

Banking Isn't Evil: software dev's view of how banking works and what went wrong - lifebeyondfife
http://www.lifebeyondfife.com/86-banking.html

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bryanlarsen
We allow and expect corporations to be amoral because of Adam Smith's guiding
hand: if you make a profit it's because somebody thought that your product was
worth at least as much as they paid for the product, probably even more. In
other words, win-win.

When a transaction isn't win-win, it's time for regulation to step in. That's
why there are limitations (but not bans) on monopolies.

The most common case of a transaction not being win-win is when the
information is asymmetrical. That's why selling a "pig in a poke" is illegal.

Banks and traders operate in this "asymmetrical information" grey area.
Arbitrage is allowed and is useful because it brings prices to their correct
level and provides liquidity to a market. But high-frequency trading is
clearly not useful to society. Who cares if it takes prices 10ms or 1 second
to complete a sale and get prices to the correct level? HFT takes money out of
the system and provides no benefit to society or the other party, and
therefore is "evil".

HFT should therefore be outlawed. But you have to be very careful. Such a law
would be very difficult to write correctly, and due to the law of unintended
consequences and the pace of change and the cost of regulatory burden, we're
probably better off without such a law.

HFT is evil. But companies that practice HFT are simply being amoral, not
immoral. So perhaps the fault lies with the government for improper
regulation, not necessarily with the companies for practicing it.

HFT is only one of the 'evil' practices that banks and large investors use.
The linked article touches others, some of which are 'evil' and some of which
aren't.

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anonymoushn
What is the alternative to permitting HFT? If we ban direct communication
between the algorithms and the exchanges, we will merely create a great deal
of busywork for the thousands of people who will be hired to manually enter
the orders produced by the algorithms. If we ban the use of algorithms
altogether, we will be legislating inefficiency into the market, to the extent
that there can be inefficiencies that are not worth the man-hours to manually
discover. We may also have a hard time enforcing either of these approaches. I
wonder how much it would cost us?

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ryanmolden
The idea that business is or should be amoral is wrong. Business, and
corporations in particular, exist and have the leeway they do because it is
generally believed the good outweighs the bad, on the balance. By saying "we
have no reason to have any scruples" you are veering into "no longer
beneficial to society on the whole" territory. While I believe there is
definitely value provided by finance (duh), some things they engage in clearly
are self serving and detrimental to an orderly society. Bundling toxic
mortgages and selling them to people under the guise "if they're stupid enough
to buy them then it's their own fault" is wrong really no matter how much one
waves his hands, yells "capitalism" and tries to act like they are doing it
for some legitimate reason.

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lifebeyondfife
I don't think business _should_ be amoral but I think it is. Businesses can do
great things, help charities, help their employees, reduce carbon footprints -
but anytime they do any of these things they squeeze all the good press they
can out of it i.e. turn it into free positive advertising.

When times are tight those are the things that businesses cut first because
they are concerned solely with money. I agree with you the toxic mortgages
were an appalling thing to offer people who don't understand about, say, the
effects of potential raised interest rates and how that might affect them. But
that's why I say businesses (all businesses) are amoral - they don't care. So
if we spot a bad business practice, like the toxic mortgages, we have to
understand that we're going to have to rely on either the government or
ourselves as consumers to fix it because business won't stop themselves from
trying to make that buck.

I'm not saying I like this being the case but that how I see it.

~~~
anonymoushn
The profitability of unsound lending is mainly an artifact of fairly recent
policy. Historically, if you were to give out loans that you knew could not be
paid, you would lose money. That does not seem to be the case any more.

If you were at a casino and wanted to make money, you might go count cards at
blackjack or try to beat the other gamblers at poker. But, if you knew that
the casino would fully reimburse you any losses, you would probably just sit
down at a roulette table and bet the house on double zero. This may or may not
be an evil thing to do, but certainly it is a rational thing to do. If
millions of Americans are harmed as a result of your policy of consistently
betting the house on double zero, perhaps they should take it up with the
casino who encourages this behavior by consistently compensating you for your
losses using money taken from the pockets of millions of Americans.

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cs702
I find the writer's explanation of the main cause of the financial crisis too
simplistic and dangerously naive: "interest rates were historically low which
made lending cheap, [so] banks had more money to lend than there were
responsible borrowers. This created a credit bubble that once over, resulted
in banks suffering large monetary losses and an atmosphere of being scared to
lend to each other."

IMHO, the structure and behavior of financial firms was a major destabilizing
force leading to the crisis.

In the years preceding the crisis, financial firms created a vast network of
complex financial claims and obligations _of their own_ that greatly exceeded
the real economy’s needs. These financial claims and obligations were at the
center of the financial crisis.

A recent working paper at the Bank of International Settlements shows that
financial flows exceeded the real economy's needs by a factor of at least 60
(!): <http://www.bis.org/publ/work346.pdf> \-- an irreverent translation of
the paper in easy-to-understand lay language is available here:
[http://www.nakedcapitalism.com/2011/09/the-very-important-
an...](http://www.nakedcapitalism.com/2011/09/the-very-important-and-of-
course-blacklisted-bis-paper-about-the-crisis.html) .

Instead of just providing a mundane but critical service to the real economy
(interconnecting the real economy's savers with its borrowers), the financial
system was _driving_ the real economy – for instance, by pushing up the prices
of many assets, particularly residential properties, simultaneously feeding on
and magnifying a housing bubble of historic proportions.

IMHO, these nonlinear feedback loops and network-amplification effects --
typical of complex, tightly interconnected, dynamic systems -- were important
root causes.

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tristan_louis
One the thing that is missing in the discussion of whether banks are evil or
not is a better dichotomy: what he describes in this entry is primarily about
transaction banking (and more particularly cash management), which one can
argue is not evil as it allows for the free flow of capital through the
financial system.

On the other hand, when banks start trading against their own book (ie.
creating financial transactions that are used to leverage the bank's own
money), then things can go wrong.

Ultimately, what failed in this crisis is that 1\. The risk around mortgage
distribution got to be so removed from the actual mortgages that it increased
carelessness. 2\. Confidence in the system was shaken, leading to a "run on
the bank" for broker-dealer banks, creating a substantial crisis of confidence
in the banking system as a whole.

Anyone interested in how the crisis came about should read "The Big Short", by
Michael Lewis, and "Too Big to Fail" by Andrew Ross Sorkin. Those two books
provide a lot of perspective on what happened in the months leading up to and
the days during the crisis.

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anonymoushn
I'm not sure that "crisis of confidence" is the right turn of phrase in a
situation in which there was a real lack of ability to pay. If there is a
"crisis of confidence" and an institution's balance sheet is actually as it
says it is, it can wait until people start behaving rationally. If there is a
"crisis of being materially insolvent," and its own solvency is dependent on
the solvency of counterparties who are materially insolvent, then it is not a
victim of a lack of confidence as much as a victim of its own lack of
diligence. Perhaps if the institution is sufficiently sophisticated then we
should consider the possibility that it knew that its counterparties could not
pay and lied about that knowledge.

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lifebeyondfife
Apparently this blog post reminded a friend of mine about an article he read
in the nineties called The Hybrid Manager. Essentially, we as developers love
technology as it really interests us. But unless we're writing tools to aid
development we need to understand at least one other business i.e. the
business we write code for.

I don't think enough coders know how the high-end financial world works or
what opportunities and interesting work it has. More computer scientists in my
industry please, we need your pragmatism!

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yardie
I read the entire thing and not once did the author even touch CDSs or even
where the banks got 40 trillion dollars from[1].

Most people don't believe banks are inherently evil. Just in this case in the
last decade they spent so much time screwing each other they ended up screwing
every one of us.

[1] For those that don't know, from 2000 until 2008 the global money supply
went from 36 trillion to over 70 trillion. Listen to NPRs "Giant Pool of
Money"

