Finance should be regulated into utility status all over the civilized
world, and if the community of hard-core financial engineers really
wants to go on being a collective pathogen, they’ll be forced to
acknowledge that what they do just isn’t civilized behavior, and do it
somewhere else. We’ll be way better off without them among us.
As George Soros describes in the historical section of The New Paradigm for Financial Markets, this was exactly the attitude which evolved from the wreckage of the Great Depression, but starting as early as the 60s the financial world steadily chipped away at the constraints which had been imposed. (Soros himself was one of the pioneers in the dilution of these constraints.)
I generally wonder whether Finance has been consider to be anything other than self-serving
No it hasn't. But there have been times (eg, post WW2 to Regan-era) and places where regulation has shaped the market in such a way that financial players interests were more aligned with society as a whole.
> But there have been times (eg, post WW2 to Regan-era) and places where regulation has shaped the market in such a way that financial players interests were more aligned with society as a whole.
How about some evidence? Be careful of correlation vs causation. Heck - be careful about correlation. (Consider fees for stock purchase.)
Note that inflation had some effect. The dollar threshold for "accredited investor" was constant for a long time, but $200k/year in income and $1M in "not-residence" investments became more common. As a result, more folks could be angels.
Fair call. I suspect we are talking about different things, though. I'm not talking about investment performance at all - more about how the financial sector supports the healthiness of the rest of the economy.
Anyway, some evidence that regulation can align the interests of the financial sector with the economy as a whole:
For example, Australia has quite strong financial regulation - much, much stronger than in the US and UK. This includes everything from higher ratios of capital-to-loans required by the banks, to stricter laws around mortgages.
When the financial crisis hit in 2008, the Australian banks were able to survive very well, which - combined with a government stimulus program and continual growth in China - meant that Australia was the only developed nation that did not fall into recession in 2009.
More evidence?
* Both sides of politics in Australia are supportive of strong financial regulation
* The World Economic Forum says The United Kingdom, buoyed by the relative strength of its banking and non-banking financial activities, claimed the Index's top spot from the US, which slipped to third position behind Australia largely due to poorer financial stability scores and a weakened banking sector.http://www.weforum.org/en/initiatives/gcp/FinancialDevelopme...
* Australia has four of the only around a dozen AA-rated banks in the world, due in part to a tight regulatory regime and domestic banks' limited exposure to poor-quality loans that were the downfall of many banks globally.
Australia has a so-called "four pillars" policy that prevents the four largest banks from merging. That has shielded the four, Australia & New Zealand Banking Group Ltd., National Australia Bank, Commonwealth Bank of Australia, and Westpac Banking Corp., from takeover and allowed them to build up profitable, dominant market positions without the need to delve into riskier lending practices.
John Brogden, chief executive of pension and managed funds industry lobby the Investment & Financial Services Association, said the results are a "testament to our deep and liquid markets, supported by Australia's superannuation (pension) and managed funds sectors."
> For example, Australia has quite strong financial regulation - much, much stronger than in the US and UK. This includes everything from higher ratios of capital-to-loans required by the banks, to stricter laws around mortgages.
You don't understand - the loose standards in the US for mortgages came from govt, not banks.
> Anyway, some evidence that regulation can align the interests of the financial sector with the economy as a whole:
You're assuming that govt is interested in the economy as a whole. I don't know about Australia, so I'll accept your assertion that the Australian govt is concerned about the economy as a whole, but the US govt isn't.
And no, the Repubs aren't the worst culprits here. They're largely useless to moderately clueless, but they're not actively hostile.
You don't understand - the loose standards in the US for mortgages came from govt, not banks.
Yes, I do understand that.
In Australia (and in many other places) "sub-prime loans" were not made by banks because they are illegal.
There have been occasional attempt by non-bank lenders to bring them in (eg, "low doc loans") but in every case the loopholes that allowed them were closed.
You're assuming that govt is interested in the economy as a whole. I don't know about Australia, so I'll accept your assertion that the Australian govt is concerned about the economy as a whole, but the US govt isn't.
That's quite a bold statement! How about some evidence? ;)
>> You're assuming that govt is interested in the economy as a whole. I don't know about Australia, so I'll accept your assertion that the Australian govt is concerned about the economy as a whole, but the US govt isn't.
> That's quite a bold statement! How about some evidence? ;)
You quoted one bit "You don't understand - the loose standards in the US for mortgages came from govt, not banks."
Another is regulatory "encouragement" for banks to hold fannie and freddie stock; that put them all at risk.
They helped distract outsiders from the truly profane event: the growing misalignment of interests between the people who trafficked in financial risk and the wider culture.
Of all the failures that led to the big meltdown, the most aggravating is the failure of the bond-rating agencies. These people took good money for pasting AAA credit ratings on piles of the most implausible shit imaginable, and what’s irritating isn’t that they did it, it’s that apparently they didn’t break any laws and thus there’s little prospect of the long prison terms that anything smelling of natural justice would require.
If anyone is looking for a YC application idea, there's one right there. To be more explicit:
Ratings agencies currently are paid by investment companies to rate the risk associated with the products they are bringing to market (ie, the fox is paying the farmer to tell the chickens how safe the hen house is ).
The financial incentives for ratings agencies are aligned with the sellers, not the buyers. That creates a huge risk for the buyers, because they can't (or shouldn't) trust the ratings.
There's an opportunity there to create a company that does ratings but takes money from the buyers, not the sellers.
(Note that entrenched players will go to huge lengths to tell you how hard this is, and how smart all the "financial engineers" are. From my very basic investigations, I'm not at all convinced that it's as hard as they try and make it seem.)
You're forgetting that many institutions can only accept/rely on ratings from regulator-approved companies.
For example, the SEC has granted a ratings monopoly to three companies.
The idea is that ratings are too important to be left to some unapproved company. If anyone could issue ratings, folks might be led to make bad investments....
This is one example of how regulation is systemic risk.
The events described in the Big Short are a national disgrace.
Wall Street was engaged in a fraudulent conspiracy in which the buyer, the seller, the guaranty company, and the rating agency would willingly suspend disbelief so the buyer could get a 'AAA' security that miraculously paid a few hundred basis points over AAA corporates and count as AAA toward risk-based capital regulations, everyone got fees, and those 'lucky' subprime borrowers could suddenly access unlimited amounts of credit without adequate income or collateral.
Then when this created a giant bubble (along with other factors like deregulation, lax application of the regulatory powers that existed, a shockingly long period of lax monetary policy, and human greed) and it all blew up with catastrophic consequences, the banks got a giant bailout, went back to business as usual, and (so far) fended off meaningful reform. They said, who could have known, when the book shows many people did in fact clearly analyze the situation and foresee catastrophe.
That being said - there are countries that have highly state-controlled finance sectors. A notable feature is that they don't have vibrant startup and VC sectors. The only reason capital is available in large sums to start up companies like Google and Facebook is because of the possibility of rich IPO exits. Interestingly, some of those countries with regulated and state-owned banks, where the startup scene is nonexistent and the same 50 companies have dominated the economy forever, did not escape reckless behavior and large losses in the banking sector.
This is still America, last I checked, and people should be free to take big risks and come up with innovative financial structures. But consumer regulation must prevent toxic consumer products like the certain subprime products that were misleadingly marketed. Banks, which are systemically important, enjoy special privileges that make them a lot of money, and receive implicit and explicit government guarantees, cannot become giant extremely leveraged hedge funds.
So, you need to make a distinction between a highly regulated utility financial sector; and a speculative sector which can keep taking the risks and innovating in ways that create value, without the rest of us being on the hook to bail them out when things don't work out.
20 comments
[ 3.2 ms ] story [ 36.5 ms ] threadThat's not a rhetoric question. I generally wonder whether Finance has been consider to be anything other than self-serving.
No it hasn't. But there have been times (eg, post WW2 to Regan-era) and places where regulation has shaped the market in such a way that financial players interests were more aligned with society as a whole.
How about some evidence? Be careful of correlation vs causation. Heck - be careful about correlation. (Consider fees for stock purchase.)
Note that inflation had some effect. The dollar threshold for "accredited investor" was constant for a long time, but $200k/year in income and $1M in "not-residence" investments became more common. As a result, more folks could be angels.
Fair call. I suspect we are talking about different things, though. I'm not talking about investment performance at all - more about how the financial sector supports the healthiness of the rest of the economy.
Anyway, some evidence that regulation can align the interests of the financial sector with the economy as a whole:
For example, Australia has quite strong financial regulation - much, much stronger than in the US and UK. This includes everything from higher ratios of capital-to-loans required by the banks, to stricter laws around mortgages.
When the financial crisis hit in 2008, the Australian banks were able to survive very well, which - combined with a government stimulus program and continual growth in China - meant that Australia was the only developed nation that did not fall into recession in 2009.
More evidence?
* Both sides of politics in Australia are supportive of strong financial regulation
* The CIA World Fact book says The Australian financial system remained resilient throughout the financial crisis and Australian banks have rebounded https://www.cia.gov/library/publications/the-world-factbook/...
* The World Economic Forum says The United Kingdom, buoyed by the relative strength of its banking and non-banking financial activities, claimed the Index's top spot from the US, which slipped to third position behind Australia largely due to poorer financial stability scores and a weakened banking sector. http://www.weforum.org/en/initiatives/gcp/FinancialDevelopme...
* Australia has four of the only around a dozen AA-rated banks in the world, due in part to a tight regulatory regime and domestic banks' limited exposure to poor-quality loans that were the downfall of many banks globally.
Australia has a so-called "four pillars" policy that prevents the four largest banks from merging. That has shielded the four, Australia & New Zealand Banking Group Ltd., National Australia Bank, Commonwealth Bank of Australia, and Westpac Banking Corp., from takeover and allowed them to build up profitable, dominant market positions without the need to delve into riskier lending practices.
John Brogden, chief executive of pension and managed funds industry lobby the Investment & Financial Services Association, said the results are a "testament to our deep and liquid markets, supported by Australia's superannuation (pension) and managed funds sectors."
Australia has a A$1 trillion-plus retirement savings industry, aided by the introduction of mandatory employer contributions to employee pension funds in the early 1990s. http://wiadomosci.onet.pl/2057316,10,global_crisis_nudges_au...
You don't understand - the loose standards in the US for mortgages came from govt, not banks.
> Anyway, some evidence that regulation can align the interests of the financial sector with the economy as a whole:
You're assuming that govt is interested in the economy as a whole. I don't know about Australia, so I'll accept your assertion that the Australian govt is concerned about the economy as a whole, but the US govt isn't.
And no, the Repubs aren't the worst culprits here. They're largely useless to moderately clueless, but they're not actively hostile.
Yes, I do understand that.
In Australia (and in many other places) "sub-prime loans" were not made by banks because they are illegal.
There have been occasional attempt by non-bank lenders to bring them in (eg, "low doc loans") but in every case the loopholes that allowed them were closed.
You're assuming that govt is interested in the economy as a whole. I don't know about Australia, so I'll accept your assertion that the Australian govt is concerned about the economy as a whole, but the US govt isn't.
That's quite a bold statement! How about some evidence? ;)
> That's quite a bold statement! How about some evidence? ;)
You quoted one bit "You don't understand - the loose standards in the US for mortgages came from govt, not banks."
Another is regulatory "encouragement" for banks to hold fannie and freddie stock; that put them all at risk.
They helped distract outsiders from the truly profane event: the growing misalignment of interests between the people who trafficked in financial risk and the wider culture.
http://www.portfolio.com/news-markets/national-news/portfoli...
That's the real problem, and that is where proper regulation can help.
And where improper regulation can make things worse. Given recent history, what's more likely?
You don't get to assume that unicorns will appear this time when talking about a situation in which ogres have been the status quo.
I'd be interested to hear how less regulation would have avoided the sub-prime financial crisis?
If we hadn't had the regulations that "encouraged" banks to do subprime mortgages, they wouldn't have been as common.
If regulators hadn't invented risk-free securitization (via insurance)....
If regulators hadn't "encouraged" banks to hold fannie and freddie stock (through tax policy and declaring it to be risk-free)....
If anyone is looking for a YC application idea, there's one right there. To be more explicit:
Ratings agencies currently are paid by investment companies to rate the risk associated with the products they are bringing to market (ie, the fox is paying the farmer to tell the chickens how safe the hen house is ).
The financial incentives for ratings agencies are aligned with the sellers, not the buyers. That creates a huge risk for the buyers, because they can't (or shouldn't) trust the ratings.
There's an opportunity there to create a company that does ratings but takes money from the buyers, not the sellers.
(Note that entrenched players will go to huge lengths to tell you how hard this is, and how smart all the "financial engineers" are. From my very basic investigations, I'm not at all convinced that it's as hard as they try and make it seem.)
For example, the SEC has granted a ratings monopoly to three companies.
The idea is that ratings are too important to be left to some unapproved company. If anyone could issue ratings, folks might be led to make bad investments....
This is one example of how regulation is systemic risk.
I assume you'd need a licence to give financial advice, but that should be easier to get than the rating agency license (I assume).
This is one example of how regulation is systemic risk. Well it sounds more like bad regulation to me.
> Well it sounds more like bad regulation to me.
Every regulation can be bad. However, unlike individual firm policy, regulation is system-wide, so the risk is necessarily systemic.
Wall Street was engaged in a fraudulent conspiracy in which the buyer, the seller, the guaranty company, and the rating agency would willingly suspend disbelief so the buyer could get a 'AAA' security that miraculously paid a few hundred basis points over AAA corporates and count as AAA toward risk-based capital regulations, everyone got fees, and those 'lucky' subprime borrowers could suddenly access unlimited amounts of credit without adequate income or collateral.
Then when this created a giant bubble (along with other factors like deregulation, lax application of the regulatory powers that existed, a shockingly long period of lax monetary policy, and human greed) and it all blew up with catastrophic consequences, the banks got a giant bailout, went back to business as usual, and (so far) fended off meaningful reform. They said, who could have known, when the book shows many people did in fact clearly analyze the situation and foresee catastrophe.
That being said - there are countries that have highly state-controlled finance sectors. A notable feature is that they don't have vibrant startup and VC sectors. The only reason capital is available in large sums to start up companies like Google and Facebook is because of the possibility of rich IPO exits. Interestingly, some of those countries with regulated and state-owned banks, where the startup scene is nonexistent and the same 50 companies have dominated the economy forever, did not escape reckless behavior and large losses in the banking sector.
This is still America, last I checked, and people should be free to take big risks and come up with innovative financial structures. But consumer regulation must prevent toxic consumer products like the certain subprime products that were misleadingly marketed. Banks, which are systemically important, enjoy special privileges that make them a lot of money, and receive implicit and explicit government guarantees, cannot become giant extremely leveraged hedge funds.
So, you need to make a distinction between a highly regulated utility financial sector; and a speculative sector which can keep taking the risks and innovating in ways that create value, without the rest of us being on the hook to bail them out when things don't work out.