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Friday, February 20, 2015

Banking is bad for the economy

It's amazing that people are talking about how excessive finance and credit money warp the economy to its detriment without ever managing to mention the vital Austrian concept of "malinvestment". But at least they are starting to talk about it, as it will lead them there eventually.
A new study from the Bank for International Settlements (the central bankers' central bank, as it is dubbed) shows exactly why rapid finance sector growth is bad for the rest of the economy.

The study, by Stephen Cecchetti and Enisse Kharroubi, is a follow-up to a 2012 paper which outlined the negative link between the finance sector and growth, after a certain point. When an economy is immature and the financial sector is small, then growth of the sector is helpful. Enterprising businessmen can get the capital they need to expand their companies; savers have a secure home for their money, making them more willing to provide finance to the business sector; and so on.

But you can have too much of a good thing. The 2012 paper suggests that when private sector debt passes 100% of GDP, that point is reached. Another way of looking at the same topic is the proportion of workers employed by the finance sector. Once that proportion passes 3.9%, the effect on productivity growth turns negative. Ireland and Spain are cases in point. During the five years beginning 2005, Irish and Spanish financial sector employment grew at an average annual rate of 4.1% and 1.4% respectively; output per worker fell by 2.7% and 1.4% a year over the same period.

The new paper examines why this might be. One part of the thesis is a familiar complaint, neatly summarised in the 2012 paper

people who might have become scientists, who in another age dreamt of curing cancer or flying to Mars, today dream of becoming hedge fund managers

In short, the finance sector lures away high-skilled workers from other industries. The finance sector then lends the money to businesses, but tends to favour those firms that have collateral they can pledge against the loan. This usually means builders and property developers. Businessmen are lured into this sector rather than into riskier projects that require high R&D spending and have less collateral to pledge.
I'm reading the paper now, and will review it once I've finished digesting it.

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73 Comments:

Anonymous Ryan ATL February 20, 2015 8:21 AM  

What do we give a shit though. Mo money someone else problems. Just move all that R&D etc to China

Anonymous Michael Maier February 20, 2015 8:44 AM  

Looking at history, I cannot help but think all money problems are solved with real currency.

Blogger Student in Blue February 20, 2015 9:08 AM  

One of the commenters on the article postulated that the Financial sector is "a good servant but a bad master".

I think he's on to something.

Anonymous Stilicho February 20, 2015 9:11 AM  

without ever managing to mention the vital Austrian concept of "malinvestment".

Yep. Plus the fact that once the sector grows beyond the point where it is meeting the needs of business vis a vis pooling capital and providing financing needed by business, it starts looking for other "markets" i.e. other things to do in order to generate profits. The result of this "financial solution looking for a problem to solve" is, as we've seen, the financialization of everything. What was once a valuable tool becomes a parasitic millstone around the neck of the economy because it skims from all productive enterprises at ridiculous levels.

The proportion of workers is an interesting metric, but my first question is what are the percentages of GDP represented by financial sector revenue over time?

Anonymous Stilicho February 20, 2015 9:15 AM  

I'll add that many on the right who correctly identify the economic problems caused by a bloated, parasitic government are often blind to similar economic problems caused by a bloated, parasitic financial sector. There is an unfortunate tendency to lump all "business" together without distinguishing between productive and non-productive activities.

Anonymous Roundtine February 20, 2015 9:24 AM  

The financial sector booms during hyper/inflation. The financial sector in the S&P 500 Index went from 7% at the end of the S&L crisis, to 22% at the peak in 2008. Financials plunged down to about 14%, but now they've crept back to 16% and not very far from the technology sector's 19.5%. The financial sector has done poor to neutral since 2008. It hasn't been a market leading sector and has maybe 1 year of outperformance relative to the index, ignoring the 2009 rebound.

Anonymous Will Best February 20, 2015 9:30 AM  

Sounds about right. Bill Gates during the Microsoft heyday of the 90s is quoted as saying his chief competitor for talent wasn't anybody in technology. The best and brightest engineers wanted the prestige of working at Microsoft. It was Goldman Sachs who he was worried about poaching talent.


Looking at history, I cannot help but think all money problems are solved with real currency.

It also creates a bunch of them.

There is an unfortunate tendency to lump all "business" together without distinguishing between productive and non-productive activities.

Some finance and some legal is good for business. Finding the happy middle is hard, but it would help if we stopped letting them write their own regulations.

Anonymous A Paradigm Is More Than Twenty Cents February 20, 2015 9:54 AM  

In short, the finance sector lures away high-skilled workers from other industries. The finance sector then lends the money to businesses, but tends to favour those firms that have collateral they can pledge against the loan.

AND the well connected. Increasing financialization of the economy has gone hand in hand with increasing governmentalization - rent seeking is much more efficient when it's easy to use government to weed out competitors.

The number of companies in the US is now at the lowest level since the 1970's, despite population increase. Financialization at work.

Anonymous Stilicho February 20, 2015 10:03 AM  

OT humor-- John C. Wright's creative cursing directed towards a pinkshirt:

May the great white apes of Barsoom bugger him and the thoat he rode in on.

Bravo!

Anonymous Michael Maier February 20, 2015 10:03 AM  

Will Best February 20, 2015 9:30 AM Looking at history, I cannot help but think all money problems are solved with real currency.

It also creates a bunch of them.


Those are features, not bugs.

Anonymous That Would Be Telling February 20, 2015 10:03 AM  

There's no way to look at the STEM talent issue in the US without acknowledging the supply of it has been artificially increased, with a pretty clear goal of driving down wages. Since at least the '80s when the National Science Foundation started its campaign, and note that Mr. Gates' comment about competing with Goldman Sachs during "the Microsoft heyday of the 90s" was also during the beginning of the heyday of the H1-B visa (which has no end in sight), which I hope I don't have to explain did not exactly bring in the "best and the brightest".

For MIT EECS majors, a common to this day first job/career, even after the 2008 financial crash, has been in finance where their math skills are appreciated with cold, hard cash, and careers don't start ending when they get into their 30s.

Another factor, certainly "finance" related, is that the classic IPO exit for venture capital (VC) ended for all but the most exceptional technology companies in the early '00s, with SarBox being the final nail in its coffin, minimally replaced by getting acquired by a big company, sometimes just for the technical talent (the so-called acquhire). So the amazing 4 decade run of that startup model is essentially over, VC returns have been flat or negative since then, and overall the sort of companies that can manage the startup gauntlet are rather different.

Blogger Feather Blade February 20, 2015 10:09 AM  

Looking at history, I cannot help but think all money problems are solved with real currency.

Agreed! We should return to the salt standard!

Anonymous Neg February 20, 2015 10:23 AM  

little bit OT, but just curious if Vox or any ilk have read this book, and if it has worthy ideas:

Knowledge and Power: The Information Theory of Capitalism and How it is Revolutionizing our World by George Gilder

Blogger Geoff February 20, 2015 10:38 AM  

Banking, per se, can be a useful part of the economy. I would change the title of this post to "Excessive" banking is bad for the economy.

Anonymous old coyote February 20, 2015 10:57 AM  

The only problem with banking is usury. The only problem with usury is who engages in it. When the church made usury illegal, Cathedrals and great art flourished in a great age of trade. Where are the Cathedrals being built today. Nothing but sterile glass boxes reflecting the lost souls far below.

Anonymous DissidentRight February 20, 2015 11:09 AM  

I think the savings rate is going to determine the size of the banking industry (ignoring central banking/fiat currency).

If the savings rate is high, that means more investments, so more bankers are needed to evaluate them. Fewer investments, fewer evaluations, fewer bankers.

So assuming a free markets with sound money, a booming banking industry suggests a high savings rate, which suggests a future of exponential growth.

Not really knowing anything about the technical details of evaluating potential investments, I would not be surprised if the number of bankers needs to scale up by the magnitude of the savings, not the rate of savings--i.e., the amount of money the average banker can handle is roughly fixed. In this case, the banking sector would grow "indefinitely" as the nation becomes wealthier. Imagine, for example, that the average banker can handle a million/year in investments. If the nation was investing a million/year per capita, every citizen would need to be a banker. Although, more realistically, bankers would just be handling ever larger amounts of money ever less competently, which would reduce the savings rate because who wants to waste money on bad investments?

Anyway, I find the idea that banking could be bad for the economy to be really weird. That sounds suspiciously like saying that investments could be bad for the economy. What does that even mean? Well, malinvestments, duh. But nobody who is investing their money wants to malinvest it. That's like saying, "Factories are bad the the economy (if they are producing trash nobody wants to buy)".

Stilicho: "There is an unfortunate tendency to lump all "business" together without distinguishing between productive and non-productive activities."

Evaluating prospective investments is easily one of the most productive activities imaginable. Maybe the most productive activity imaginable. If the evaluators are incompetent, then you create an industry of con men, making saving a waste of time.

Anonymous Titus Didius Tacitus February 20, 2015 11:16 AM  

old coyote: "The only problem with usury is who engages in it."

Usury can be worse depending on who engages in it, but it's an open door to destruction even if it isn't combined with ethnic conflict.

The Roman elite engaged in too much usury, gradually enslaving and thus ending the Roman farmer-soldiers that had made Rome the jewel of the world.

Biology is boss, not economics. When barbarian armies wandered around Italy unopposed, it didn't matter any more how much money unwise Roman elites had made selling their extended relations into bondage.

Anonymous Titus Didius Tacitus February 20, 2015 11:19 AM  

Will Best: "Some finance and some legal is good for business. Finding the happy middle is hard, but it would help if we stopped letting them write their own regulations."

Finance capital weaponizes readily. Two countries that are the same in wealth and other power factors may have very different military strength because of the difference between extensive peasant-farmed estates on the one hand and a strong steel industry on the other. So too, in internal conflict, some forms of wealth are easier to mobilize to buy political power and influence. Even in its heyday, the buggy whip sector probably never had the same potential to rewrite first its own rules and then a lot of other things that the finance sector does.

Anonymous Stilicho February 20, 2015 11:22 AM  

Anyway, I find the idea that banking could be bad for the economy to be really weird

Start with the fact that you think banking has anything to do with the savings rate. You seem to be operating under the misapprehension that banks make loans from the savings accounts that constitute their reserves. Now, that is certainly how it's taught, but the reality is much different. For more info, read Steve Keen's essay "Roving Cavaliers of Credit". It will give you a good grounding in how bank lending works in practice.

But nobody who is investing their money wants to malinvest it.

It's an Austrian concept related to the false signals sent to businesses by manipulated interest rates. Follow the link at the right side to the "Intro to Austrian Economics" for more info and a grounding in the specific concepts being discussed.


Evaluating prospective investments is easily one of the most productive activities imaginable.


If you are talking about the pooling of capital for investment into productive enterprise, sure, that's a valid, useful function of the financial sector. No one (other than Marxists) disputes that. It's the mission creep that has overtaken the financial sector to the point where, for example, the derivative tail is orders of magnitude larger than the capital deployment dog.

Blogger Geoff February 20, 2015 11:38 AM  

"You seem to be operating under the misapprehension that banks make loans from savings accounts"

Agreed, Stilicho. Banks can basically make loans (i.e. create money) out of thin air as long as they have enough capital.

Anonymous patrick kelly February 20, 2015 11:38 AM  

The smart, talented, and motivated gravitate to where the money and power is?!?!?

I'm shocked...
I know, NASTMPART.....

Anonymous MrGreenMan February 20, 2015 11:41 AM  

@DissidentRight

"I think the savings rate is going to determine the size of the banking industry (ignoring central banking/fiat currency)."

You might think it, but you are wrong, or you are woefully misapplying this concept, or you are so oversimplifying with your statement about central banking and currency as to make your statement void.

http://www.tradingeconomics.com/united-states/personal-savings

The personal savings rate in that chart is pretty steady around 8%, then collapses, then rebounds to only around 4%, from 1959 to present.

If you go ask the commies:

http://tcf.org/blog/detail/graph-how-the-financial-sector-consumed-americas-economic-growth

Their chart shows finance from 2% of the GDP in 1940 to 8% recently.

Anonymous DissidentRight February 20, 2015 11:43 AM  

You seem to be operating under the misapprehension that banks make loans from the savings accounts that constitute their reserves.

The parenthetical statement at the top of my post: "ignoring central banking/fiat currency" was meant to apply to my entire post.

It's the mission creep that has overtaken the financial sector to the point where, for example, the derivative tail is orders of magnitude larger than the capital deployment dog.

Because of state interference in the financial sector, and "free" money from the central bank. This could never have happened a free market. I'm simply suggesting that, in a free market, the banking sector might grow "indefinitely" as a nation becomes wealthier.

If you are talking about the pooling of capital for investment into productive enterprise, sure, that's a valid, useful function of the financial sector.

That is the extent of what I am talking about, yes. I'm not aware of any other market function of banking (except for maybe stockpiling money in guarded vaults).

Now, that is certainly how it's taught, but the reality is much different. For more info, read Steve Keen's essay "Roving Cavaliers of Credit". It will give you a good grounding in how bank lending works in practice.

It's an Austrian concept related to the false signals sent to businesses by manipulated interest rates.


Yes...

Anonymous Ludwing Von Mises, mentor to Scrooge McDuck February 20, 2015 11:50 AM  

Banking (credit) can be useful if it facilitates capital formation (production, supply, technology) and consumer spending (demand, higher perceived quality of life).

But is being produced now? Transgenderism, faggotry, drones to bomb ragheads, Ferguson, "tolerance"

What is being consumed now? ObamaPhones, ObamaCare, porn, CandyCrush, tweets, prolefeed.

Bottom line is we are fucked.

Anonymous DissidentRight February 20, 2015 11:51 AM  

@MrGreenMan

The personal savings rate in that chart is pretty steady around 8%, then collapses, then rebounds to only around 4%, from 1959 to present.

Since America has had central banking and fiat currency (and Keynesian monetary policy) throughout that whole period, this does not constitute a response to my (purely theoretical) claim, does it?

Anonymous Noah B. February 20, 2015 11:57 AM  

Taxation is another major cause of malinvestment, of course.

Anonymous Stilicho February 20, 2015 12:03 PM  

This could never have happened a free market.

Not to this degree certainly, because a free market would not protect the industry from the consequences of its foolish decisions. Enter gov't intervention on behalf of political favorites, stage left...

my (purely theoretical) claim

In theory, with sound money and limits on bank leverage, I expect that the savings rate would act as a control on the size of the financial sector.

Anonymous Jack Amok February 20, 2015 12:10 PM  

people who might have become scientists, who in another age dreamt of curing cancer or flying to Mars, today dream of becoming hedge fund managers

Add in lawyers, lobbyists and politicians, and I said something rather similar on this blog some years ago.

The parenthetical statement at the top of my post: "ignoring central banking/fiat currency" was meant to apply to my entire post.

Shit. You might as well parenthetically state "ignoring gravity" and talk about how falling off a cliff isn't dangerous. We're talking about the world as it exists, not some fantasy land.

Anonymous Noah B. February 20, 2015 12:11 PM  

Now I'm pretty much in favor of total deregulation of banking, provided the government makes no attempt to backstop the financial sector and only takes on the role of vigorously hunting down and prosecuting those who commit fraud. Get rid of the Fed, ditch the FDIC and NCUA. When you deposit money in a bank, there should be an unequivocal understanding that all of your deposit is at risk. That is in fact the reality of the situation, and government interference has done little but to ensure that the most egregious criminals in the financial sector continually reap large profits.

Blogger Student in Blue February 20, 2015 12:15 PM  

@patrick kelly
NASTMPART
Not Aw Smart, Tarented, Motivated Peepoe Are Rike That?

Anonymous DissidentRight February 20, 2015 12:17 PM  

@Stilicho

I agree.

I expect that the savings rate would act as a control on the size of the financial sector.

Yes, but even if the savings rate is fixed, the actual amount of money being invested will grow as the nation becomes richer (richer per capita). Unless bankers are capable of competently investing an unlimited amount of money, banks will need to hire more of them (per capita).

@Jack Amok

We're talking about the world as it exists, not some fantasy land.

Sure, but in that case blaming the (private) banking sector (and not the State-orchestrated central banking/fiat money scheme) is like blaming the fire and not the arsonist.

Also, we want to shift the world towards free market capitalism, so it's worth discussing what that might look like.

Anonymous Will Best February 20, 2015 12:25 PM  

It's the mission creep that has overtaken the financial sector to the point where, for example, the derivative tail is orders of magnitude larger than the capital deployment dog.

Derivative markets are insurance markets, and insurance is a good thing. If I am a farmer over the last decade I have seen corn sold for $2 per bushel all the way up to over $8 (its currently below $4). Which is a pretty sizable risk for the independent farm (which is why so few exist anymore). Particularly when you can get 25-50% price increases/decrease between the time you plant the crop and the time it is harvested.

Anonymous Stilicho February 20, 2015 12:27 PM  

@DissidentRight I don't think it is particularly controversial to say that a banking sector that is 2% of a larger economy will be larger than a banking sector that is 2% of a smaller economy. However, the premise of the original post we've been discussing is at what point the financial sector's percentage of the overall economy reaches a relative size that is counter-productive. What you've posited (in the context of sound money/banking) is just the banking sector growing at the same rate as the economy (as expressed in the savings rate).

Anonymous Jack Amok February 20, 2015 12:30 PM  

Evaluating prospective investments is easily one of the most productive activities imaginable.

Yes, but how successful are finaciers in doing this? Not very, taken as a whole. Look at the stock market - a perfect test case where the whole point of fund managers is to evaluate possible investments and steer money towards the best ones. Funds that simply buy the market - index funds that don't attempt to evaluate anything but just spread their money evenly around to all businesses - outperform funds that selectively invest in companies their fund managers evaluated as good bets.

Sure, sure, there are some funds that outperform the S&P500, but most don't, and the ones that do usually don't for very long, they eventually crash back to earth. In other words, some funds get lucky. Most of the really successful financiers of history weren't pure financiers anyway, they had significant involvement in some actual Productive Economy industry. J.P. Morgan for instance was a steel baron as much as he was a finacier.

And we haven't even gotten to the subject of malinvestment pressure created by ignorant "money men" who don't really understand an industry but get to exercise influence over companies in it.

"Evaluating prospective investments" turns out to be a useful thing done on a personal scale, but exceptionally counterproductive when done on an industrial scale.

Blogger rumpole5 February 20, 2015 12:33 PM  

"Looking at history, I cannot help but think all money problems are solved with real currency."

By which you mean? Salt? (see above comment) tulip bulbs? Gold? And can't a technology advance inundate any established system with a tsunami of abundance? The internet did so with Clinton's profligacy, and by Jove. I believe Fracking will do so with the MEGA profligacy of the Bush II/Obama era.

Anonymous Stilicho February 20, 2015 12:34 PM  

Derivative markets are insurance markets, and insurance is a good thing.

Tell it to AIG's creditors! It can be useful in the primary derivative market (hedges based on actual production), but we've reached the point where it is an incestuous round-robin of banks buying and selling each other secondary and perhaps even tertiary derivatives (derivatives of derivatives etc.) in order to generate profits NOW with little or no regard to what happens when one bank in the daisy chain can't pay out on its side bets on interest rates, credit defaults, etc.

Anonymous Jack Amok February 20, 2015 12:36 PM  

Sure, but in that case blaming the (private) banking sector (and not the State-orchestrated central banking/fiat money scheme) is like blaming the fire and not the arsonist.

In this case, the banksters are the arsonists and the fire is the central banking/fiat currency apparatus they've created, so I'm placing the blame in the correct spot. You're ignoring the complicity the financial sector has in creating the system that it then exploits.

Anonymous Will Best February 20, 2015 1:07 PM  

Tell it to AIG's creditors! It can be useful in the primary derivative market (hedges based on actual production)

Well at some point you are going to have a speculator (aka somebody willing to take on the political/environmental risks). But the house of cards that gets built on top of that is unstable.

The whole problem with the derivative markets is that when the check came due, the government forced the taxpayers to step int. If we would have just let it all implode in a fiery mess, it would have been an 18 month process that would have cleaned out most the sociopaths that created the mess. Instead we have gotten 6 years of a 1000 cuts courtesy of those sociopaths who have escaped mostly unscathed.

Anonymous DissidentRight February 20, 2015 1:14 PM  

@Stilicho

What you've posited (in the context of sound money/banking) is just the banking sector growing at the same rate as the economy (as expressed in the savings rate).

That was my lesser (stronger) assertion, but my greater (weaker) one is that maybe there are insufficient "economies of scale" in investment evaluation to allow investment management to scale up with national wealth per capita.

If, for example, the average banker can competently handle only 1 million/year, but the economy is saving a 1 million/year per capita, then every citizen would have to be employed in the banking industry to ensure competent investment, regardless of whether they are saving 2% of their income or 50%. Obviously that's absurd and other market factors would come into play, but I mean to suggest that perhaps the equilibrium point isn't merely a ratio of the population based on industrial capital (like, say, agriculture) but is instead based on the productivity of the population, which can grow without bound.

@Jack Amok

But they're not really financiers, are they? They're just gussied up conmen.

"Evaluating prospective investments" turns out to be a useful thing done on a personal scale, but exceptionally counterproductive when done on an industrial scale.

Even if the basis of investment evaluation is just one smart guy doing due diligence (which could be said for a lot of things), if he's turning a profit it makes sense for him to hire some staff and teach them his methods. So you end up with the "industrial" scale anyway. And as long nobody (e.g., the government) is covering your losses, it's not clear why your firm would trend towards counter-productivity…

You're ignoring the complicity the financial sector has in creating the system that it then exploits.

The financial sector created an institution that society authorizes to tax, to coin money, to legislate and enforce arbitrary laws? Without the State (or at least without a Marxist State), [financial] conmen are up shit creek without a paddle and are subject to profit/loss like the rest of us.

Obviously the banksters lobby the State very successfully, but so do any number of other industries.

Anonymous Stilicho February 20, 2015 1:17 PM  

OT-- some inspired levity from Roissy to lighten this discussion of the dismal science:

We hold these truths to be self-evident, that all women are created unequally, that they are endowed by their Creator with certain divergences of appearance, that among these are Beautiful, Ugly, and Downright Hideous. –That to gloss over these divergences, Feminism is instituted among Women, deriving its magical thinking from the consent of the lovelorn. –That whenever any Form of Feminism becomes destructive of these ends, it is the Right of Women and their effete Male petitioners to alter or to reinvent it, and to institute a new Feminism Wave, laying its foundation on such irrationalities and organizing its powers in XXL vestment form, as to them shall seem most likely to effect their glowing Self-Conception and freedom to Hallucinate.

Anonymous 2BIG2FAIL February 20, 2015 1:19 PM  

"The only problem with banking is usury."

Hear, hear, old coyote!

Usury is the Banksters weapon of mass destruction...which is incidentally why all of the major media corporations all fund blasphemy, idolatry and deviancy in our mass media to corrupt the moral character of the nation, and to subvert what used to be a commonly held, Christian ethos, so as to make the masses forget that usury is anti-Christian (among many other aims, of course).

Whether on a micro level, or a macro level, the end goal of usury banking is debt enslavement. They already admitted as such in history's most authentic forgery:

"What also indeed is, in substance, a loan, especially a foreign loan? A loan is - an issue of government bills of exchange containing a percentage obligation commensurate to the sum of the loan capital. If the loan bears a charge of 5 per cent, then in twenty years the State vainly pays away in interest a sum equal to the loan borrowed, in forty years it is paying a double sum, in sixty - treble, and all the while the debt remains an unpaid debt.

From this calculation it is obvious that with any form of taxation per head the State is baling out the last coppers of the poor taxpayers in order to settle accounts with wealthy foreigners, from whom it has borrowed money instead of collecting these coppers for its own needs without the additional interest." - Protocol 20


As Henry Ford said in 1921: "The only statement I care to make about the Protocols is that they fit in with what is going on . . . They have fitted the world situation up to this time. They fit it now."

Blogger CarpeOro February 20, 2015 1:19 PM  

"is like blaming the fire and not the arsonist."

Your giving the financial sector a bit to much credit. Considering the access Goldman Sachs has had to most of the Presidential administrations and the FCC for my entire lifetime, they have been heavily involved in creating the situation, benefiting from it, and avoiding the consequences of it. Not to mention there were financiers involved in the creation of the Creature from Jekyll island.

@Vox
I don't see any mention of Iceland in the article. Let us know if it has an entry in the paper (at work atm, no time to read it). I think Iceland would fit a number of the points, and the results of their refusing to cover the bank debt and the impact on them would be pertinent. After all the ballyhoo when they refused to cover the banksters gambling debt they have become "the country that shall not be mentioned" even in passing regarding what happens when financial sectors run amok and what the post script can be like.

Blogger Akulkis February 20, 2015 1:33 PM  

However, nobody but the bankscan invent money out of thin air to us in bribing the political class.

Anonymous DissidentRight February 20, 2015 1:37 PM  

@ CarpeOro

The thing Goldman Sachs has access to is the real problem. Not Goldman Sachs itself. Without that thing, Goldman Sachs would run out of clients and money as soon as it demonstrated incompetence.

Blogger MATT February 20, 2015 1:52 PM  

Banking Bad on A&E

Anonymous Jack Amok February 20, 2015 3:14 PM  

Apparently according to DissidentRight, banking and Communism are similar in that they'd work perfectly if they were just done right.

Anonymous DissidentRight February 20, 2015 4:02 PM  

Lol, try this: "Apparently Jack thinks that producing food turns out to be a useful thing done on a personal scale, but exceptionally counterproductive when done on an industrial scale."

A nation that can't manage to scale up its investment evaluation services to meet demand is as doomed to poverty as a nation that can't scale up its agricultural services is doomed to starvation.

Anonymous Jack Amok February 20, 2015 4:33 PM  

Scale up its finance sector... beyond 3.9%?

Funny, how we managed to scale up our food production while reducing the number of farmers but when we "scaled up" our finance sector, the number of financiers skyrocketed. And the quality of the product plummeted.

Anonymous DissidentRight February 20, 2015 4:44 PM  

Remind me again, what is the financial equivalent to a gigantic tractor? That is the whole point. We haven't figured out how to build a machine to evaluate arbitrary investment opportunities. So scaling up the process means scaling up the manpower. What's the alternative, let your savings sit because there is no one to competently investment them?

And the quality of the product plummeted.

Funny how having a free market in agriculture makes agriculture awesome, but having a centrally-planned interest rate makes finance suck.

Anonymous Will Best February 20, 2015 5:14 PM  

Remind me again, what is the financial equivalent to a gigantic tractor? That is the whole point. We haven't figured out how to build a machine to evaluate arbitrary investment opportunities.

Really? I used to need to call my broker and spend $50 + % of the transaction. The whole process has been automated with computers and now I can do sophisticated investing for flat dollar rates.

And even business to business financial service products are largely automated these days. The average accountant is 10 times more efficient than he was two generations ago.

In fact its too efficient because we have sophisticated computer models that play high frequency wargames against each other in the same sandbox as everybody else is trying to use. I am not a fan of taxing, but perhaps a 5% total transaction tax on any position held for less than a week would help cut most of the shit out.

OpenID bc64a9f8-765e-11e3-8683-000bcdcb2996 February 20, 2015 5:24 PM  

"...but tends to favour those firms that have collateral they can pledge against the loan."
Unless they have a "strategic bankruptcy" legal teem with a Get out of jail free card.
Or maybe a "Nationalization" scheme in the works.
Let's cut to "The Merchant of Venice"

CaptDMO

Anonymous Jack Amok February 20, 2015 5:35 PM  

Funny you call agriculture a free market.

Anonymous DissidentRight February 20, 2015 6:08 PM  

@ Will Best
I don't think you're describing the process of evaluating a potential investment, although I confess to not knowing much of anything about buying stocks (although I was more thinking along the lines of providing startup capital to entrepreneurs).

It is hard for me to believe that computerized trading is useful for making long-term investments…but again, I don't really know what I'm talking about there. Feel free to clue me in if you like.

@ Jack Amok
I think agriculture was essentially free back when it was industrialized. Meanwhile the financial sector has blossomed, it seems, as a direct response to increasing government intervention in banking.

Blogger Zimri February 20, 2015 7:49 PM  

The Telegraph in the UK is now under fire. Because they've been corrupted by... a Swiss bank.

Anonymous Jack Amok February 20, 2015 10:19 PM  

I think agriculture was essentially free back when it was industrialized.

What role did agriculture play in triggering the Great Depression?

Blogger pyrrhus February 20, 2015 11:04 PM  

Absurd levels of malinvestment, from wind power and Tesla to bullet train from nowhere to nowhere, permeate the US economy...meanwhile Obama is plotting to destroy the Trans-Alaskan pipeline, one of our most valuable pieces of infrastructure....

Anonymous Discard February 21, 2015 2:38 AM  

Training men who would make good engineers to become bankers is like training women who would make good mothers to be engineers.

Anonymous DissidentRight February 21, 2015 10:17 AM  

@Jack

I assume agriculture was one of the industries that elected to keep prices artificially high as per the wishes of the communist leadership.

Was agriculture's share of the economy rising or falling during this time?

Anonymous Jack Amok February 21, 2015 12:43 PM  

I assume agriculture was one of the industries that elected to keep prices artificially high as per the wishes of the communist leadership.

Actually the opposite. Agriculture industrialized in the first two decades of the twentieth century during a relative boom. US farmers were making good money, especially when WWI broke out and Europeans were too busy shooting each other to grow their own food.

Farmers responded to the free market by leveraging themselves to the hilt, borrowing money against the value of their land to buy more land and more expensive equipment to increase yelds. Banks were happy to lend to them, since even if grain prices fell, the bankers figured they had the land and machinery as collateral. Fantastic example of linear thinking, not realizing that the value of the land and machinery was tied to the profitability of farms and if prices fell to where farmers couldn't pay off their loans, the value of the collateral would go away too. But nobody worried about that, they just poured money into bringing as much new - usually marginal - land into production as possible, regardless of how much food people actually needed.

And of course all the extra production created a glut, which the end of the war and massive grain exports to Europe highlighted. Prices crashed in the twenties. In the years running up to the Stock Market crash in 1929, hundreds of thousands of farms were foreclosed on, and the banks that loaned them money were left undercapitalized and in no position to survive any further problems.

Plus, a lot of the marginal land bround into production via borrowed money was previously scrubland that, after being plowed was succeptible to soil loss and became the source of the Dust Bowl.

Since you mentioned the "free market" industrialization of agriculture as a success story, I thought you'd enjoy a little stroll through history of how that went and what impact banking played in the story.

Anonymous DissidentRight February 21, 2015 9:50 PM  

That's fascinating, and I appreciate the effort. My understanding of the Austrian view is that bubbles are caused (chiefly) by loose monetary policy, and that this was indeed the policy leading up to the Great Depression. So a bubble in agriculture would be consistent with that view.

Regardless, the point I was making about agriculture is that the free market allowed technological innovation to thrive, vastly reducing the necessary manpower. (I.e., the number of farmers went from like 70% or whatever to 2-3%.) And the only reason I brought that up was as contrast to the banking sector, where it is not clear that technological innovation can substantially reduce the manpower. Of course I could easily be wrong.

I merely point out that _if_ this is the case, then we would expect the proportion of labor in the banking sector to rise with per capita wealth, other things being equal, such that the optimum size of the banking sector could be "very large".

Also, I don't get people's disdain for bankers. Engineers are great, but somebody needs stand in the middle to make sure the engineers aren't actually conmen.

Anonymous Discard February 22, 2015 12:13 AM  

DissidentRight: Disdain for bankers could be likened to disdain for lawyers. There are too many and their collective vices outweigh their virtues.

Anonymous DissidentRight February 22, 2015 12:08 PM  

@Discard

I don't really understand the disdain for lawyers either. Disputes about the law are inevitable, and if you're involved in a dispute, you want an expert in the law to argue your case. And I _really_ don't understand why people think we have "too many" lawyers. If there are few lawyers, they can demand high wages and shut out the poor and middle class from adequate representation, while the wealthy get the best representation. (Which is what happens.) Many lawyers drive the price down.

Obviously it would be nice if our legal system was less archaic and insane. I think it's immoral to make any law that can't be comprehended by a highschool dropout with a IQ of 85. But given the legal system as it exists (particularly victimless "crimes"), the number of lawyers is clearly far too small. Probably by an order of magnitude. Or more.

Anonymous Jack Amok February 22, 2015 1:58 PM  

I don't really understand the disdain for lawyers either. Disputes about the law are inevitable, and if you're involved in a dispute, you want an expert in the law to argue your case.

No, what you want is for the law to be simple enough that you are capable of arguing your own case. The notion that we need special priests of the law to intervene for us is the source of the problem. And lawyers work very hard to make sure they continue to have employment by making the law as obtuse as possible.

They are paid to argue for a living, with other men's lives, freedom and fortunes at stake. A more contemptible occupation I can't really imagine. Even bankers are higher creatures.

Anonymous Discard February 22, 2015 11:29 PM  

DissidentRight: IIRC, barratry is the crime of deliberately dragging out a case with the cooperation of the opposing lawyer in order to run up both your fees. What we have today is barratry on a national scale, which is why we have a "need" for so many lawyers. Does it really take two years or more to settle a properly drawn up will, or to prosecute a simple shooting? Should 1/3 of the cost of a ladder really be liability insurance? Having many lawyers have not driven the cost of legal representation down, it has driven the need for legal representation up.

Anonymous DissidentRight February 23, 2015 12:55 AM  

@Jack

Yes, I said as much: "I think it's immoral to make any law that can't be comprehended by a highschool dropout with a IQ of 85." Of course, tens of millions of people have IQs less than that, and criminal rates tend to spike up amongst that class.

Don't you think you would win an argument against a person with an IQ of 80 every time, regardless of who was right or wrong? I'm confident I would...

Anyway who says I want to argue my own case? Some of us are better (much better) at arguing than others. Men are much better at arguing than women. I'd prefer a trained expert. I don't write my own computer code or produce my own groceries, why should I be expected to argue my own case, regardless of how simple the law is?

Do you think it's contemptible to argue an innocent man's case? That is one of the most noble occupations possible. Perhaps the most noble, if you don't count military service in a defensive war.

@Discard

I don't dispute any of that, but my problem is I don't like objecting to an otherwise perfectly good principle just because our marxist society has corrupted it.

(For example, many libertarians lambast the police...mainly for racism. Yet a libertarian society would need police, and given racial crime differentials, those police would be "racist". Substantially more racist than they are currently.)

Anonymous Discard February 23, 2015 2:55 AM  

DissidentRight: The Marxists have added to the corruption of the lawyers, but they didn't invent it. Charles Dickens' novel "Bleak House" turned on a fictional case, Jarndyce vs Jarndyce, in which a huge inheritance was consumed by legal fees over a span of 30 years. The case was fiction, but the problem wasn't. The idea of making a living by cleverly stealing from others is an ancient one.

Anonymous DissidentRight February 23, 2015 7:46 AM  

"Arguing the case of the innocent" is the opposite of "cleverly stealing from others."

The thing is, Discard, what you are objecting to (lies and crime, particularly lies and crime that carefully skirt the border of technical illegality) is the very thing you'd want a (moral) lawyer to protect you from.

Yes, it's particularly obnoxious when lawyers cheat (especially when they just barely cheat) the innocent, but I think the whole reason we have law and lawyers in the first place is that all kinds of people are already doing their best to cheat the innocent.

Rather than knock the profession out of principle, it's better to admit that the profession is necessary due to human nature, and we should search for ways to systematically elevate moral lawyers and destroy the dishonest ones. Much as the same as we would do for any profession...

Anonymous DissidentRight February 23, 2015 4:04 PM  

Indeed. And it's a problem that includes plumbers, used car salesmen, and investors.

Anonymous Jack Amok February 24, 2015 1:07 AM  

Do you think it's contemptible to argue an innocent man's case?

I'm rather late in replying, but fine, defending an innocent man is admirable.

Now, what about the other 99% of lawyers?

(and BTW, if a laywer is nobly defending an innocent man... who is on the other side? Is the innocent man being prosecuted by an auto mechanic or something?)

Anonymous Discard February 24, 2015 1:10 AM  

DissidentRight: How many lawyers are defending the innocent as opposed to cheating them? I don't knock lawyers out of principle. I knock them for the same reason that I knock Blacks. There are good ones, but I have no use for the great majority.

Anonymous DissidentRight February 24, 2015 5:02 PM  

I concede that lawyering is a profession uniquely susceptible to corruption, but there are plenty of dishonest men in other professions who will happily rip you off given the chance.

The point is, if consumers demand a service/product, like competitively-priced honest legal representation, then the market pressure will be on providers to actually provide that service. So if lawyers are uniquely dishonest, what factors are distorting the market? ("Quite a few".)

I think a big factor is, as was mentioned, the absurd scope/complexity of laws, combined with a glacially-unresponsive repeal process to get rid of laws that are unnecessary or have unintended consequences. A streamlined legal system focusing on the non-aggression principle and carefully defined property rights would go a long way.

who is on the other side?

A lawyer representing either a bad person or a mistaken person. Mistakes can be forgiven (and restitution made for the innocent party's legal expenses), but bad people (and the lawyers representing them) should be punished harshly. That does seem to happen occasionally, but it needs to happen a lot more. "It's the law" is not an excuse if the law is bad, and lawyers are uniquely well-qualified to determine if laws are good or bad.

As far as knocking...blacks (surely there's some word that alliterates better? lol) the main problem is the accepted Narrative. 200 years ago, criticizing blacks would just be classless/cowardly because civilization was already organized to account for black dysfunction. (The same basic logic applies for women--charity and chivalry are necessary components of sane civilization.)

Anonymous Discard February 24, 2015 9:35 PM  

DissidentRight: Charles Murray has written ("Coming Apart") that one of the best things that could be done for ordinary people would be to simplify their administrative burdens. Too much paperwork for most people, the letters stack up, much of it doesn't get taken care of, and the common man is punished for it. I once found myself facing a smirking government clerk, telling me that I owed over $200 in late dog fees. Fortunately, there were big discounts for old people and I got away with a lot less, but the point remains. The law is too complex.

Regarding market pressure to provide honest legal service for reasonable prices, my guess is that the profession as a whole would stop at nothing to distort the market, and the judges and legislators would back them. We didn't get this way because of good intentions.

Anonymous DissidentRight February 25, 2015 12:04 PM  

There will always be a strong incentive for established firms to collude and develop cartels to extract more income from consumers, or at least to hold their income constant against the threat of new competition.

The problem is, it doesn't work…unless you get the State involved. If one existing firm gains some competitive advantage, it is always in their interest to ignore the cartel (and then reestablish it after their market share reaches its new equilibrium). If the industry is profitable, it will always be in the interest of investors to finance new firms to cut into the cartel's market share and its profits.

Theoretically, there is no reason why this wouldn't also apply for legal representation. If there is a demand for honest legal representation, profit-seeking men are going to try to supply it. In practice, you're right, the problem is the judges and legislators (the State) who form a symbiotic relationship with the corrupt lawyers. Moving towards libertarian "anarchism" helps solve that problem. At the very least it would be preferable to have 50 mini-states all competing for citizens based (among other things) on fairness of legal code--rather than a continent-wide monolith with no reasonable checks on its behavior.

Charles Murray's scientific writings are what converted me.

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