
Finance is Not the Economy - the-enemy
http://www.unz.com/article/finance-is-not-the-economy/
======
prostoalex
Mervyn King, formerly of the Bank of England, in "The End of Alchemy" has a
great parable of an island populated by fishermen. It starts with a pretty
basic need of financing the nets and boats to do the fishing, where the lender
then gets slowly repaid with the fish caught.

At some point a finance person steps in and introduces a credit lending
facility, which overall is a good thing for the health of the economy. Then,
in decision to not take on too much risk, the said finance person offloads the
loans in a securitized fashion to other wealthy islanders who then benefit
from fishing booms and receive below average returns in years that are dry.

Then another finance person figures out the futures contracts, which act as
insurance to fishermen and guarantee a reasonable price even at times of
market over-supply.

At some point trading the loan securities and fishing future contracts starts
paying more than humble fishing, which means that the best and brightest
switch into finance, creating a stigma for fishing as less desirable
occupation for under-achievers. Majority of island's GDP is now comprised of
fishing-related loans and futures, with fishing itself occupying a relatively
small niche.

This, of course, collapses at some point, but the problem is that it's hard to
point out that one step that's completely irrational and bonkers - everything
created by finance industry has found some demand among fishermen and
simplified their lives.

~~~
wallace_f
This is a great comment. I hope it reaches many people.

In the spirit of this comment, and I can't find the particular article I'm
looking for right now, but Paul Krugman many years back was writing about how
financial services should move more towards a public utility model.

The argument is, we would all be better off if we separate off all the risk-
taking in finance to for-profit companies that can fail without posing greater
risk to the economy.

The more mundane, more-necessary, day-to-day financing that we all need (home
loans, etc.), according to Krugman, should move to the public utility model.
It's not complicated and if the companies that do these jobs fail they pose
enormous risk to the entire economy.

This is the analogy I can think of: If our water company became bigger, more
risk-friendly, and more profit-oriented, people would obviously know that is
ridiculous. Basic financial services is not any more complicated, to be
honest.

The welfare of humanity would benefit enormously from an even more robust
version of Glass-Steagall, but the finance industry is so entrenched in US
politics I don't see it happening.

~~~
mtgx
Would that be the same Paul Krugman who only a few months ago said the big
banks are not a systemic threat anymore, in an effort to undermine Bernie
Sanders' anti-big bank message?

[http://www.huffingtonpost.com/entry/elizabeth-warren-big-
ban...](http://www.huffingtonpost.com/entry/elizabeth-warren-big-
banks_us_570ea9d6e4b03d8b7b9f52aa)

~~~
icantdrive55
I kinda wish they let those banks fail.

Those banks turned around and raised fees for everyone. Don't loan to most
small business. Don't loan to most self-employed. Are just horrid
institutions.

They have just seemingly given the wealthy credit?

They have given the wealthy so much money; somedays these 1 percenter's appear
to be just gambling?

Literally just gambling, except in the realestate market. That market is still
a sure thing for them, and very rich investor knows it. And they know so many
of us will never qualify for loans; so jack up that rent Thurstan!

This recovery hasen't helped guys like me, or my mother who relied of safe cd
rates to get ahead. (And no--I'm not blaming banks on low fed interest rates.
I probally shouldn't have even wrote that last sentance.)

I probally should comment--I'm no expert.

I just wonder if we severely regulated credit default swaps, and the
derivitave markets--the crash in 2008 would have been less dramatic?

The one thing I liked about Bush is he wanted the poor/middle class in homes.
He believe little guys should be given a chance. I just wish he went about it
with more regulations, on the big boys.

My brother in-law used to flip houses. He now is a yoga instructor. The banks
won't talk to him. Houses are still being flipped, but only by the wealthy.
They are making a killing in my county. They are buying up everything. Why
not, at these interest rates, and banks that are literally bending over.

~~~
eli_gottlieb
>Those banks turned around and raised fees for everyone. Don't loan to most
small business. Don't loan to most self-employed. Are just horrid
institutions. > >They have just seemingly given the wealthy credit?

Let me relate a short story about my experiences with my regional retail bank.

Since I don't have my paperwork in order with Vanguard after changing my
address, I haven't been able to put my saving money into ETFs and bonds and
such like I should. So it's been piling up for more than a year (yeah,
irresponsible of me, _I know!_ ) in my retail bank accounts, checking and
savings.

When it piled up to more than $25k, the bank "invited" me to join their
"Platinum" accounts. These would impose a whole bunch of minimums on how much
I have to keep in my accounts (minimum $10k in checking, minimum $15k in
savings, something like that), in exchange for which they would... waive a few
fees. And raise my interest rate on savings to the highest heights of 1%
annually!

Whereas for the normal account, you get 0.02% interest annually, and for a
_credit card_ , you can get 1.5% cash back on your _spending_. They'll pay you
more to spend than to save!

To the banks, us tech workers with our measly six-figure annual incomes are
just more plebs, not even worth an interest rate above inflation.

------
ksar
"An economy based increasingly on rent extraction by the few and debt buildup
by the many is, in essence, the feudal model applied in a sophisticated
financial system."

The financial services sector adds value to society by providing mechanisms to
diversify risk, price assets, and make capital available for productive uses.

These mechanisms are valuable, but are gamed to extract economic rents greater
than their value to society. Extract too much, and you kill the underlying
economy.

~~~
baq
has anyone tried to estimate how much can finance extract to itself before
killing its host economy?

~~~
macawfish
Related:

I've often wondered how much money is spent on the money system itself. There
are people whose entire days are spent devoted to the goal of keeping the
money system flowing. They could be off somewhere else, tending gardens,
nurturing children, cooking, educating, repairing, cleaning, healing from
stress and trauma, etc. But no, they are at some office working for the all
mighty dollar. Keeping tabs on society at large.

I'm not saying that it is overall evil to count supply and demand of
resources. I'm merely wondering if the current state of money systems is
really well suited to do this without devastating collateral damage on its
host, the "human resources."

~~~
lmm
The great success of capitalism is to allocate resources efficiently.
Fundamentally, someone is paying banks for their services; either the value
they're providing is more than they charge for it, or not, but in the latter
case people would stop buying their services (conspiracy theories
notwithstanding). Then at the individual level, the bank is willing to pay
someone x amount for the value they provide the bank, and either that's where
they can earn the most (because it's where they can contribute the most) or
the person will be paid more elsewhere.

There are of course inefficiencies, but they're self-correcting. A bank that
overpays its bankers will be undercut by one that doesn't. A company that
overpays its banks will be undercut by one that doesn't. It works better than
any alternative that's been tried.

------
bawana
Money needs to be classified into two types- money derived from financial
transactions and money derived from stuff - the exchange of goods/services.
'Financial' money should only be used for stuff. Only 'stuff' money should be
used for finance. This would avoid the uncontrolled feedback loop that leads
to financial money revving itself into a massive force that exceeds the real
world on which it should be based.

~~~
wu-ikkyu
Why should money be derived from financial transactions in the first place? It
is just electric bits going across the internet

~~~
andrevvo
It's a lot more than electric bits. Banks and other financial institutions
allocate capital in the economy. By efficiently and effectively injecting
capital into the right companies/sectors, the economy and standard of living
will be drastically improved. It is in our best interest that it is the
smartest and brightest making these decisions. Of course they should be
compensated for these incredibly important services they provide.

~~~
bawana
But that was my point. Financial institutions USED TO inject capital into
companies. Now they inject MOST of their capital into other financial
instruments. Their 'investments' are actually just wagers - bets - because
nothing is ACTUALLY manufactured and people are not actually serviced.
Financial institutions should be outlawed from 'investing' money in any other
financial institution or instrument.

------
YZF
An interesting read but I think it's just the same old "pushing on a rope"
situation that people who have been following economic news are already
familiar with.

The problem is that central banks are tasked with trying to solve something
they are fundamentally incapable of solving on their own. They can QE or
reduce rates until the end of time to try and stimulate growth but it has a
limited effect on the real economy. Note that it does have _some_ effect on
the real economy so it's not completely useless but on its own it isn't good
enough.

The players in the market, including both the finance system and individuals,
take note of the low interest rates and just increase their leverage into
bubbles. As the central banks keep pumping, so do those bubbles inflate. Why
would anyone invest in productivity or infrastructure when the governments are
signalling you will make a lot more money speculating on bubbles and we will
keep backing you up in doing that. Cheap money is a double edged sword.

The real solution IMO is two-fold. First we must accept that at least right
now we will not grow our economy as fast as we used to. Second is that rather
than trying to stimulate the economy by QE and lower rates the governments
should be investing in infrastructure and start normalizing rates (with
respect to new realistic growth targets).

The crazy thing about all of this is that at a time governments should be
borrowing like crazy (like everyone is doing) to finance their investments
because it's so cheap to borrow they are trying to reduce their debt and
expenses (with the extreme being "austerity"). Everyone else is acting fairly
rationally except the governments.

EDIT: As some of you already know, there is a direct connection between
interest rate expectations and asset pricing. So in a sense it is inevitable
that the expectation of long term low interest rates will result in asset
bubbles. If the long term rate expectation is zero then assets with any non-
zero return should be valued at infinity, i.e. dividend stocks, houses etc.
Central bankers are absolutely aware of this as they are aware that raising
rates will cause asset prices to go down with all the implications. That's why
they are stuck at the token 0.25% raise. If the US ever goes negative rates
then you'll know we're in real trouble.

~~~
jamez1
The article is about the distinction between the financial economy and the
real economy. Everything you wrote seems to lump them together, and then make
inferences assuming both economies are one in the same. (Missing the point of
the article, from the title down)

I feel that you're the one "pushing on a rope", when the best you've got in
your framework of the world is that some components of monetary policy
correlated to asset prices sprinkled with some vague ideas of government
spending.

~~~
YZF
Apologies for having a strong opinion about the roots of the crisis which I
think is reasonably well informed. And yes I am operating within some sort of
framework.

I'm always willing to adjust based on new information.

I think I have a pretty good idea about how asset pricing relates to interest
rates expectations and inflation expectations. If you want a better idea of
where I'm coming from I recommend Coursera's Financial Markets course.

I'm not lumping them together. I said: "Why would anyone invest in
productivity or infrastructure when the governments are signalling you will
make a lot more money speculating on bubbles and we will keep backing you up
in doing that. Cheap money is a double edged sword."

So I differentiate (to some extent) between the "real" economy (which no one
is incentivized to invest in) and what the authors call the FIRE economy. I
just disagree where I think the authors are pointing to a root cause where I
see something that is just a symptom. I do agree with the authors points about
the negative impact of bailouts but this is only part of the equation in my
opinion. Also at the end of the day it's really hard to separate the "real"
from the "financial". You can use the money created to go buy things in the
real world.

There is not much new in the paper. Lots of people have talked about the role
of debt in the crisis. Lots of people have talked about how bailing out the
banks encourages bad banking practices.

~~~
buzzybee
The paper's intent is to articulate a particular ideological element within
the current mainstream(finance being equated to the real economy), identify
its appearance, and set the stage for a counter ideology that pushes finance
away from power; it's more historical-political in nature than anything.

So yes, saying it says nothing new is missing the point, because it's not
really aimed at economists who have already started critiquing these
distinctions. If it aimed to craft new theory or policy, it probably wouldn't
be referencing more detailed, years to decades old, sources in every other
paragraph.

~~~
YZF
I see. I guess I'm not that familiar with ideologies in the world of economics
academia.

In the real world I don't think there's anyone, including central bankers, who
currently thinks (or really ever thought) that bailing out banks that give bad
loans is a good idea or e.g. that companies taking debt to buy back shares is
a good idea. Central bankers also don't think (any more) that QE or reducing
rates can restore real economic growth to the pre-crisis levels.

What do you think looking at "finance" vs. "real" economy is going to get us?
How will it impact policies? What does it mean to "push finance away from
power" and what are the implications?

Not to mention the futility of trying to track what's finance and what's real.
Is VC "real" or "finance"? When Microsoft buys LinkedIn is this "real" or
"finance"? Is Facebook a part of the "real" economy? Disney? My retirement
savings that are sitting in the bank, is that "real" or "finance"?

------
xapata
It's not surprising that interest income has been reclassified from rent to
natural profit. One only needs to consider who is doing the classification to
understand it.

------
jackgavigan
Actually, when the central banks are so scared of the implications of letting
companies fail that they start propping them up through QE, it's probably safe
to say that Finance _is_ the Economy.

------
musgrove
Most people don't even realize economics is a social science, not a business
discipline. Business schools don't issue economic degrees, even. But whatever.
This country thinks it's full of experts on everything if they have an
internet connection.

~~~
rifung
> Most people don't even realize economics is a social science, not a business
> discipline. Business schools don't issue economic degrees, even

What point are you trying to make with this statement? Indeed research
universities are the ones which offer economics degrees as it seems they
should?

~~~
kesselvon
The old 'its all theory' argument against economics

------
ivan_ah
Related: a very interesting visualization that shows all the "money" in the
world: [http://money.visualcapitalist.com/all-of-the-worlds-money-
an...](http://money.visualcapitalist.com/all-of-the-worlds-money-and-markets-
in-one-visualization/)

------
stana
Isn't the finance industry in conflict between supporting stable growth of
'real' economy by providing capital vs. their ability to gain during volotile
times. Or can someone enlighten me why they are so oblivious to asset bubbles,
with no effort to restrain borrowing in a particular bubbly asset, unless
volatility is seen as no issue - or even an opportunity.

~~~
rukittenme
Its precisely the opposite! The financial industry supports stable growth. If
the crops fail, insurance contracts keep farmers from going out of business.
If you grow old and can't work, your retirement fund keeps you from being a
weight on society.

Asset bubbles are always identified in hind-sight. Volatility does not create
asset bubbles. If anything volatility keeps investors bearish.

------
heisenbit
We can't control what we don't measure. For better or worse it is a time
honored tradition to optimize for that measurement. It generally leads to fast
improvements until the system is gamed to a degree that measurement and
reality decouple.

~~~
geggam
Control is an illusion.

------
jokoon
I remember someone saying that finance is about the future, accounting is
about the past.

~~~
polotics
This is either weird propaganda or very funny. Maybe he or she meant
backwardation? If i remember correctly "The big short" is about something that
happened in 2007 though, so check your futures, and do not taunt happy fun
negative interest rates!

------
macawfish
I'll push this one step further and say The Economy is not the ecology.

~~~
xapata
You don't have to go that far even. Many people don't realize the economy is
not the whole of society.

The idea that economy is embedded in society rather than the other way around
is a radical thought.

~~~
macawfish
You have no idea how deep what you're saying resonates with me.

[https://www.youtube.com/watch?v=2owZXPyeilc](https://www.youtube.com/watch?v=2owZXPyeilc)

~~~
xapata
The big two analyses are Smith and Marx. For some reason, few people know
about Polanyi. Read "the Great Transformation". It's worth the effort.

I'll summarize: Smith says people like to haggle; Marx says people like to be
the boss; Polanyi says people change.

~~~
parasubvert
Big Polanyi admirer.

David Graeber's Debt: The first 5000 years, is a great anthropological
exploration of some of the things Polanyi was saying about how market
economics were forced on people rather than being the natural state of affairs
(though grain of salt is needed in later chapters due to factual errors)

Also I really think Liaquat Ahmad'a Lords of Finance is a useful exploration
of gold bug central bankers causing global instability, this one focuses on
WW2 more

------
yuhong
Thinking about it, the 1930s Great Depression was after a US trade surplus.
Today US have a trade deficit. If the banks actually failed in 2008-2009 and
caused another depression, it would be probably harder to recover from.

~~~
Gustomaximus
But failing in 2008 more likely would have caused a recession, What happens
next will likely be 2008 with a multiplier. Nothing has structurally changed.
We have a bunch more debt globally. Most of the problem children are treading
water and many getting into a worse position.

I think we're heading for either 1) A pretty solid crash where a bunch of
banks and pension funds are going to get smashed by the domino effect of
finace going low risk or 2) High inflation (not hyper) as nations increase
current monetary policy tactics to try and revive things ongoing, eroding
value of wages/cash savings followed by a bigger crash.

And the elephant in the room for me is US/China national debt. The economies
are so influential the world over. For US most forecasts have it stabilising
at existing levels (relative to GDP). I just can't see strong economic growth
to back up debt growth, or a desire for fiscal responsibility with existing
political candidates. You'd need incredibly strong conviction (and political
majority/backing) to pull back hard on required social/military spending to
achieve this. And a vision for the future. I see the current candidates as
short term responders.

For trivia the last president to reduce national debt during their term was
Calvin Coolidge!

~~~
yuhong
I know. I was thinking that the FDIC would convert banks into DINBs with the
insurance limit raised to $250k per account holder. All debts including
mortgages would be discharged tax-free automatically (making the topic of
mortgage notes moot). Bank charter restrictions would be loosened so that new
banks can be created as soon as possible.

------
jnordwick
What?

I tried to read this article, but sometimes it degrades into an incoherent
string of words that barely make any sense.

Here is a random sentence where I stopped reading: "By viewing capital gains
as transfers instead of as income, we define the long-term sustainability of
capital gains and asset prices in terms of trends in disposable income plus
debt growth."

It's half gibberish to me. People think because they can sprinkle citations it
makes it well written.

~~~
eropple
That's completely comprehensible to me, and I sport all of an incomplete
undergraduate-level understanding of economics. And it's not citing its
sources because its authors think that makes it "well-written"\--it's citing
its sources because _it 's an academic work and citing one's sources is
important for future research_.

I have seen a lot of middlebrow dismissals around here. (Made a few myself).
It is rare to see a _lowbrow_ one.

~~~
mysterypie
> That's completely comprehensible to me

OK, so then why don't you try to explain that sentence as a good rebuttal (to
his assertion that the article feels like half gibberish)? You're dismissing
him as much as he's dismissing the article.

~~~
eropple
I agree with you that I am dismissing his post. If he had asked for an
explanation, instead of frothing that it was "gibberish", I most likely would
have given him one. If you aren't (currently) capable of understanding the
contents of an _academic journal article_ , but insist on going on about how
you don't understand it and how it is a failing of the authors that you do
not, it requires angels of a significantly better nature than I possess to
help you.

Gotta want to get it to get it, IMO.

------
neffy
It's really the operating system - and the network.

~~~
pessimizer
It's really process scheduling and context switching overheads.

