
The Financial Sector Is the Greatest Parasite in Human History - Tycho
http://neweconomicperspectives.org/2014/03/financial-sector-greatest-parasite-human-history.html
======
quanticle
The problem isn't the financial industry. Or, rather, the financial industry
is only a special-case of the problem. The problem is middle-men.
Specifically, it's the fact the Internet has made a certain class of people,
whose job it was to take money from people and give it to people who need
money (in exchange for a cut) obsolete.

The financial industry is the man-in-the-middle between lenders and borrowers.
The recording industry is the man-in-the-middle between listeners and artists.
Auto-dealerships are the man-in-the-middle between car companies and car
buyers. Realtors are the man-in-the-middle between home buyers and home
sellers. In every case, these used to be vital services in a pre-Internet,
pre-cheap-communication world. But now, they all look like parasites, simply
because we don't need their services any more. And, instead of refocusing
their business around providing information and helping the market clear, all
of these industries are trying to carve out regulatory havens that would allow
them to continue business as usual whilst imposing higher costs on the rest of
us. It is this rent-seeking behavior that makes them parasites.

~~~
marcosdumay
It's funny how the Internet only become widespread about 20 years ago, yet we
need people like you remembering us how it was like before.

It's amazing how fast we changed, and how fast we got used to it.

~~~
quanticle
They funny thing is that I'm only in my 20's :) It's not that I necessarily
remember how times were before the Internet (I was but a child then), but I
study a lot of history in my spare time.

So maybe everyone needs to sit down and read a few books and think about how
different life was when you couldn't just look up whatever you wanted to know
in a matter of minutes.

------
refurb
The financial sector provides no services? What?

If I want to sell my company, the banks sure as hell provide a service. They
provide a valuation, put together a pitch book, shop the company around and
close the deal.

How is that not a service?

~~~
drblast
You can provide a service that is a net loss overall, but still a benefit to a
few. It's the tragedy of the commons.

Let's make it simple and say there are two villages. Some people in village A
decide to start raiding crops from village B, because they find they can steal
crops more easily than growing them, so stealing is a net benefit to village
A.

Village B, noticing the theft, decides to start paying some farmers to defend
the village instead of farming. This is a positive outcome for Village B,
because the cost of their new security force is less than the cost of the
stolen crops.

Ostensibly there are two positive outcomes; both sides now maintain a security
service and find themselves at an equilibrium.

But if you look at Village A and B together, you'd see that they'd both be
better off if there were no raiders and no defenders and could concentrate on
farming. The overall drain on society gets worse as the situation escalates.

Imagine that Village A decides to create more thieves to overwhelm B's
security, and that turns out to be profitable.

Now imagine that this exact thing is taking place, at every scale, millions of
times a day.

Let's say I'm competing with Dave to buy a house we both want. The only thing
holding that price down is our collective willingness not to borrow huge sums
of money to outbid each other. Let's say the bank starts to offer a 60 year
mortgage, so that Dave can outbid me by shackling himself to a loan he
probably won't pay off in his lifetime. Dave is a moron, so he does that. It's
a free country.

Dave, in this circumstance, is acting like Village B, where he shoots himself
and the rest of society in the foot by dedicating most of his future income to
paying a bank in order to get a short term gain and win a house bid with me.

But the real winner in the scenario is the bank, not Dave.

Edit to add: I believe the article was talking about "service" in terms of the
overall gain to society, not the individual services that a bank typically
provides, many of which are completely legitimate like helping you sell a
business.

~~~
mediaman
What is unjust or inefficient about your example with purchasing the house?

Should Dave not be allowed to borrow money to own a house? Should only the
wealthy, with sufficient cash reserves, be permitted to buy a house, without
financing?

If you don't value the house as much as Dave -- on a net present value of the
future payments you have to make to own it -- why should you have it, instead
of Dave?

Should real estate prices be capped, by a central planning board, so that Dave
cannot borrow too much to own it? If so how does the seller choose who to sell
to, between you and Dave? Who says the house is worth X, and not Y, when Dave
is happy to pay Y?

Or is it unjust that Dave likes the house enough to commit much of his future
income to it?

Why is Dave a moron? Because he disagrees with you on what to use his future
income for? Should you be able to tell Dave what to spend money on, and what
not, out of your view of what is socially efficient?

Perhaps not just you; you could get a few of your neighbors together and call
a vote on what Dave can spend his money on. Based on social utility, of
course.

But to go back to your example. Suppose you choose not to outbid Dave, because
you are smarter, and instead opt to rent an efficiency studio and save up over
your life and build a sizable amount of investment assets (because you did not
spend frivolously on a large house). As you age, you look for your savings to
work for you, because you were smart enough to defer consumption and now you
feel you should be rewarded.

Where to put your assets? There are many choices. Should one of them not be
the option to lend Dave's son, Dave Jr., money for his own house, in return
for a level of interest to compensate you for use of your capital? But that's
a pain to find the borrower and vet him, and risky if it's just relying on
Dave Jr (who may be a moron like his father).

What if there was an agent you could pay, who would originate the loan, check
that the title was valid, check Dave Jr.'s credit, author the loan documents,
and then provide it to investors like you -- or even bundle them together, so
that you could spread risk of default over a few different mortgages, instead
of just one?

That would be great -- you could earn a return on your saved capital, and Dave
Jr. would get what he wants too (even if you disagree with what he should
want)!

Ah, but of course, agents like that are just parasites. So instead of
reinvesting your saved capital with someone willing to borrow the money, you
stuff it in your mattress.

To make society more efficient.

~~~
logfromblammo
The prices of things are not what they are worth, but what the market will
bear.

The 30 year mortgage allows a rich man to outbid you on the home that you want
to buy to live in, a property that he has no personal interest in, so that you
can pay interest on the money you only had to borrow so that it could not be
loaned to someone else, such that they could afford to pay more than you. That
money pumped into the market only serves to raise prices. Houses are built
larger and more expensively than they otherwise would be because the buyers
are able to pay more.

If there were no mortgage loans available, the market would be producing a
greater number of cheaper homes for sale, and a greater number of rental homes
for investors, with more economic separation between those markets. The rich
man outbidding you for property would have to actually assume ownership of it,
and would shoulder some risk of carrying vacant rental units. Venturing into
property-owner-land as a rentals investor would evoke a nasty NIMBY response.

Believe me when I say that it is possible for every person in America to own
their own home, even with just a single minimum wage job for the whole
household. But it isn't bloody likely, thanks to mortgage lending, zoning
laws, and building and occupancy codes that completely eliminate entire
classes of low-cost housing as either unprofitable for developers or outright
illegal.

This same phenomenon is now occurring in higher education, wherein loans
inflate the price, the product remains essentially the same, and the buyer is
saddled with an enormous burden of debt. Debt is a trap laid by the wily for
the foolish. But it persists because the practice nestles snugly into a Nash
equilibrium. The practice is not at an absolute maximum, but neither player
alone can improve his position by making a different move.

The only way for the erstwhile borrower to win is to form a cartel able to
punish anyone who takes a loan to pay for a good or service too scarce to
supply everyone in the cartel. In other words, non-rich folks win by
regulating the hell out of lending, to reduce the number and amount of loans
available.

~~~
thelamest
OK, so loans taken for purposes of speculation on scarce goods are a Bad
Thing. But loans taken to build up real infrastructure and support innovation
still seem to be a very valuable service that the financial industry provides.

~~~
logfromblammo
And they have leveraged this one valuable service into a massive industry
that, while still engaged in the valuable service, has also branched out into
destructive parasitic services. One cannot remove the parasite, because no
effective alternative exists for the necessary and valuable function.

So what is to be done? The only plan likely to work even a little bit would be
to establish a government bureau of capital and infrastructure investment,
such that if the financial industry vanished overnight, the small businesses
engine would not putter out. But such an agency would be an obvious target for
lobbying, regulatory capture, and personnel rotation to and from the financial
industry.

They have us over a barrel, and they know it.

If lending were abolished entirely, people who would otherwise lend would be
forced to buy shares, with all the associated risks of ownership.

------
rdl
Bigger than government? Arguably at least the military and internal-to-
government overhead is a direct parasite on everyone else, and its only value
is fighting other parasites (other governments). Some parts of government seem
to be very useful, but it's a big enough sector that just the parasite parts
are probably the biggest parasite.

~~~
craigyk
yes. why even bother to argue your point? while a lot of government spending
might not benefit you directly, the odds are that someone out there is getting
some kind of service from it. Also, a sizable fraction of government money is
going to salaries of middle-class workers. They, in turn, are likely to spend
that money on things you might consider useful or neat, thereby helping the
overall economy. The process might be inefficient (or less efficient than a
perfectly executed and fictitious counterpart) but that doesn't make it a
parasite.

~~~
rdl
The military part is negative-sum for the world.

A competent engineer designing weapons, even if he makes $150k to spend on
food/cars/etc. and support those people, is still depriving humanity of the
$100k to near-infinity of positive contribution ("consumer surplus") he could
be making, some of which he'd capture as additional expected income, if he
worked on something genuinely useful to humanity.

The only reason we have a military is to protect from other militaries;
therefore, militarism is a parasite.

~~~
jfoutz
What has DARPA done for me lately?

Money seems to be an excellent motivator, but when death is on the line people
seem to embrace a little more out of the box thinking. Rent seeking and
collusion to avoid innovation seem to be problems with both the money and
violence types of power.

~~~
robotresearcher
"What has DARPA done for me lately?"

How about the internet?

If that's too last-century for you, you can look forward to the benefits of
DARPA funding the development of the basic tech and Open Source software
that's driving the rapid development of robots right now.

~~~
jfoutz
Easy tiger. The point was not all military spending is a waste.

~~~
rdl
Useful side effects for sure, but even if you took away the direct non-
financial costs of the military (non-zero chance of nuclear armageddon...), I
think there are things we as a species could work on which would produce the
same kind of competitive, focused effort. The "space race" accomplished a lot,
and consumer IT tech (say, mobile phones) has progressed even faster than
military tech (outside maybe an existential war like WW2).

~~~
arg01
I don't disagree with your wider point that their are other useful motivators
out there but it's worth noting that the space race was militarily motivated.
Sputnik flying overhead effectively showed the soviets had/would have the
ability to drop bombs anywhere in the world. Even the space shuttle was
influenced in design by militaristic influence.

------
billspreston
Who keeps pushing this meme? If anything, the worst parasites are lobby groups
and politicians.

~~~
adventured
It's a populist call to arms. You'll be seeing a lot more of it over the next
few years, expanding ever more loudly toward the rich, wall street, bankers,
and corporations, with calls for much higher tax levels and minimum wage. The
Fed's asset bubble-based fake recovery did absolutely nothing for the bottom
50%, but has _vastly_ increased the wealth of the top 10%, the future social
consequences of that are obvious.

~~~
brc
Indeed. If you take a populist rant like this, and replace keywords like '1%',
'rich', 'banker' with words like 'Jew','Semitic' and 'Zionists' \- you start
to get an appreciation for how ugly these latest movements really are through
the lens of history.

Do I mean that some of the public policy choices of the last decade are beyond
criticism? No, definitely not. 'Too big to fail' is a terrible phrase because
it calcifies economies and entrenches bad practice.

But the latest meme of 'if you're rich you're a parasite and should be
stripped of your property' is disturbing for me. It lumps a class of people
into a 'generally bad' category without looking at specific problems. There
are angry young people out there who have been fed a simplified story and are
running around with 'eat the rich' style placards. That is worrying to any
ordered society.

~~~
honestcoyote
To be fair, the actions of many (not all) of the rich in this country have
brought it on themselves. When the middle class is stagnant or declining, and
the wealthy keep getting richer and richer, then the populist rhetoric will
take root.

And who can blame them exactly? When wages are stagnant, income inequality is
rising, most companies have little-to-no loyalty to their employees and
discard them at will, and many of the rich and comfortable push relentlessly
towards eliminating the safety net, then those at the bottom are going to feel
more than a little resentful. They feel ignored and powerless, which is a
correct assessment of their position.

While not all the rich are bad, it's very hard in the current climate to have
the slightest bit of sympathy for them. They, as a class, have the power to
change things and avoid the coming storms, but, they've already shown they're
not the least bit interested in addressing the immense financial inequalities
and the problems to an ordered society caused by such divisions.

~~~
logfromblammo
If the rules of the game seem rigged against you, there is a great incentive
to either stop playing or to cheat. Some people don't seem to realize that a
_gigantic_ portion of everybody's wealth in developed nations is the ability
to go out in public without fearing for the loss of your life, liberty, or
property.

When you intentionally cultivate a class of people with little to lose and
much to gain by brutal and violent action practically on your own doorstep,
you are very likely to be hoist by your own petard. If I were a billionaire, I
would be quite certain to conspicuously make myself an obvious asset to the
whole community, particularly with respect to the folks that might be thinking
of me as they rescue mostly-edible food from garbage containers. Public
relations are important, if you wish to be a man that is not an island unto
himself.

------
thatthatis
Just like the transportation industry parasites, all the finance industry does
is move things around. Neither makes anything. /s

------
arbuge
Warren Buffett's Gotrocks anecdote is an interesting take on this:
[http://money.cnn.com/2006/03/05/news/newsmakers/buffett_fort...](http://money.cnn.com/2006/03/05/news/newsmakers/buffett_fortune/)

------
tim333
The military has been worse historically surely? At least the financial sector
has some function you'd miss if they didn't exist - banks, insurers etc are
useful although I'll give you that about half their activities are parasite
like. I'm basing that number on Krugman
[http://www.nytimes.com/2009/03/27/opinion/27krugman.html?_r=...](http://www.nytimes.com/2009/03/27/opinion/27krugman.html?_r=1)

~~~
jfoutz
It really depends. Traditionally, the US navy was to stop pirates from
screwing with US exports. IMHO it was a pretty effective policy. we pay taxes,
our stuff gets to new markets.

Iraqi oil is apparently doing nice things for XOM, not sure if they payoff
will be worth the price. Afghanistan seems like a loser. There's nothing there
we can take to pay for the war.

~~~
protomyth
Reviewing the history of the US's first six frigates is a very interesting
take on a lot of sides of this issue.

~~~
samstave
Can you elaborate?

~~~
protomyth
The conflict between the desire not to have a Navy and the problems being
caused by pirates presented interesting arguments for both sides. The conflict
generated the conditions to build the 6 frigates.

[http://www.amazon.com/Six-Frigates-Epic-History-
Founding/dp/...](http://www.amazon.com/Six-Frigates-Epic-History-
Founding/dp/039333032X/)

------
tailrecursion
If the scandals described in this article and Taibi's articles are the result
of a few bad actors, and if the result of these scandals is a broad perception
on the part of the public that the entire financial sector is corrupt, then
Goldman Sachs should be interested in policing its own.

I wonder if G.S. feels unable to police itself, or maybe they feel the
aluminum story is not a problem, or that what they did was harmless. I don't
know what they think about what they do. I can't really blame below average
people for cheating -- they're not good enough to win playing by the same
rules as everyone else.

But if I'm to draw a circle around the corrupt people should I draw it around
a piece of G.S., or around the whole company. It seems like the scandals keep
happening, and that market manipulation such as laddering and hoarding are
considered by the financial industry as another way to make money.

If the financial industry isn't greased entirely on deception, then I'd like
to know what percentage is deceptive and what percentage is figuring out a
hedge plan for e.g. BMW's exchange rate risk. I can see how billions can be
made one way, but I don't see how billions can be made the other way.

------
guylhem
Maybe it's just me, but the maths seems strange.

I just quickly glanced at some figures, like "Have they earned it?", and it
seemed wrong.

The author says the total return for say Barclay was 12.61%.

bc -l running in a terminal disagree

Taking 100 as the base value to ease our math:

100x1.112x1.0825x0.9452x1.1088=126.156497322240000

That's a 26% something cumulative return in 4 years. What is this 12.61% meant
to represent?? The average per year was closer to 6.5% if that's what he
meant.

(Edit- replaced the * by x and added an =)

~~~
rm999
>The rule of thumb is that hedge funds charge a 2% per year management fee and
keep 20% of all profits,

>All returns shown are net of fees

So, subtract 20% from the 3 positive numbers, and that's about 6% in fees
(this may be off by a bit, I'm quickly approximating the math in my head).
Subtract another ~8% for 4 years of fees, and that's about 14% combined fees.
26% - 14% = 12%. Seems to be about right.

The author could have made the way he calculated the fees more clear, but his
point stands that a huge % of hedge fund profits go to fees.

------
ergoproxy
The article doesn't address the question: Why has the GDP share of the FIRE
sector recently grown so much so fast?

If its growth were the result of increasing authentic demand for financial
services, or increasing efficiency in the supply of financial services, then
that would be OK. However, I see three main bad reasons for the recent
explosive growth in the FIRE sector:

1\. Their cost of borrowing is artificially low. They don't need depositors
anymore. They can borrow limitless funds from the Federal Reserve now at
0.25%. Their real borrowing rate is actually negative if we're honest about
inflation, rather than relying on fabricated government numbers that leave out
housing, healthcare, food, fuel and education.

2\. The Fed is creating artificial demand for financial products. After the
2008-9 crisis, the Fed has created $3T out of thin air and used half of it to
buy mortgage backed securities.

3\. Over the last 30 years, the federal government has shown its willingness
to bailout failed financial institutions that took on too much risk-- We saw
it with the S&L crisis of the 1980s and 1990s; we saw it with the 1998 bailout
of LTCM; and we saw it again with the $700B TARP in 2008.

If we would simply allow the free market (rather than The Fed and federal
government) to determine interest rates, and the demand for securities, and
the appropriate level of risk appetite, then we'd see the FIRE sector shrink
back to its historically low share of GDP. Page 37 of this paper by Thomas
Philippon charts the growth of the US Financial Industry as a share of GDP
from 1860 to 2007:
[http://pages.stern.nyu.edu/~tphilipp/papers/finsize_old.pdf](http://pages.stern.nyu.edu/~tphilipp/papers/finsize_old.pdf)

------
avaku
Thanks HN! Although, there is an element of overcompensation in finance, as
well as a lot of overconfident people with more testosterone than knowledge,
it still does provide hell of a lot of services. I'm happy to see that the HN
crowd doesn't really "just believe" whatever is said in that article. True, I
agree the management fees are high. However, the argument about HFT is
basically "kitchen level" of someone who doesn't know a thing about it and
just read some blogs and watched something on TV. HFT firms get paid for
providing liquidity in the market. How exact that happens is actually easy to
understand, but not many people bother. All these stories about front running
"fair investors" are almost a complete fake (there was some issue about flash
trading but that has gone away now).

------
babuskov
"The Financial Sector" is too broad to make a statement like that.

------
harrystone
That brush is so broad it's blocking out the sun.

------
Eleutheria
“The few who understand the system will either be so interested in its profits
or be so dependent upon its favours that there will be no opposition from that
class, while on the other hand, the great body of people, mentally incapable
of comprehending the tremendous advantage that capital derives from the
system, will bear its burdens without complaint, and perhaps without even
suspecting that the system is inimical to their interests” .- Self

~~~
gruseom
Fake, according to
[http://en.wikiquote.org/wiki/Conspiracy](http://en.wikiquote.org/wiki/Conspiracy).

~~~
fsk
Even if it is a fake quote, the point it makes is true.

