Any entities that earn undeserved profits (and some will argue many financial institutions fall under this umbrella) want to stay invisible and opaque to maximize these earnings. I think a case can be made that a substantial percentage of profits earned by the financial industry derive from economic "rent seeking" and are not materially contributing to productivity in society.
I like this attempt to disinfect this mess with some sunlight, though at the end of the day the only way to truly solve these problems (as they may exist) will be for all of us to stop being willing participants in the system. I believe strongly that technology will offer solutions for this in the near future.
I think a case can be made that a substantial percentage of profits earned by the financial industry derive from economic "rent seeking" and are not materially contributing to productivity in society.
This is a hugely popular sentiment in the wake of the financial crisis, but do you actually have some examples of rent seeking activity by banks in 2014 that is emblematic of this? Your modern megabank takes in billions of dollars in profits per quarter and I'm just curious where the rent seeking shakes out in all of that.
> This is a hugely popular sentiment in the wake of the financial crisis, but do you actually have some examples of rent seeking activity by banks in 2014 that is emblematic of this?
The Goldman LME aluminium warehousing, where they paid people to deposit aluminium with them to inflate the length of the queue to get aluminium out, so that the queue was longer and they could charge more (literal!) rent before people eventually got their aluminium out.
> Your modern megabank takes in billions of dollars in profits per quarter and I'm just curious where the rent seeking shakes out in all of that.
I have a thesis that every megacorp turns to rent seeking, because they're too rigid to innovate. But yeah, I suspect it's a small proportion of the profit of the financial industry as a whole. A lot of people want to buy and sell stuff, so there's a lot of money to be made in even a slim margin there.
This doesn't directly address your question, but the "financialization" [0] of the economy has gotten us to the point where 9% of GDP (as of 2012) is consumed by the finance sector [1].
It's certainly conceivable that the risk management Wall Street provides has led to economic growth, but considering the systemic instability that led to the 2008 crash, I take that claim with a grain of salt.
LIBOR manipulation (which many banks confessed to), FOREX manipulation (ongoing scandal), Goldman's Aluminum debacle and other commodity rigging.
These are just the ones I'm familiar with. I believe it's 80-20. 20% of banks profits are rent-seeking behavior. If we compare this with megacorps in general I'm sure some of their bottom-line is also from rent-seeking behavior.
Edit: additional thought: Rent-seeking is child's play when you consider too-big-to-fail, too-big-to-jail.
> Any entities that earn undeserved profits (and some will argue many financial institutions fall under this umbrella)
Some people will argue for just about any absurd personal opinion. It doesn't mean it's correct or that it has any merit.
> I think a case can be made that a substantial percentage of profits earned by the financial industry derive from economic "rent seeking" and are not materially contributing to productivity in society.
Even if this is true so what? What's your point? A lot of businesses don't contribute to productivity nor do they need to.
Not so fast. Banks are in positions of trust which are easy to abuse. That is a different animal than some ex-im guy selling widgets at a huge market to people who don't know better. Not onlly are they in positions to exploit their delegated trust in the information flow of major economies, they are also in positions that allow them to exploit both their data and verious mechanisms of market micro-structure through the revolving door relationship with the regulatory infrastructure. In other words, nobody outside of finance really has a clue about how to regulate a bank...and 9/10 bankers barely have a clue about anything in the bank that they don't directly deal with. This limits the amount of people that are feasible to regulate these banks. Which means that being a senior executive is in an of itself a pathway to exploit this type of second derivative opportunity that comes from holding onto a scarce commodity that is on the one hand in high demand by the enforcemnet patrons in government, and on the other hand, can be exploited in and of its own right through various commercial channels both legitimate and less so.
Well, banks are earning money, and if it ends up this money is essentially just a "gift" to banks from the rest of us in society, that's a problem.
If you object and say "but they deserve these profits!" then you're arguing that they are contributing to productivity (and then the profits would be fine)
The only reason people think that banks profits are undeserved in comparison to the other industries, is because people don't care to understand banking.
If you take, for example, pharmaceuticals or the food industry, you'd find a lot more f'ed up things, with people massively taken for a ride. But apparently it's not hip to hate on those industries yet.
Having technology perform many of the functions that front-office staff have traditionally done, allows banks to improve their efficiency - industrialise as you say.
However, it also allows the financial industry to become commoditiesed and lowers the barriers to entry. You only need to walk down the City of London to see the sheer number of banks form all over the world. They all compete (except when they collude) and drive down prices. Secondly, you also start seeing large corporates doing their own banking - what does a bank to that BP can't do on their own?
My banking charges only ever seem to go up, while the interest I earn in the bank is quite pathetic, due to the instability they have caused. We have had 7 years of "emergency low" interest rates here in Europe.
I like this attempt to disinfect this mess with some sunlight, though at the end of the day the only way to truly solve these problems (as they may exist) will be for all of us to stop being willing participants in the system. I believe strongly that technology will offer solutions for this in the near future.