"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."<p>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".<p>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.
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 <i>understand</i> these things. But they do understand finance itself, as well as big dumb markets like real estate.<p>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.<p>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.
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.<p>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.
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.<p>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?
I think the thesis is correct - but I couldn't finish this piece.<p>I tuned out after the comment about diamond scarcity. Diamonds are their own example of economic rent extraction through monopoly/artificial supply.<p>Might be more interesting to explore the parallels between diamond cartels and banking cartels.<p>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??<p>It's hard to do commentary well, referencing a wide range of subjects and facts. Details need to be right.
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.<p>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.
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.<p>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.<p>They are the real anti-socials of the world.
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.<p>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.
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?
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.
"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.
Comparing annual finance sector costs against net investment is approaching completely misleading.<p>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).
>>>But there can be no doubt that their compensation is, at best, incomprehensible — at worst, a crime of unfathomable social magnitude.<p>I agree, but these salaries are set by markets and I have to respect the market
<i>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.</i><p>Diamonds are actually a great metaphor for overpriced executive "talent". Why? First, diamonds are <i>not fucking rare</i>. 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.<p>I guess the major difference is that few diamonds have <i>negative</i> value, while most corporate executives do.<p>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.