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Comment by bhouston | Hacker News Reader

Summary:

> 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.

> A property boom then develops. But property is not a sector marked by high productivity growth; it can lead to the misallocation of capital in the form of empty Miami condos or Spanish apartments.

> R&D-intensive industries - aircraft, computing and the like - will be disproportionately harmed when the financial sector grows quickly. By contrast, industries such as textiles or iron and steel, which have low R&D intensity, should not be adversely affected

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So, buy barrier puts on those R&D intensive industries that is activated by a high growth of the companies in the financial sectors (bank...). As someone who used to do pricing, I find it pretty ironic that I can get investment tips from an article criticizing finance - I am not working in finance anymore and tend to agree with the article, though.

Sounds like the ABCT to me.

http://en.wikipedia.org/wiki/Austrian_business_cycle_theory

Sounds to me like printing money and pumping it into finance leads to an unsustainible economy.

Austrian school economics seems unheard for many. After skimming books by Mises, I believe Austrian school is on the right track. But the tool for it has not ready at that time. When I learned about complexity systems. I think it can supply the right tool. And just this week, I'm reading papers by W. Brian Arthur. (http://en.wikipedia.org/wiki/W._Brian_Arthur) Quite fascinating experience.

Another issue with economics is it has very tight connection with financial and political systems. Until some players could take advantage with those more advanced theories, a new wave of mind-sets would not emerge and widely accepted by the public. Money, power, information, control, it sounds like crazy words. When things become closer to those, you have to think harder to get closer to the reality, if you do care about it.

That's an interesting thought. Any papers you'd recommend in particular?

"All Systems will be Gamed: Exploitive Behavior in Economic and Social Systems"

http://tuvalu.santafe.edu/~wbarthur/Papers/All%20Systems%20G...

He has a new book with all his papers: Complexity and the Economy (http://www.amazon.com/Complexity-Economy-W-Brian-Arthur/dp/0...). I have not bought it yet. The preface is free to download here: http://tuvalu.santafe.edu/~wbarthur/Papers/Complexity%20&%20...

Since there is an obvious political slant to the message, it should be pointed out that it is the finance industry itself that is "printing money". So take that into account while thinking through the political implications, if skylan_q's premise is actually true.

And it should also be pointed out that only governments can grant the power to print state-approved money. If you don't have permission, you will go to jail. There are countless movie plots dedicated to this simple topic, it should already be pounded into most peoples' minds already.

That's what it sounds like to me too. Unfortunately, most people don't want to hear the truth so they downvote you. Big news for the ostriches; we never paid for the 2008/9 mortgage bust and those chickens are coming home to roost -- fattened up by the Feds ZIRP, TARP and continued credit creation. The mortgage bust was papered over by the Fed printing $4B+ and that is what they admit. It wouldn't surprise me if they printed double that to secretly loan to US and foreign banks and governments. Actions have consequences and soon we will see what von Mises meant by the crack up boom.

See also: Dutch Disease

http://en.wikipedia.org/wiki/Dutch_disease

(Also from The Economist initially)

see also: the present Australian economy.

Our future is not bright...

Seems an odd statement. Australian economy is awesome, transitioning from resource to service long before it needs to... Which part of the future isn't bright?

Exactly what about it is awe-inspiring? In what services does Australia have an intrinsic advantage, or an advantage that will remain for the medium to long term? Why is a service economy a good thing?

Australia went through the entire commodities boom without posting a current account surplus. Australia has been a net debtor every year since 1973. Australia has no money to invest in itself because its population is too busy borrowing money from overseas to speculate in real estate such that shitty brick veneer houses built in the 1960s are worth 1 million dollars.

Our economy is so dependent on borrowing from overseas for "growth", that if we stopped borrowing and started paying back, then our economy would shrink, due to all the interest going overseas. Unlike Japan, for instance, Australian private debt is ultimately owed overseas, in another currency.

If that borrowing had been directed towards productivity rather than real estate speculation things might be better.

As it stands, the really expensive real estate is nothing more than a massive overhead for the economy. I challenge someone to argue how it aids Australia's productivity and competitiveness.

If GDP is increasing, there is no reason to get account surplus, but instead to manage debt/growth ratio. Admittedly Australia hasn't done too well on this recently, but it's still in a good position (~30% of GDP). Unless you subscribe to the "Countries should be run like households" school of economics.

Service based economies are desirable because they are human resourced (i.e they are renewable), and given Australia was resource based, there was a significant risk it could just sit on that and fall apart when it runs out. I'm not sure what you are talking about with "Intrinsic advantage"... Are their states with service based intrinsic advantages?

The awe-inspiring part: The economy has done nothing but grow (in recent years, and has been one of the only ones to do so).

Is it perfect? not at all. But seriously, you've got to have pretty massive global blinders on to say its future is not bright.

That ~30% of GDP number is government debt.

I am not talking about government debt. I am talking about private debt.

Australia has a much much worse private debt problem than a government debt problem: total private debt ~150% GDP; mortgage debt ~80% GDP; gross foreign private debt ~85% GDP; gross federal public debt ~20% GDP [1].

The reason you take on debt matters. Almost all of that debt went towards unproductive bidding up of real estate. Much of the "growth" experienced in the last 20 years was just making the economy larger by importing more money via debt from overseas. I challenge anyone to argue that was a prudent course of action, unless you were a political party that wanted to get re-elected by making people feel richer.

Why intrinsic advantage? Australian wages/salaries are high, in part, because the average Australian has to pay so much to service their mortgage debt. Because service economies are human resourced, any where with humans can do those jobs. If Australia is inherently more expensive due to the overhead of high house prices, what services can we offer for which others are willing to pay a premium? Also, we must have a service economy bringing money in from overseas, rather than just supplying services internally, because we still have all that interest to pay on our debt.

The future for Australia might be bright in as much as it is slightly less dark than some other countries.

[1] https://independentaustralia.net/politics/politics-display/a...

edit: figures

Australia's competitive advantage is the rule of law. This is the main reason it and places like Canada are valued by foreigners buying real estate.

Australia is particularly valued as the only non-city-state country with close to perfect rule of law and predictable individual rights in Asia, i.e. a relatively short flight away from the homes of the current buyers. Fancy taking a punt on the direction foreigner investment rules are taking in the next ten years in Indonesia?

Arguably, Singapore's and Hong Kong's economic success stems from similar concerns.

I didn't RTFA, but I have a question.

> the finance sector lures away high-skilled workers

I only just recently learned that doing finance is something people want to get into. And I still don't understand why, so that's my question.

See, I've always thought of it as this thing that people only do because they thought they were supposed to. I'm in a maths degree right now, so I really know this feeling of not being qualified for anything real.

Other than being a teacher, which is the thing I want, being an office boy in an insurance company is like the only other option I've ever been given.

So I always thought finance people were only in it for that same reason. Not having a choice.

What's the appeal? I'm still learning.

Money. The amount of Money one can make in finance is the appeal. I graduated with my engineering degree ~8 years ago, if I knew in college what I know today about what any "real world" work environment/income levels are, I would have gone into the finance sector, hands down. Its's not too late for you. Sell out, cash in.

Can't say I agree with these statements. I would wager that the scale of money a rapidly growing finance sector is using is more important than an unsubstantiated claim of industry brain-drain.

Industry brain drain is a known phenomenon in other circumstances, such as the natural resources trap. It's plausible that it could occur here.

Totally agree. When the finance sector grows, demands for return interest on capital investment intensifies, acting as a gravity-well for capital away from development. Firms like Goldman make every investment require higher and higher returns at a greater and greater scale. Money chasing money. Casino economy. Instead of opening a new line of business, your profits must be funneled into paying back on that loan at higher and higher rate.

Take a look at the allergy to investment in broadband in the US.

The economics for Fiber Optics looks good in almost all situations in the US if you look at a ten year horizon. In the short term, however, Verizon can make more money by building an LTE infrastructure that costs more and does less and will be thrown away in five years and has 15x the OPEX of an optic fiber network.

Today interest rates are crazy low and you'd think a company like Frontier would do this and know that that they won't be overbuilt in the flyover states and will pay a great dividend year after year for decades, but they don't.

But just watch, once interest rates are crazy high you'll see companies scramble to get money.

Frontier's home city of Rochester had to redeploy fiber for all their trunk lines after a disastrous ice storm in the 90's. You'd still be lucky to get 4Mbit DSL from them. They are bottom feeders only out to milk a dying cow. Improving infrastructure is cost center that doesn't pad the execs wallets so it gets ignored.

I've often held the opinion (and someone argue/correct me if I'm wrong here), that a lot of this artificial demand for growth is a problem due to inflation. I.e. Government keeps devaluing the currency and lowering natural interest rates, causing individuals (and banks) to seek riskier returns. This effect is pervasive in the economy.

I can't even begin to comprehend what our economy/world would look like if interest rates and inflation weren't controlled/manipulated by state governments. Sustainable companies? Ones that don't chase every tiny increase in short-term profit/gain? I don't know.

Would we even have such a huge equity market? Most of everyone's money is in the equity market, and I have no idea why. Everyone is trying to leverage what little they have to "beat inflation" that they only thing they can do is either a risky business venture, or play the equity market.

</rant_while_under_the_influence_of_food_poisoning>

The bond market is larger than the stock market (by 2x or more). There's also quite a few people whose primary asset (most of their money) is their house.

I think you are also using a different definition of natural interest rates than is typical in economics jargon, in the jargon, the natural interest rate is approximately the rate at which the economy is growing (it isn't particularly likely that easy money is restraining economic growth, so low central bank rates shouldn't lower it; if anything, they would tend to push them higher).

Poorly structured regulations are probably a bigger problem for the economy than easy money. An example would be regulation that appears to approve of the activities of a company that is giving derivatives high ratings when they know it is bullshit. That regulation either needs to be effective or to not exist.

Another example would be the tax incentives surrounding mortgage interest, combined with pseudo-governmental programs to lower the interest rates on mortgages. It turns out that people don't buy a house based on some carefully estimated value of the house, they buy the house based on the payments they think they can afford to make. Given that psychology, the tax incentives lead people to pay a higher price for a house, and the lower interest rates lead them to pay a higher price for a house. What do you get? Skyrocketing housing prices that don't particularly benefit anybody.

Lower inflation favors those with lots of capital parked in low productivity growth, high output sectors like resource extraction (oil, logging and mining). It makes it harder for sectors with intense R&D and complicated LoB like aerospace and other tech.

A good sampling of some big national success stories exist over the last half century or more where inflation was over 4% where economies grew and diversified much faster than the US in the same period. Up to a point, inflation alone is not a very insightful indicator of economic health. Lots of other factors have to be compared, too.

The really scary thing is that our leaders talk like this is a good thing. It's as if to them there is no other way to make money but to put your money together with other people's money and hope that someone with real initiative comes along and generates profit with it.

In short it seems like they've created a system where the only way to truly be successful is to work in high finance, where you collect 2% of everyone's money as a fee no matter what.

The finance sector does more than lend/invest capital themselves. Large investment banks provide a wide range of services for companies (e.g. bond issues, IPOs, secondary offerings, working out M&A deals, brokerage services, ...). The biggest problem with the finance sector is that it is extremely opaque and almost no one outside the industry understands what financial institutions actually do. Yet, everyone seems to know that banks are bad.

Which is better: a bright graduate working on making a large web company's advertising algorithms slightly more efficient or the same person working for an investment bank on a bond deal that helps a biotech company raise more money for future R&D?

>Which is better: a bright graduate working on making a large web company's advertising algorithms slightly more efficient or the same person working for an investment bank on a bond deal that helps a biotech company raise more money for future R&D?

That's the very definition of a false choice. We should be pouring more resources into developing new technology itself, not just trying to advertise or fund it more efficiently. Right now small technical innovators are being absolutely starved of capital, and it's going to have some pretty dire consequences for the US economy in the coming decades. When is the last time that you saw a successful hardware startup that did something nontrivial (a la Intel)? The only reason software businesses are doing so well is because they require very little capital.

All of the shifting money between hands on Wall Street is sucking the air out of our industries.

> When is the last time that you saw a successful hardware startup that did something nontrivial (a la Intel)?

Define 'nontrivial'. I'd call Tesla and SpaceX nontrivial. Or what kind of hardware are you talking about? Maybe take a look here: https://angel.co/hardware

> All of the shifting money between hands on Wall Street is sucking the air out of our industries.

That's the very definition of a false cause and it's also so woolly that is barely means anything. Which money is "shifting hands on Wall Street" and what is is that even supposed to mean? Of course money is being transferred, that's the very idea of a financial system. And how does this "suck the air out" of anything? Banks are not the ones who would rather fund your photo sharing app than the next Intel. If you want to go down that route, blame the Angels/VCs who are the driving force behind what is getting funded. Or blame the people who are more interested in reading about/working on the latest flavour-of-the-month Javascript framework instead of actually tackling the hard(ware) problems. Wall St. are not the ones behind the wheel when it comes to determining which new ideas get attention.

Elon Musk nearly bankrupted himself funding SpaceX and Tesla.

IBM, Apple, Google, Telsa, Microsoft, SpaceX, Intel, BAE Systems, Raytheon, Lockheed Martin, Governments (a la ITER) and others, are pouring money in to R&D.

The lack of capital for small hardware innovators (if this concept even is true) is rational because there's little profit to be made there. The age of small hardware innovators has come and gone. To bring non-trivial innovative hardware to market is a huge undertaking and requires a lot of capital.

There's nothing unfair about this.

The economy wasn't blown up because an M&A or bond issue went bad. I don't think anyone seriously believes that "banks are bad", I think they (myself included) tend to think that "the banks we have are bad". It's a subtle, but important difference and totally consistent with the article.

The bright graduate working at the biotech company, of course.

You know, not that biotech companies actually train or hire permanent professional employees these days (source: fiancee is a biologist).

Returns are relative. Using the US example there has been a continious downward trend in post inflation returns over the last 100 years, but investment keeps growing.

Brains are part of the real economy. Money is just money, and large amounts of it flows through institutions of various brain quality without being "eaten".

I thought that the finance sector taking on too much risk is what led to the 2007 financial crisis? They would invest in things with less or no collateral to pledge.

The problem with the finance sector was actually largely the opposite: financiers were so confident the collateral would hold its value that they were happy holding loans made to people with little or no skin-in-the-game or ability to make regular payments. They assumption was that even if significant numbers of loans in a portfolio failed, the repossessed houses could be sold on, perhaps even at a profit,

Unfortunately the value of that collateral didn't hold up when a glut of repossessed houses appeared on the market and many prospective housebuyers suddenly found they couldn't borrow quite so easily any more.

The banks and mortgage brokers making all those "liars loans" knew that the loans weren't going to be repaid, but they didn't give an effing eff. They knew that they would be able to sell the mortgages in RMBSs and pay their loan officers and executives handsome bonuses for all those massive phony profits. They would blacklist appraiser who wouldn't give them appraisals to fit the loan they wanted to make.

Spot on. Other responses are naive. They speak of "the banks". There are two entities here: 1. companies 2. individuals working for companies who get commission for selling loans whether they get paid or not

Plus there are many many other problems with banking other than sub-prime which boil down to the above.

That's why we need to start putting individuals in jail.

This is ludicrous and ill informed.

To put someone in jail, typically they need to commit a crime. If someone lies about their income, and borrows money based on that information, the borrower has committed fraud, not the lender.

I'll grant that it is immoral to steer someone into a loan which they probably won't be able to repay. However, unless the lender's agent materially misrepresented the loan, it is not illegal.

The originate-to-sell model does introduce perverse incentives on the part of the lender's agent -- prudence takes a back seat when you don't hold the note. But if a borrower lies, and the lender's agent willfully ignores the lie and then sells the loan, both the agent and the borrower have defrauded the buyer of the loan, and it is that investor who is the victim of the fraud.

No one was making borrowers take out loans. The reason why no one is going to jail, is because no one is wants to talk about 1) the culpability of the borrowers; and 2) the trillions of dollars of lost wealth did not flow into Wall Street bonuses, rather it went into loans to the public which were not repaid.

Is it not part of the banks responsibility to be checking that these loans can realistically be repaid? Would you lend a large amount of money to someone without a job and expect to see it all back?

It is their responsibility -- their responsibility to their shareholders. However, unlike an unsecured line like a credit card, the claim on the property that a mortgage entails, makes the more likely to be repaid even in the event of a default.

In the industry, the terms 'subprime' was often used interchangeably with 'home equity'. 'Home equity' was used not in the sense of the consumer borrowing 'Home Equity Lone of Credit', but rather that the basis of the loan was not the borrowers ability to pay, but rather the value of the home.

This made sense in an environment of rising home prices. No one defaults when they can just sell to get out of the loan. That was the realistic basis for the loan being repaid. (However in an environment of stagnant prices it fell apart.)

I'm sure you can find enough anecdata of predatory lenders to get your dudgeon up, but the reality is that they were a cause of the crisis only at the far margins. Th bulk of the crisis was caused by banks and borrowers making foolish decisions in good faith.

The crisis, like virtually all financial crises, was caused by leverage. Home buyers want it (they'd rather put 3% down than 20%); home lenders should be averse to it. The combination of the originate-to-sell model along with asset-backed security structures which were intended to de-lever the loans to make them palatable to investors had consequences which should have been foreseeable, but which were not.

People (and bankers) did not somehow become more greedy, more evil and more shortsighted in the lead up to the crisis.

> People (and bankers) did not somehow become more greedy, more evil and more shortsighted in the lead up to the crisis.

Actually, by most accounts, they did.

The problem was that when 90+% of your financial colleagues are betting that the market will go a certain way, it doesn't pay to fight that. That self-reinforces and things get worse and worse.

Look at the game theory:

1) I'm right about the economy going bust and the economy is about to collapse. Well, I can protect myself (a bit), but my company is going to collapse if the economy goes off a cliff and I'm out a job.

2) I'm wrong about the economy going bust and the economy is not about to collapse. Well, I'm still out a job.

3) I'm wrong about the economy going gangbusters and it goes haywire, I'm laid off along with everybody else.

4) I'm right about the economy going gangbusters and it goes gangbusters, "Yay! We're all rich. Where's the hookers and blow?"

I only have one good outcome--drink the Kool-Aid and pray I can get out before it all goes bust.

Prem Watsa of Fairfax Financial lost money for a few years betting against the markets, until the markets tanked in 2008 and he finally made a boatload on selling short. Unfortunately for him, he then turned around and invested his winnings in Blackberry. :)

I really find it hard to believe that people became more greedy, more evil, and more shortsighted.

1) there was a global capital glut chasing returns. 2) stability and growth in the US economy, made investing in US property (through mortgage backed securities.) 3) this additional capital was enough to prime the bubble and drive up home prices faster than the general price level. 4) a combination of economic and political factors in the US led to the growth of 'affordability product' -- subprime loans -- which kept the bubble inflating.

No extra evil, no extra greed.

> The banks and mortgage brokers making all those "liars loans" knew that the loans weren't going to be repaid, but they didn't give an effing eff. They knew that they would be able to sell the mortgages in RMBSs and pay their loan officers and executives handsome bonuses for all those massive phony profits. They would blacklist appraiser who wouldn't give them appraisals to fit the loan they wanted to make.

The problem that created the problem was still that people were investing in mortgages rather than companies doing R&D. You can't sell bad mortgages to investors who don't buy mortgages.

In short, the finance sector lures away high-skilled workers from other industries

LOL. When other industries aren't run by chinless public schoolboys where engineers are second class citizens, call me.

What is meant by "public schoolboys" exactly? I'm struggling to grok the intended message.

Although the other comments covered the gist of it, you might be wondering why Britain's best private schools are called "public": http://en.wikipedia.org/wiki/Public_Schools_Act_1868

FWIW all the schools have relatively extensive scholarship programs whose breadth and funding is cyclical and dependent on the views of the Headmaster and Board.

Amusing anecdote: I attended Westminster (on a scholarship) under Tristram Jones-Parry who was known for both keeping the school at the top of the UK ranking for the duration of his tenure, and for expanding the scholarship programs. He was the quintessential "close to the troops" manager, he chatted with all pupils regularly, cornering them in the yard or the street to ask them their thoughts, and occasionally barging into a maths class and teaching it (incredibly well). When he retired and wanted to spend a bit of time teaching disadvantaged kids in state-run schools, his application was rejected by the government because he did not hold the appropriate teaching qualification. See: http://en.wikipedia.org/wiki/Tristram_Jones-Parry

I believe he is saying it's run by people of weak moral fiber and character.

In England Public School is where the "upper class" send their children for a private education. Chinless wonders is a derogatory term for less than intelligent children from those schools (in-breeding amounget limited aristocratic gene pool lead UK to have royalty with unusually small jaw lines for a while) And jobs in finance were considered till mid century to be available only to those people who knew each other, went to the same schools and used same networks.

In short - an industry run by in-bred, unintelligent, privately educated with a small and elite job network.

Are you suggesting that finance isn't?

I think that's mostly just a British thing.

What's your number?

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