23T03:41:12.656-05:00OK think what happens if the buyer can't pay. ...OK think what happens if the buyer can't pay. <br /><br />Now the financer no longer can foreclose - but what he can do is throw the "renter" who can't pay the rent out - or he can buy back some of his equity in place of the rent.<br /><br />Now do you see the difference?reasonhttps://www.blogger.com/profile/10958786975015285323noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-63876016395599143582013-01-23T01:30:05.536-05:002013-01-23T01:30:05.536-05:00Actually, from the first wave of supernovae. The g...<i>Actually, from the first wave of supernovae. The gases they ejected, which contained heavy elements, eventually gave rise to solar systems with heavy elements. Assuming you mean our Sun by "the Sun" I cannot image a mechanism that would move heavy atoms from the Sun to the Earth.</i><br /><br />Ah, thanks for the tip.<br /><br /><i>It comes from being drunk on your own cool-aid (models).</i><br /><br />Evolution - or, really, natural selection - isn't a model. It's a principle. We know that in this case, the selection pressure is "getting people to pay you for stuff".<br /><br /><i>Another point: as far as I'm concerned, "face-ripping" is fraud. If it's not fraud under the law that's probably because the law has been corrupted by financial interests.</i><br /><br />Well, you appear to be correct:<br />http://www.forbes.com/sites/johnwasik/2013/01/10/wall-street-winning-war-against-investor-protection/<br /><br /><i>A final note on the subject: in my recollection of the real world, outside the medical context that slogan has been used mostly by right-wingers intent on low taxes for the wealthy at the expense of any action benefitting the non-wealthy. Having witnessed several decades of this I'm throughly sick of it.</i><br /><br />Well, I kind of disagree with that, but I'm open to being convinced otherwise by non-ranty thoughtfulness...<br /><br /><i>My apologies for the lack of coherence in this rant. I'm too upset to organize it coherently; besides, doing so would take more effort than I'm prepared to exert and probably more expertise than I possess. But you really need to address the question of the other side of no harm.</i><br /><br />But the other side of "do no harm" is that sometimes regulation doesn't do harm, it does good! Noah Smithhttps://www.blogger.com/profile/09093917601641588575noreply@blogger.comtag:blogger.com,1999:blog-17232051.post-24840524516233580152013-01-22T23:40:53.466-05:002013-01-22T23:40:53.466-05:00"Actually, from the first wave of supernovae...."Actually, from the first wave of supernovae. The gases they ejected, which contained heavy elements, eventually gave rise to solar systems with heavy elements."<br /><br />A little sociological note here: this account was dreamed up by a group of cosmologists of whom the most prominent was Fred Hoyle. But Hoyle managed to so annoy the powers that be in physics that although his collaborators got a Noble for it, he was left out.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-14763886285847715682013-01-22T23:35:52.734-05:002013-01-22T23:35:52.734-05:00"Where does the gold come from?
Originally, ..."Where does the gold come from?<br /><br />Originally, it came from nuclear reactions in the heart of the Sun. Or so we think."<br /><br />Actually, from the first wave of supernovae. The gases they ejected, which contained heavy elements, eventually gave rise to solar systems with heavy elements. Assuming you mean our Sun by "the Sun" I cannot image a mechanism that would move heavy atoms from the Sun to the Earth.<br /><br /><br />"If large parts of finance are valueless, why would people, especially rich people who are probably pretty savvy, pay for these things? Maybe value is being created and we just don't understand it."<br /><br />This kind of argument that drives non-economists, such as myself, crazy. I suppose it would be too radical to ask the people paying? (I rarely have trouble imagining possible reasons for almost anything, as long as I'm not required to actually test the idea against the real world.) It comes from being drunk on your own cool-aid (models).<br /><br />Another point: as far as I'm concerned, "face-ripping" is fraud. If it's not fraud under the law that's probably because the law has been corrupted by financial interests. I suspect that there is little that would drive this type of transaction out of the market faster than the sight of some of the people who profited serving prison terms.<br /><br />Cochrane and co. will of course argue that this would discourage potential efficiency-producing innovation. Yeah, right. Question: how much extra efficiency for how long will it take to make up for the harm done by the last set of supposedly efficiency-producing innovations? Which is how many trillion dollars in lost potential economic activity, and counting, not to mention prolonged unemployment exceeding that in the Great Depression. Etc., etc.. This is your idea of doing no harm?<br />Also reference Paul Volker's famous comment that the only financial innovation he could think of that was unambiguously welfare-enhancing was the ATM.<br /><br />All things considered, I'm of the opinion that at this point financial innovation is guilty until proven innocent and should be regulated accordingly. "First do no harm" means "First be sure there won't be any more explosions." <br /><br />A final note on the subject: in my recollection of the real world, outside the medical context that slogan has been used mostly by right-wingers intent on low taxes for the wealthy at the expense of any action benefitting the non-wealthy. Having witnessed several decades of this I'm throughly sick of it. <br /><br />My apologies for the lack of coherence in this rant. I'm too upset to organize it coherently; besides, doing so would take more effort than I'm prepared to exert and probably more expertise than I possess. But you really need to address the question of the other side of no harm.<br />Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-39414955894888237732013-01-22T21:52:53.028-05:002013-01-22T21:52:53.028-05:00I was surprised not to see more discussion from No...I was surprised not to see more discussion from Noah of regulatory and tax gaming as areas of finance that don't add value for society. <br /><br />These abound - lots of activities (in housing finance and elsewhere) were designed to create securities with a particular credit rating to meet regulatory mandates. The goal was, of course, to create the highest yielding security that would get that rating, not really to balance risk and reward. Similar regulatory gaming in shadow banking - essentially setting up "banks" not called banks and "deposits" not called deposits to get higher returns than available through related banks. <br /><br />In asset management, of course, there is also often a tax management aspect, especially at the high end of the market.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-17232051.post-82562477110961101932013-01-22T21:44:34.788-05:002013-01-22T21:44:34.788-05:00Reason - I don't see how your proposed equity ...Reason - I don't see how your proposed equity arrangement ("the financer gets a nominal share of equity and you pay it a rent + purchase some of the equity at an agreed rate") is really equity and not just debt using different terminology. The way that you describe it sounds a lot like debt - that's basically interest ("rent") plus principal repayment ("purchase some of the equity at an agreed rate"). The financier presumably needs some recourse if these amounts aren't paid - that's the only way the structure works - so in the end this structure is just debt by another name.Anonymousnoreply@blogger.com