
The Rent Is Too Damn High: The Enormous Cost of Letting Finance Rule - pje
https://www.jacobinmag.com/2014/02/the-rent-is-too-damn-high-2
======
soup10
"Those who work in banking, venture capital, and other financial firms are in
charge of allocating the economy’s investment resources. They decide, in a
decentralized and competitive way, which companies and industries will shrink
and which will grow. It makes sense that a nation would allocate many of its
most talented and thus highly compensated individuals to the task."

The simple flaw with this idea is that wall street is squarely focused on
making more money. Not making society better. Not allocating capital
effectively. Not even on creating wealth(which is distinct from money). The
single guiding equation for all deals and transactions is "how can we make as
much money as possible with as little risk as possible and also stay out of
jail".

That wall street occasionally invests in companies that actually do create
wealth and allocate capital to the betterment of society is more a case of
broken clock sometimes being right.

~~~
randyrand
>on making more money. Not making society better. Not allocating capital
effectively.

The simple flaw in your argument is that you assume that these things are
usually mutually exclusive. In fact, it is typically the opposite; they
usually are one in the same. The things that are "best" for society also tend
to make the most money. People pay for things because they want (or need
[2])them, because it makes their lives better [1]. To extend this to
investments, smart investments are investments to companies who will
eventually make money, because their products are worth buying.

Investing money is an incredibly rewarding but very risky activity. Smart
investments will make upwards of 100x ROI, bad ones will lose every penny.
Having smart investors is an imperative to maximizing the usefulness of money.
Just look at Solyndra ;)

1\. since people are having trouble understanding how to interpret this
sentence let me clarify. "Better" is completely subjective. For the purpose of
making buying decisions, "better" is whatever the person making this buying
decision defines as "better" for them. All in all the point of "better" not
really being "better" is irrelevant (as it the distinction between want and
need). If you want to make the argument that investors are investing in
companies that actually make our lives _worse_ , then the solution is
typically banning those companies and products directly, not banning
investments to those companies.

2\. thanks to /u/revscat (yes I know this is not reddit)

~~~
locopati
"Things that are 'best' for society also tend to make the most money."

You can make an awful lot of money in the short term doing things that are
horrible for society. Look at natural gas extraction by fracking - are we
saying that polluting the water table, the air and ground in an is best?

Or look at the defense industry. The make a lot of money too. Is taking our
great intelligence and devoting it to weapons and destruction best for
society?

Best might be best for a small group, but is rarely best for society.

~~~
jpadkins
> Look at natural gas extraction by fracking - are we saying that polluting
> the water table, the air and ground in an is best?

Yes, it's better than the alternatives. Cleaner and less CO2 than coal,
cheaper than solar/wind/nuclear. It has never polluted the water table. For
North American energy, what's better?

> Or look at the defense industry. Since the power WWII superpower era, death
> and destruction has gone way down. Overwhelming force and vastly superior
> weapons are making large scale wars a thing of the past. We are actually
> living in the most peaceful time of human history, from a bodycount
> perspective.

I agree too much money is spent on defense, but thats a political problem not
a banking/investment problem.

~~~
bitcrusher
It has never polluted the water table? Oh really?

[http://www.usatoday.com/story/money/business/2014/01/05/some...](http://www.usatoday.com/story/money/business/2014/01/05/some-
states-confirm-water-pollution-from-drilling/4328859/)

That's the first hit on a google search.

~~~
jpadkins
I live in western PA. I follow this issue closely. I care about my and my
families health.

Your article simple says there are reports of pollution. Pollution !=
polluting the water table. All fossil fuel extraction creates pollution.

Hundreds of studies of been done, both public and private about fracking's
risk of getting close to the water table. It's never proven to be true. The
only study that suggests its possible is the Duke study, but it doesn't prove
that it has happened.

This is a hot button issue around here. The water is monitored closely, there
are no fracking chemicals showing up in the water tables.

------
api
The rich are simply not smart enough to intelligently allocate their capital.
Things like rent extraction schemes (formulaic investment patterns) and
bubbles (indicative of simple herd behavior) dominate because they are easy,
dumb ways to make more money off existing money. You don't see big investments
in new technology, science, infrastructure, or other complex and difficult
areas because by and large the financiers do not _understand_ these things.
But they do understand finance itself, as well as big dumb markets like real
estate.

These schemes are dumb because they contain the seeds of their own
destruction. Rent extraction eventually kills the golden goose or provokes a
populist revolt, while bubbles are basically casino gambling.

The libertarian anti-tax/anti-government revolution was largely predicated on
the idea that private capital would be so much smarter and more agile than
state capital. What we're seeing is that this isn't the case. Private capital
is every bit as stupid as the state; Goldman Sachs is not that different from
a Soviet planning bureau.

~~~
enoch_r
If the market is "stupid", what testable results do we expect? Here's one:
smart people who figure out _better_ ways to allocate money should be able to
consistently beat the market performance.

Great--now let's test that hypothesis! Studies have consistently shown there
is very little or no autocorrelation between excess returns--that is, someone
who beats the market in year n is essentially no more likely to beat the
market in year n+1 than anyone else. This is very different than a field like
programming or basketball, where someone who performs well one year will
probably perform well the next year.

To me, this is absurdly good evidence that the market is not "stupid," even
when I think it is.

Worse, arguments like this don't merely say that the market is stupid and
_could be beaten_ \--they use the _author 's personal views_ on the stupidity
of particular market movements to make that claim. In other words, to accept
this argument, I need to believe that you are one of the (maybe) few people on
the planet who can consistently beat the market. I don't believe that.

~~~
grey-area
_If the market is "stupid", what testable results do we expect? Here's one:
smart people who figure out better ways to allocate money should be able to
consistently beat the market performance._

Markets behaving irrationally/stupidly != Markets behaving predictably

So I disagree that if markets are stupid (irrational is a better word, but
stupid would do) other people in the know could take advantage of them. Just
because a given person cannot predict the movements of the market, that
doesn't mean the market encodes some special unknown information or is in some
aggregate sense smarter or more informed than that person. If the market moves
essentially randomly in the short term, the most informed person would not
have much chance of beating it.

The market doesn't need to be clever to beat you, on the contrary, often it
beats people by persisting in stupidity for much longer than they thought
possible, or longer than they have time for, until they give in and invest,
and then perhaps soon after it reverts to something resembling rational for a
short while. That's not to mention the many ways in which our stock markets
and other markets are rigged and stacked by insiders (insider trading, market
manipulation, LIBOR, forex etc). So your contention that you'd need to be
incredibly talented to 'beat the market' as you put it isn't very convincing -
there is another explanation for the studies you cite - almost no-one is able
to consistently beat the market, except by luck.

I suspect (though it is just supposition), that markets are the average of all
the uninformed and panicky humans who make them up, and that in those crowds
of investors and speculators you'll find a madding mill of people all looking
for the main chance which oscillates in a chaotic manner, not a huge
collective wisdom which outshines everyone on the planet.

~~~
enoch_r
The GP's claim was that:

> The rich are simply not smart enough to intelligently allocate their
> capital. [...] You don't see big investments in new technology, science,
> infrastructure, or other complex and difficult areas because by and large
> the financiers do not understand these things.

To me, this is saying: tech, science, and infrastructure and undercapitalized
relative to their expected returns. It is very difficult for me to construct a
model in which a) capital is foolishly providing too little capital to certain
sectors relative to the returns it should get, and b) those sectors _don 't_
provide outsized returns to the capital they _do_ get.

Of course, such a model is _possible_! It's _possible_ that returns are random
but allocations are still irrational. But what does such a model look like?

One possibility is that returns are _totally_ unrelated to the underlying
performance of an asset. For example: new technology is a more rational
allocation of capital, and would provide greater return, but it doesn't,
because return is totally disconnected from the performance of the technology.

To me, that possibility seems quite unlikely. Yes, the anti-EMH position holds
that prices frequently depart from their underlying value--but the idea that
there is _zero_ connection, as would be required by such a model, is not
tenable. It's absolutely clear that real-world events have effects on asset
prices. If, say, Oculus Rift becomes extremely popular with consumers, the
capital that invested in it will receive large returns.

Another possibility is that there are network effects that make it impossible
to make the excess returns from these sectors unless the rest of the financial
sector decides to invest in these sectors as well. But it's very difficult to
see what those network effects might be, and it's even more difficult to
imagine that they are present for _all_ productive investments in these
sectors.

Unpredictability of asset returns is _the_ primary testable prediction of the
EMH. On the other hand, it is difficult to construct a reasonable anti-EMH
position that incorporates the observed unpredictability of asset returns.

Finally, if the claim that the market is ignoring great opportunities because
of stupidity or irrationality does _not_ imply that there are excess returns
available on investments in those great opportunities, it's frankly difficult
to see what the claim means. If I say "you should invest in my startup,
because it's a more intelligent allocation of your capital than real estate--
but no, I do not expect that you'll earn higher returns from my startup than
you would from another investment," it's pretty difficult to understand what I
actually mean by "more intelligent allocation."

------
manishsharan
I am techie working in the banking industry for last decade for some of the
top banks in Canada. Here is what I have noticed from a micro perspective: In
these lines of businesses --commercial banking, online banking , retail
banking -- the pay is shit, the work is heavily outsourced and the PCs are
crappy and stifling bureaucracy . Where as in capital markets Line Of
Business, the pay is awesome, the PCs/notebooks are best of class and there is
virtually no outsourcing and little bureaucracy. This leads me to believe that
banks value capital markets operations more that commercial banking. However,
it is obvious that commercial banking provides more value to the society as
they enable businesses to borrow to grow and expand . Capital markets and
trading activities of the bank earn more profits but I doubt they have as much
impact on growth of a business.

Finance will always rule ; however society should make an effort to
discriminate between different sub-sectors of finance industry. Short term
trading is not as valuable to society as giving $100mm loan to a businesses.

~~~
afterburner
"Finance will always rule"

That was not nearly as true today as it was before 1980. Things don't have to
be this way.

------
chrisBob
I firmly believe that the financial sector is nothing more than a thief. If
you are making money, but not a product then you are stealing from someone.
The high speed traders are the best and easiest to explain example.

Having said, that I send about 5-10% of my income every month to my financial
advisor for him to invest because I don't know of any better option. Can
anyone tell me a way to save for retirement that produces similar results and
isn't funding criminals?

~~~
gaius
Of course that is nonsense. What finance really is is the buying and selling
of risk. Charging a fee to assume the risk of an asset changing in value (say,
an airline pays a bank for an option on buying oil at a set price) is honest
business. You make money at it by specializing in evaluating and managing risk
and by being better at it than organizations for whom it is not their core
competence.

~~~
georgemcbay
It stops being an honest business when you can fail at it very badly, have
your short-term losses covered by taxpayer bailouts and then just keep going
as usual.

~~~
randyrand
You're thinking about it the wrong way.

The financial sector did not _want_ to make bad investments that caused a
recession. In fact, the financial sector (mainly investments) was undoubtedly,
like all recessions, hurt _most_. Who wants to invest when companies are
failing left and right? This is the reason the fed makes interest rates so
low, to encourage investing since no one wants to invest.

But bad investments _do_ happen, and so did the rescission. Unfortunately the
problem here was that we had put too much faith in one market, the housing
market. There was not enough diversification when things started to fail.

The financial sector did not steal their bailouts, we gave it to them. Just
like we gave them our investment money in the first place.

~~~
MaysonL
_The financial sector did not want to make bad investments that caused a
recession._

They were forced to knowingly make hundreds of thousands of fraudulent loans?
(Loans on which they profited mightily, personally and corporately)

As far as the bailouts go, look at the players in the decisions to give them.
It looks a hell of a lot like the finance industry gave itself the bailout,
out of the national treasury.

~~~
gaius
_They were forced to knowingly make hundreds of thousands of fraudulent
loans?_

Yes. Why do you think everyone was so keen to sell the mortgages they had
written on? Because everyone knew they were bad of course! But they were
compelled to write them by the Community Reinvestment Act passed by Clinton.

~~~
dctoedt
> _But they were compelled to write them by the Community Reinvestment Act
> passed by Clinton._

That's directly contrary to the conclusion of a bipartisan government
commission that investigated the subprime mortgage crisis: _"...the CRA was
not a significant factor in subprime lending or the crisis. Many subprime
lenders were not subject to the CRA. Research indicates only 6% of high-cost
loans—a proxy for subprime loans—had any connection to the law."_ [1]

Indeed, CRA-induced loans had a far-lower default rate: _" Loans made by CRA-
regulated lenders in the neighborhoods in which they were required to lend
were half as likely to default as similar loans made in the same neighborhoods
by independent mortgage originators not subject to the law."_ [1]

Even the dissent by three Republican commission members agreed, _" Neither the
Community Reinvestment Act nor removal of the Glass-Steagall firewall was a
significant cause. The crisis can be explained without resorting to these
factors."_ [1]

[1]
[http://en.wikipedia.org/wiki/Government_policies_and_the_sub...](http://en.wikipedia.org/wiki/Government_policies_and_the_subprime_mortgage_crisis#Conclusions_of_the_Financial_Crisis_Inquiry_Commission)

~~~
gaius
Then why play musical chairs?

------
lmg643
I think the thesis is correct - but I couldn't finish this piece.

I tuned out after the comment about diamond scarcity. Diamonds are their own
example of economic rent extraction through monopoly/artificial supply.

Might be more interesting to explore the parallels between diamond cartels and
banking cartels.

Once concept that is largely dead in American thinking is "anti trust" \- the
idea that powerful companies might act in mutually beneficial ways. The recent
consolidation of mega-financial institutions is a fairly obvious case, but
america is either willfully obtuse (or deliberately) in not seeing this as a
problem to address. Sure, let one company have larger notional derivatives
exposure than the entire world economy (JP Morgan) - what could possibly go
wrong? What are you, a communist??

It's hard to do commentary well, referencing a wide range of subjects and
facts. Details need to be right.

------
araes
A good start on solving this would be to reinstitute Glass-Steagall with the
strong provisions (20 & 32), the famous loopholes of the late-70's/80's
removed, no grandfather clauses, and aggressive maintenance to fight new
loopholes. Course, what politician would support that? You need money to win
elections.

That big spike that starts in 80 was right after the 1977 decision to allow
commercial paper from private banks, and the 1982 decision to allow
subsidiaries that could deal in securities. Banks and their lobbyists fought
this from nearly the day of inception (Glass himself fought it) right up until
the repeal in 1999 when it was pretty much dead. Why? It stops them from doing
exactly what they're doing right now. Unfortunately, now all we get is Dodd-
Frank, which is all the bureaucracy with none of the bite.

------
PythonicAlpha
Financial sector is our new aristocratic system. Those will be and are now our
rulers with the blue blood of money and we others have to sweat to pay for
their living.

They tell us, that they are needed (as the aristocrats did in the middle ages
to the farmers), since we can not go without (system relevant). But the thing
is, that by manipulating our democratic systems, they made them self system
relevant and they hinder that things can change. What they do is, they take
the wealth of the earth away from the 99% and give it to themselves and the
other riches. This system will one day kill of any creativity and any living
resources of the earth.

They are the real anti-socials of the world.

~~~
Florin_Andrei
> _Financial sector is our new aristocratic system. Those will be and are now
> our rulers_

"Are"? Yes, I'm afraid. "Will be"? It depends.

> _They tell us, that they are needed (as the aristocrats did in the middle
> ages to the farmers), since we can not go without_

An argument echoed by Ayn Rand BTW.

~~~
api
A lot of people think Rand defended capitalism as we know it, which is quite
untrue. Her conception of it was something very different. She referred to the
present finance industry types as the "aristocracy of pull."

Not that I'm a Rand fanatic per se, but she is often misquoted and completely
misunderstood. Some of her supposed fans misunderstand her as much as her
opponents.

------
nawitus
Sad to see such a low-quality article being upvoted on Hacker News. Kinda like
that other massively upvoted low-quality article on AI. Anyway, it's a strange
article. It says the problem is rent-extraction, which seems to be a nother
name for rent seeking. Rent seeking is these days defined to mean corrupting
regulators, yet the article claims that the solution is even more regulation.

In an efficient market without monopolies there's no such thing as rent
seeking. Anyway, the biggest problem with this article is it's naievity and
blaming rich people in a populistic fashion. Advocating for nationalization of
banking? Come on.

~~~
gopher1
Please explain, how do you get an efficient market without monopolies if you
don't have anti-trust regulation?

~~~
jpadkins
Please name a natural* monopoly or cartel?

*not created by the government or by government regulations.

The most monopolistic sectors of the economy (FIRE, healthcare, energy,
defense) are also the most regulated.

~~~
nikatwork
The monopolies create regulations through lobbying (aka bribery).

You anti-regulation people have it nearly right but stop short of the deeper
truth. The problem is not the concept of regulations, the problem is a
corrupt-by-design government that accepts cash payments to create unfair
regulations.

------
dbingham
Woah, did I miss something? When did HN start voting up articles from "a
leading voice of the American left, offering socialist perspectives on
politics, economics, and culture"? I mean, not that I'm complaining too much,
but that's a total shift from what I remember of a year or two ago. Did the
demographics shift or have the times changed people's opinions?

~~~
tankenmate
You haven't seen the full effect of the "Controversy Penalty" kick in yet;
it'll be coming your way shortly. To quote "A "controversial" story gets
severely penalized after hitting 40 comments." \--
[http://www.righto.com/2013/11/how-hacker-news-ranking-
really...](http://www.righto.com/2013/11/how-hacker-news-ranking-really-
works.html)

------
snake_plissken
I'm curious about the apparent decoupling/lag between net-rent and gross-rent
that begins sometime in the mid-90s. For most of the chart's time series, they
correlate fairly well.

------
danmaz74
"the top 25 hedge fund managers (financial rent extractors par excellence)
make more money than all the CEOs of the S&P 500 combined" This is really
impressive, considering that big companies CEOs don't earn little money.

------
verelo
Second sentence "does has". I don't get the feeling this is going to be a
great read.

------
ianferrel
Comparing annual finance sector costs against net investment is approaching
completely misleading.

It's like being outraged at my annual grocery bill compared to the value of
the food in my cupboard (ignoring the cost of all the food I ate).

~~~
collyw
There were a number of comparisons made, such as the amount taken by the
sector now, as compared to the 40's. I think you can get a good picture from
that of how bloated and inefficient the system is.

------
jackson1989
>>>But there can be no doubt that their compensation is, at best,
incomprehensible — at worst, a crime of unfathomable social magnitude.

I agree, but these salaries are set by markets and I have to respect the
market

------
etanazir
Some religious people used to call usury a sin.

~~~
AnimalMuppet
Also greed/covetousness.

------
michaelochurch
_Why are diamonds more expensive than water, when the latter is far more
useful? Because there’s a lot of water in the world but very few diamonds._

Diamonds are actually a great metaphor for overpriced executive "talent". Why?
First, diamonds are _not fucking rare_. The price has been heavily
manipulated. In executives, the manipulation pertains to the closed social
network of entrenched parasites who can get those jobs: a similar cartel over
high-echelon relationships (and owed favors, and extortions). The scarcity is
illusory; there are a hundred times more people who are competent to fill
their shoes. Second, many diamonds are junk. Third, diamonds are not really
natural. Diamonds from the earth must be carved into a man-made shape through
technical means, and (anyway) artificial diamonds are often superior in
quantity. Similarly, "executive talent" is an artificial artifact, not some
genetically-ordained rarity. Fourth, there's a lot of negativity and violence,
even, involved in keeping this phony scarcity intact.

I guess the major difference is that few diamonds have _negative_ value, while
most corporate executives do.

The greatest trick these assholes (the upper class) ever played on society is
convincing us that we need them, and that they are somehow so special that
having connections to their stupid little club should be the #1 dominating
factor in who makes the most money, gets to make important decisions, and
works in the highest-level jobs.

~~~
jquery
> First, diamonds are not fucking rare.

True, but jewel-grade diamonds _are_ rare. Likewise, run-of-the-mill executive
talent isn't rare... but top quality talent is.

~~~
ForHackernews
"The difference is that the world diamond market is largely controlled by a
single private enterprise, the South Africa-based De Beers cartel. The
geniuses behind De Beers recognized early on that a stable, profitable diamond
industry depended on controlling both supply and demand. De Beers rarely
discovers new sources of diamonds; rather, it focuses on controlling existing
ones, limiting production, and if necessary buying up surplus gems and
stockpiling them to prop up the market. It sets prices arbitrarily and cuts
off supplies to dealers who buy through unauthorized channels. On the
marketing side, De Beers hired advertising firms, starting with N.W. Ayer in
the late 1930s, to render axiomatic the idea that diamonds = true love."

[http://www.straightdope.com/columns/read/2524/is-a-
diamonds-...](http://www.straightdope.com/columns/read/2524/is-a-diamonds-
price-a-true-measure-of-its-value)

[http://www.barnesandnoble.com/w/the-rise-and-fall-of-
diamond...](http://www.barnesandnoble.com/w/the-rise-and-fall-of-diamonds-
edward-jay-epstein/1013550616?ean=2940012796721)

~~~
jquery
De Beers is no longer a monopoly and controls roughly 50% of the market:
[http://en.wikipedia.org/wiki/De_Beers#Diamond_monopoly](http://en.wikipedia.org/wiki/De_Beers#Diamond_monopoly)

> On the marketing side, De Beers hired advertising firms, starting with N.W.
> Ayer in the late 1930s, to render axiomatic the idea that diamonds = true
> love."

Irrelevant to anyone except history buffs. Want to learn how Christmas
started?

