Rolling US Economy Into The Shitbin Thread

At least in 29 there was still some money in mattresses

i mean, like, finance finance obv

― flopson, Monday, March 11, 2013 2:12 PM Bookmark Flag Post Permalink

don't really know what you mean by this, sorry

― space phwoar (Hurting 2), Monday, 11 March 2013 14:58 (Yesterday) Bookmark Flag Post Permalink

i had this smug prof who had all these clever heuristic arguments for why we need finance, like: ppl somewhere in the world have spare cash they want to invest in something profitable while somewhere else people have profitable projects but need finance to start them, therefore, we need finance. it's a seductive argument but most finance as it exists involves exchanging currencies & other assets six billion times a day & then periodically destroying the entire economy, erasing years of growth, wiping out pension funds etc. the model of finance we use to justify the existence of finance time & time again is not what is actually called finance in the world. i think some form of investment market should be allowed to exist, but it should be socialized and/or regulated beyond recognition

Maybe the internet + instant global communication will destroy finance.

Just productivity tbh

productive finance vs "hot money"

i mean, like, finance finance obv

― flopson, Monday, March 11, 2013 2:12 PM Bookmark Flag Post Permalink

don't really know what you mean by this, sorry

― space phwoar (Hurting 2), Monday, 11 March 2013 14:58 (Yesterday) Bookmark Flag Post Permalink

i had this smug prof who had all these clever heuristic arguments for why we need finance, like: ppl somewhere in the world have spare cash they want to invest in something profitable while somewhere else people have profitable projects but need finance to start them, therefore, we need finance. it's a seductive argument but most finance as it exists involves exchanging currencies & other assets six billion times a day & then periodically destroying the entire economy, erasing years of growth, wiping out pension funds etc. the model of finance we use to justify the existence of finance time & time again is not what is actually called finance in the world. i think some form of investment market should be allowed to exist, but it should be socialized and/or regulated beyond recognition

― flopson, Tuesday, March 12, 2013 5:27 PM Bookmark Flag Post Permalink

The "growth" and "pension funds" you refer to are themselves inherently dependent on finance. I wouldn't argue with you if you called our financial system severely bloated or broken, but I'm also not clear on what a "socialized" investment market would constitute (although I guess we already have semi-socialized financing tools like the fannie-backed 30-year mortgage). The argument your professor made doesn't strike me as smug at all -- it's a description of what the finance industry is supposed to be, a big marketplace between investors and people/businesses/etc who need investment. For all the sexy, evil stuff that's in the news all the time, there's a lot of boring stuff integral to our economy as well. If you were to say "a lot of the activity of the finance industry is useless, if not counterproductive" I would agree. I don't know what the percent is though, and even today I doubt it's the majority.

I mean a huge percentage of financial activity is still "the model of finance we use to justify the existence of finance time & time again" -- mortgages, business loans, bond issues, institutional investment, etc. Even trading in currencies, commodities, stocks, etc. serves a useful function although it's arguable how much of it is really necessary to that function (probably less than we have now).

I mean a huge percentage of financial activity is still "the model of finance we use to justify the existence of finance time & time again" -- mortgages, business loans, bond issues, institutional investment, etc

Directly "productive" financial activity like you describe amounts to about 30%, according to Bloomberg. There's a grey area in the amount of the other 70% that goes to make profits that could somehow affect/support the 30%, but even then most of the rest is casino-esque fucking about.

word

i think a lot of ppl make the mistake "finance exists, therefore it must be serving some function" but u can't just jump to that conclusion. it's counterintuitive because you would think all that money & all these people are actually doing something, or at least that "a huge percentage" are... but, yeah, that's just not really true & even finance bros know it

it's an obvious point but i feel like i must point out that you're not defining your terms. you're saying "finance" and you seem to be talking about one thing (i.e., making short-term investments in risky "assets", making bets on bets, etc), but finance is a much larger concept than that.

yeah, i realize i'm being pretty crude... but like, all the discussion about financial regulation since the crisis has been such feeble stuff about capital requirements, how big is too big... no one is really questioning whether finance as it exists should be radically changed, it's just these little tweaks. i think there's a disconnect between the kind of proposals for reform being made & the models we use to justify the existence of finance. as it exists i think it's a destructive institution & a critical source of inequality (this book does a pretty good job making some connections bw financialization & inequality http://www.oup.com/us/catalog/general/subject/Economics/MacroeconomicTheory/?view=usa&ci=9780199855650) and no one is really addressing that

Finance is largely based on the difference between the value of money right now and the value at some future time. Finance is a hedge on the future, that is all.

Directly "productive" financial activity like you describe amounts to about 30%, according to Bloomberg. There's a grey area in the amount of the other 70% that goes to make profits that could somehow affect/support the 30%, but even then most of the rest is casino-esque fucking about.

― stet, Tuesday, March 12, 2013 7:20 PM Bookmark Flag Post Permalink

Would kind of like to read that Bloomberg article, if you can find it.

I think that, for example, having an active stock market with regular trading, while not "productive" does support the productive role that raising equity capital plays. But you only need so much trading to have a liquid market, and we obviously have way more than we need especially with high-frequency.

I also think it's unquestionable that the increasing role of finance has a strong relationship to increasing inequality, where so much wealth today is built on elaborate forms of arbitrage and skimming, as it were.

I saw an article in the past 6 months (I think) that showed wealth distribution in the US, minus the finance "industry"...I don't remember if this included shadowy elements of "finance" such as "life insurance" and all the various feeder industries that prop up that category. I'm looking at you, finance-related lawyers.

Elaborate arbitrage is kind of frightening, mostly because it is intellectually above the heads of most people (as is high frequency trading that is dominated by the algorithms and the quants that write them). On a simplistic level, it's merely playing the spreads just like any other gamble. But because modern, machine-based arbitrage is so complicated (and often lucrative), it has an insider feel to it and a lot of exclusivity. Consider the new fiber optic cable linking Europe, just so that HFT can grind down by the microsecond...

just regulate the hell out of the debt markets imo

why debt markets specifically and regulate how?

and which debt markets specifically?

I read it on the terminal, H2, and can't seem to find it on the website. Will see if I can get a copy, it was full of pretty juicy stuff.

so, cyprus? can someone give me the lowdown, i kind of hate reading finance blogs

It seems like pretty much everyone in the financial blogosphere thinks ECB screwed up royally by forcing small-time depositors to take a haircut.

x-post-Flopson & Stet are you referring to this, below:

http://www.bloomberg.com/news/2011-01-26/goldman-s-mortgage-trades-commodities-relied-on-derivatives-report-shows.html

Derivatives accounted for about 70 percent to 75 percent of revenue in the firm’s commodities business from 2006 to 2009,

"derivatives" isn't really a good proxy for "useless" -- it's a very broad term. There are useful derivatives, and there's plenty of useless financial activity that has nothing to do with derivatives.

that cyprus shit is cray

literally everyone with a bank account there just had money taken out of it by the government

not yet!

well the banks are still closed so yeah i guess they could reconsider

it's just insane tho - morality and the law aside, it's the exact opposite of what you want to do in a recession but hey

well the cypriot parliament hasnt voted on it yet, unless im reading the cov'g wrong

my impression was that their hands are tied but i could be reading it wrong too. you gotta love the transparency of the troika's death embrace with popular govts.

i can only guess that they anticipate massive capital flight no matter what, so they figure they might as well grab it while its in the country at all?

xxpost

"trading in commodities is largely derivatives" is a stupid revelation actually. basically derivatives come from commodities because it makes total sense there to engage in a contract for 'corn in july' as opposed to 'a big stack of corn right now'. at least within the boundaries of how capitalism works, having an active futures market is much better for farmers than the alternative.

Cyprus discussion here: The Eurozone Crisis Thread

"derivatives" isn't really a good proxy for "useless" -- it's a very broad term. There are useful derivatives, and there's plenty of useless financial activity that has nothing to do with derivatives.

― space phwoar (Hurting 2), Monday, March 18, 2013 8:20 PM (Yesterday) Bookmark Flag Post Permalink

It might have been used as a shorthand for credit default swap derivatives

That seems unlikely in the context of the article

credit default swaps aren't useless either! like as a straightforward way to mitigate risk on bonds. (although people do insane things with them). most structured credit, on the other hand, is a horror show. indexed (or even worse, indexed/tranched) cds are pretty much just tools for betting on the other hand.

right, in theory credit default swaps should function like insurance. the problem is that the companies writing them didn't treat them that way (you know, like, making sure they could pay out).

I think most of the problems with derivatives are not intrinsic to derivatives themselves, but are a byproduct of the history of how they were regulated and their favorable legal and accounting treatment. Specifically, in the US, derivatives were exempted from most regulatory oversight by the CFMA of 2000 (http://en.wikipedia.org/wiki/Commodity_Futures_Modernization_Act_of_2000) - although this was mainly formalizing what had been de facto treatment of derivatives prior to that. Also, derivatives were given exceptionally favorable priority in bankruptcy claims (see for instance http://www.ft.com/intl/cms/s/0/16da702e-ea41-11de-aeb6-00144feab49a.html#axzz2O1DdRu2C). Furthermore, derivatives were usually carried "off-balance-sheet" for accounting purposes, which allowed banks and others to mask their true level of exposure (http://www.rooseveltinstitute.org/sites/all/files/Off-Balance%20Sheet%20Transactions.pdf). So I think if you fixed the regulatory, accounting, and legal treatment of derivatives, you would solve most of the problems with them, and they would probably not be so popular once they lost that favorable treatment.

right -- there's a very good argument that huge amounts of derivative products are ways to get around risk controls. that's largely changing with new regs already, which weight certain sorts of assets waaay more heavily than they used to be. regulatory arbitrage will always always though show up in new stupid ways. the argument is really then its not the products, its that people use them to take enormous bets (and i don't see any way of curbing these bets in a bubble market in general, actually, since human creativity is endless when profit is involved).

OTM, water rolling downward etc. Peeps always gonna gamble.

So if you can't keep people from gambling then you at least have to try to use some social engineering mitigate risk with taxes/fines accounting rules and hope that the SEC will bother to enforce them.

chinese government spiked the emerging housing bubble by basically saying people can't buy more than one apartment. very effective. meanwhile greenspan couldn't even _say_ 'irrational exuberance' without getting landed on. policy needs to be responsive to new scams and bubbles to have any hope of being effective, and i'm dubious that legislation will ever do more than just ban the practices that everyone's just already decided lost them heaps of money.

the other thing is deriv contracts (even the more complicated ones) are basically equivalent to combinations contracts that you really can't prevent people from entering into. so really better to not let these things stay over-the-counter and not centrally managed, and instead pull them into transparent, regulated markets. the more the transparency, the less interest there will be in abusing 'em. but of course there's the issue that you have random consortiums of banks serving as voluntary associations to standardize this crap.

Not really sure how our monetary policy could be used that effectively against the Chinese.

chinese government spiked the emerging housing bubble by basically saying people can't buy more than one apartment. very effective.

But now you have married couples getting divorced so that each of them can own one apartment. So I guess there are always loopholes.

you also have chinese investors buying up houses like mad in the western US and creating a new bubble there!

"derivatives" isn't really a good proxy for "useless" -- it's a very broad term. There are useful derivatives, and there's plenty of useless financial activity that has nothing to do with derivatives.

― space phwoar (Hurting 2), Monday, March 18, 2013 8:20 PM (2 days ago) Bookmark Flag Post Permalink

can we start with synthetic derivatives ffs

sure

see this is precisely the thing. as far as i know, huge portions of synthetic derivatives are now considered bad ideas (because they were impossible to model and lost people lots of money) and nobody is entering into them anymore. when something like them comes back again, it will have a new name, some fancy new math, and everyone will swear this is a totally different thing that won't be like last time, honest abe.

once a product is that obviously bad that its not politically infeasible for the govt to regulate it, its bad enough that even the banks usually don't want to screw with it anyway.

People are going to gamble, but banks and insurance companies need to be watched to keep that urge in check, because gambling with other people's money should require their permission, y'know.

Is there any good reason not to treat CDS like insurance, e.g. to impose some kind of reserve/capital requirement so that the party writing them is actually able to pay out, and to disallow or limit parties from buying CDS on assets they don't own?

there are reserve requirements on cds already plus pretty strong capital-transfer occurs as contracts get riskier. the problem is that didn't really help AIG when everything plummeted at once.

you actually can get insurance on lots of things you don't own (including other people's life insurance! but they have to take it out and then later sign it over to you...).

that said, limiting buying cds on things you don't own seems somewhat possible. you already can't short stocks you don't hold (although that's violated all the time). the usual complaint is that it would kill liquidity and drive up prices, but with more standardized cds contracts it might work. but there would be things like curve plays (taking long and short bets on the same name, but with different maturities for each) that would let people express basically the same sort of positions. and forcing holdings to all maturity match really would destroy cds. on the other other hand, even though cds serves a 'legit' purpose, honestly the bond markets got along just fine without it for years.

so a blanket ban on it, though basically impossible, wouldn't actually have much in the way of negative effects on the actual economy i think. especially since there are so many ways both countries and companies are trying to structure 'default-like' events so they don't trigger cds contracts lately.

like the worst thing about vanilla cds isn't necessarily any bad economic effects its had on its own, but that even at its most straightforward its a legal tangle in terms of what constitues a 'credit event' and the worse things get, the more likely precedent will get thrown out or rewritten to screw protection-holders out of their payday.

ban math