Isn't there something inherently wrong with society when an industry that provides little value to society make so much money that they can afford to pay better than anyone else?
"an industry that provides little value to society"
Whilst this is a nice popular statement to trot out in the current climate, it is simply not true, at least not in fiscal terms. Some facts:
* The financial services industry accounted for 10% of GDP in 2009
* It provides 4% of total employment in the UK (1 million jobs)
* It contributes 28% of the UK’s total exports of services
* It contributed £53.4bn in tax in 2009/10 (11% of total government receipts)
Much as everyone would like to say "sod the bankers, let them go elsewhere", the truth is doing so would likely torpedo the economy.
You need to think a little bigger to properly understand his point.
Humankind is mis-allocating some of its most talented labour to what is essentially an arms race in financial market predictive algorithms. It provides some benefit for humankind - increased liquidity in markets, but the value of the marginal liquidity is small compared to the talent that is wasted.
Salman Khan is an excellent example - he left his job as a hedge fund analyst to start Khan Academy. How many new Khan Academies would we have if the incentives were right to have talented people working on useful projects instead of the financial arms race?
Sure, the incentives are right for an individual or country to specialize in financial markets. Think bigger - an alien looking at what we're doing here on planet earth would say we're wasting a lot of our talent on stuff that just re-arranges the pie instead of making it bigger.
Trading algorithms is a minute portion of what a bank does. The primary function (and activity) of investment banks is to help clients raise money (via bonds issues, shares issues, etc). Some secondary functions include helping them insure against risks (e.g. with futures contracts), and acting as brokers for speculators (e.g. hedge funds), or as market makers to make the markets more liquid so that more trading happens.
I'm missing quite a few things, of course, but my point is: this "algorithmic trading arms race" that you mention is basically something like 1% of what the average investment bank does (and 0% of what retail banks do).
Yes but the question is not whether the banking industry is justified in it's existence. But rather whether they provide a value to society that is equal to what they take out of it.
They absolutely do. Focusing on investment banks (I assume you have no problem justifying the existence of retail banks and insurers, the other two giant topics in financial services), what they do is effectively make the allocation of capital more efficient.
Without efficient capital allocation, most enterprise becomes extremely difficult. Without banks, there would be no stock market. There would be no way for companies to raise large sums of money to grow faster. There would be no one keeping markets liquid, which would encourage people to stick their money under the mattress rather than invest it. There would be no way for startups to exit, and so there would be no VCs, and no angels either (or at least, much more limited ones, making maybe one or two investments to help out a friend). All of this would massively reduce the amount of capital available to work with, and decimate the business world.
Now, you might take the view that "you don't need capital to do business", but that's just a very limited viewpoint that applies in very narrow circumstances, like some small percentage of internet startups. Almost all businesses need capital to get started. There's a good reason why microloans are so successful - they provide capital that helps enterprise. Think of the banking system as an equivalent of microloans for people who need more than $100 (for example, because they need to design and sell new products, build new factories, buy stock, make strategic acquisitions, etc).
I agree but I think it's a little more complicated.
The problem is that we we loosing developers to high paying jobs in the banking industry. I.e. not your average netbank developer but the developer who can develop for those 1% you talk about.
So the problem is that the developers in talk here are the talented ones that goes for those jobs within certain parts of the banking industry that certainly don't provide anything close to the value they extract from the market.
Your argument only really stands if basically every single one of those programmers is Mark Zuckerberg, able to create a $50b company... I don't think that's a reasonable assumption.
My argument is that the startup community is loosing good developers to a specific part of the banking industry which I fail to see provide much value other than to their bosses.
I have no problem with them making more money. I think it's obvious why they make the choices they do.
The problem is that the part of the banking world they go to. That part of the banking industry that can pay the high salaries aren't benefitting society.
A good point - I was looking at things from a purely fiscal perspective, and trying to challenge the prevailing opinion in the UK that banks == bad, but you are right that they suck up a disproportionate amount of talent and skill.
I guess for many graduates the banks seem to offer the best answer to the risk/reward question.
The challenge is how to change that mindset, in a way which doesn't just lead to all the qants leaving the industry to build another social photo-sharing app :)
Economic value is not the only value society lives of.
The very fact that value is a subjective dynamic variable underlines the importance of not getting too focused on the actual fiscal numbers.
You can have societies where the oil industry makes up most of the value for the countries export but where the actual money does not benefit society in general.
And again I am not saying sod the bankers. I am simply questions whether they are making too much money compared to the value they provide to society.
The day that the banks choose to bail out it's customers I might consider changing my opinioin about the value the provide to society. (not saying that they don't provide any)
UK GDP is around 1.5 trillion. Therefore we spent the equivalent of ONE WHOLE YEAR OF OUTPUT FOR THE WHOLE COUNTRY on bailing out the banks. You do not solve a debt crisis with more debt. You do not solve a financial crisis by supporting the financial institutions that caused it in the first place. Northern Rock has no assets other than a bunch of shit 125% mortgages and repo'd Barrats buy to let flats worth cents on the dollar. The idea this could turn a profit is absurd.
I don't know where you get that "little value to society" nonsense from. Asset allocation is a non-trivially hard problem, and the alternative to doing it our way is Five Year Plans and the like, which tend to result - and this is actual, historical fact - in tens of millions of people starving.
You seem to be confusing what is difficult with what is beneficial to society. But if how hard a problem is would be an indication of how beneficial then there are plenty of jobs that is grossly underpaid.
You also seem to be assuming that there can be only two possible solutions to this problem.
No - my point is that countries that have sophisticated financial services industries have historically been extremely unlikely to make catastropic errors of asset allocation resulting in famine, etc.
If we had a group - let's call it The Party - deciding what to invest where, and they ballsed it up, then you get the Great Leap Forward (30M starving to death is half the population of the UK).
I'd rather live in a country with lots of lawyers and bankers than none. And some of these lawyers and bankers are, without question, very valuable to society.
People who look favorably on these industries would probably describe the rent-collection or wealth-destroying activities of these sectors as the regrettable but minor (and maybe inevitable) byproduct effect of an activity that is, on the balance, very positive. We all have these types - high tech has patent trolls (er, innovative technology development partnerships), but nobody would say that the tech sector is a rent-collecting segment of the economy (though many would say that patent trolls are part of the legal industry, not the high tech industry).
Other people like Wooley at the LSE (quoted in the article) take a far dimmer view:
“The amount of rent capture has been huge,” Woolley said. “Investment banking, prime broking, mergers and acquisitions, hedge funds, private equity, commodity investment—the whole scale of activity is far too large.” I asked Woolley how big he thought the financial sector should be. “About a half or a third of its current size,” he replied"
I think there are more than 2 alternatives to the Asset Allocation problem. There's no need to polarise the debate by saying that the alternative to Banker Bonuses (and the rest of the system) is millions of people starving.
John Cassidy wrote a piece for the New Yorker titled "what good is wall street?" that takes a dim view of the economic usefulness of the financial sector (1)
It's a long article, but this is probably the strongest case for banking as rent-collection (or even worth, wealth-destruction) you'll read in the mainstream press (ie., as opposed to academic journals).
(1) not an opposition to banking per se, which he sees as immensely valuable
Yea it's definitely a non trivial problem to rip people off with as much success as the likes of Goldman. IBs are completely socially useless, excessively criminal, and for the most part just exploit clients through front-running etc. I used to work for one, now I work for a startup that actually makes stuff. Happy days.
Yes, there is certainly something wrong with it, but for some reason the entire country is effectively owned by the banking industry at the moment (despite the fact the country in fact owns a good chunk of the banking industry).
Personally I'd quite like to see the government actually tax them at decent rates, and call the bluff that they're all going to up and leave if they have to contribute to the country. The chances of that happening when the current government all made a fortune in investment and banking careers is low though.
Thom, if you're so convinced that the financial industry provides so little benefit to modern society, why don't you try and live in a country without one.
The Great Depression in the US (which effectively wiped out a significant portion of the financial industry here) was the source of much misery and pain. Pick up a book on bond valuation and capital allocation and tell me if YOU would like to do that work for yourself. Finance is hard won and specialized knowledge. Don't dismiss that expertise.
I never said it wasn't of any value. I have repeatedly clarified that I am talking in the context of this article and about certain parts of the financial industry, namely the part can afford to pay better than anyone else. The developers working on your average netbank aren't in question here their salaries are not extreme.
All I am saying is that the kind of developers that the OP is talking about are being lost to parts of the financial industry that aren't providing value to society but primarily to themselves and I find that problematic.
That has nothing to do with my view of other parts of the banking industry.
They aren't being "lost" to the financial industry. They are proving "value" to the consumers of those (valuable) services.
You could make the same argument for home health care workers and cardiac nurses. Potential home health care workers aren't "lost" to the nursing industry. Society VALUES what they provide to a greater degree because it compensates them more.
You seem to be laboring under the assumption that a career in the financial services industry is a guarantee of high-income. The truth is quite different. Life in the financial services industry has its own downsides (insecurity of income, long hours, poor working conditions generally) which you seem to be glossing over to make your argument.
On my last flight to Mountain View, I sat next to a guy who left a job at Goldman Sachs (as a broker) to go do ad sales for Google. His reason: better working conditions and quality of life.
Don't assume that your choices are everyone else's. The high pay in the financial services industry is there because the work is hard and few people can or are willing to do it.
Maybe you should read the entire thread here and see what the argument is all about. You seem to be arguing against claims I am not making.
I have worked with everyone from Bofa to citibank to online trading services to private wealth. I think I have a pretty good idea about who is paid what and what they are paid for.
So again instead of arguing a strawman why not talk about what I am actually claiming.
I see a lot of finance industry bashing in between the lines of your post. You're making an argument about the choices that individuals make based on their own personal goals and circumstances. When you bemoan the choices that other people make under the guise of "what's best for society" you're making a statement that you think differently and that inevitably leads to calls for the state (or some other authority) to involve itself.
Sorry but that is your problem not mine. Whatever you think I am putting in between the lines is up in your head.
As I said, you are attacking a strawman, a position I don't hold.
I have been pretty precise in what I mean and what part of the industry I am referring to. If you can't get paste seeing ghosts then obviously you have a problem, but it's not me nor my post.
"Isn't there something inherently wrong with society when an industry that [b]provides little value to society make so much money[/b] that they can afford to pay better than anyone else?"
Yes you did and if you had just an ounce of integrity you would aknowledge and admit that I actually clarified what I meant in countless other posts removing any possibility of reading in between the lines.
Isn't there something inherently wrong with society when an industry that provides little value to society make so much money that they can afford to pay better than anyone else?