

Ask HN: Financial Sector Shrinkage Good? - euroclydon

I will try to state this as succinctly as possible:<p>Over the past ten or more years, the percentage of the S&#38;P500 that financial service firms occupied, as I understand it, rose from ~5 to ~20.<p>My opinion is that these firms (IBanks, Hedge Funds, etc.) don't really add useful innovation (even if they do add jobs), but rather they skim money from the system in the form of fees, at their most legitimate, and CDOs and CDSs at the more shady end of the spectrum.<p>What do you think? Will we be better off after these organizations get beat down, and there is not so much money out trying to make a quick buck, but instead is spent trying to add real value to our lives?
======
RobGR
I agree with this hypothesis. Furthermore, advances in computers and
communication and electronic record keeping should have allowed fewer people
to be employed in the industry, shuffling much larger amounts of money.

I think much of the current economic "crisis" is actually a necessary shift or
adjustment from certain industries to others. It was the veiw of many that the
"panics" that occurred at the end of the 1800s railroad building boom were
simply a necessary adjustment, society had employed many in building
railroads, which were done now, so period of unemployment might be necessary
as lots of people shifted to doing other things.

I think the collapse of the housing market had that as a factor. The number of
bedrooms, bathrooms, and square footage per capita had increased a lot, as
people's standards increased. It may be that many people feel they have enough
house, or maybe even too much, and are shifting to other things. Such a shift
of course exposes the shakiest business practices first, such as sub-prime
mortgages and so on.

I believe that there are two other industries that are also due for some
shrinkage, and they are education and health care. Both of these are, like
housing, heavily intertwined with the financial industry through loans and
insurance.

------
noodle
its a multifaceted problem. while the financial services firms multiplied,
yes, it is also a byproduct of the fact that the global pool of money also
grew by a similar factor over that time period.

the things that the institutions did to break the economy were definitely bad,
with their poorly planned investment vehicles, but i don't _think_ that the
number of firms reflects anything beyond the existing wealth. there became
enough money and interest to support more firms.

------
gaius
IF all they did was skim money, then the economy would have simply routed
around them (just as discount execution-only brokerages did to traditional
stockbrokers, or Internet banking did to branches on the high street). That it
didn't suggests that they _did_ create value, and that the premise of your
question is flawed.

~~~
euroclydon
I am saying they occupied a disproportionate size of the economy relative to
any potential they had to add value.

Yes, they may have sold investments to those who wanted to invest, like the
first commenter said, but that's just filling a need, not adding value to
people's lives.

~~~
gaius
How does fulfilling a need _not_ add value?

~~~
RobGR
Take the lottery, for example.

The economy hasn't routed around that, and it clearly does not add value to
the economy or society. Yet it "fulfills a need" in the sense that people
willingly seek it out, and in fact seek out illegal "numbers game" lotteries
were no official one is allowed.

~~~
gaius
But it blatantly does. The National Lottery funds all sorts of stuff ranging
from arts to athletics and provides a form of entertainment in and of itself.
People who don't wish to participate don't, yet it is still very popular.

