It's a problem because unlike other activities finance produces benefits to society only when it well, finances people doing things other than finance. Other activities are valuable in themselves.
I still find it hard to parse that as a problem. I mean, power generation only provides a benefit to society when someone uses the electricity to do something.
So what? Infrastructure isn't inherently parasitic. Lots and lots of infrastructure isn't even necessarily bad.
I view finance as infrastructure. The machinery that hooks investors up with investees is fundamentally useful. The machinery that lets people and businesses manage risk, that lets them define very specifically what gains and losses apply to them in what events . . . that's really darn useful stuff. If it's complex sometimes--even incomprehensible--in order to achieve something, so what? So is software. So is engineering in general.
Some people practice finance badly, I don't doubt; some engineers are snake oil salesmen, too, hiding behind the inherent complexity of problem and solution. The government bailed out finance and that's bad, but it bailed out auto, too. That doesn't make car manufacture generally parasitic.
Those are historical specifics, justified complaints against individuals and events. But I don't see anything here justifies the demonization of the industry in general.
If you see finance as infrastructure to help other businesses grow (as I do), then it's growth should result in the growth of other industries. Instead what we see is finance growing and other industries declining. To me that suggests a general dysfunction in the role of finance. It simply isn't doing the good it's supposed to.
There may be many or even most individuals who are acting in good faith, but the sector as a whole appears to be broken.
This isn't about demonization. It's about pointing out a serious threat to society's continued prosperity.
And as for the auto industry - they shouldn't have been bailed out either - that doesn't somehow make it better that the financial industry was. Also the auto bailout was a rounding error compared to the financial bailout.
What industries are declining? As far as I know, virtually every sector of the economy has grown. Manufacturing, medicine, education and technology certainly have.
What industries are declining, and why do you believe that finance has failed them?
The private goods-producing sector value added fell 6.4 percent in 2009, after a 4.2 percent decline in 2008. The private services-producing sector declined by 2.1 percent, after a 0.4 percent increase in 2008. The finance and insurance industry grew 6.1 percent in 2009, partially offsetting the widespread economic decline. The increase was primarily driven by the strong recovery of the insurance carriers industry.
That's a quote from a December 2010 report from the government's bureau of economic analysis.
Sorry, I didn't realize your comment was limited to a single year of our current recession. You are correct - for a short period, finance has grown while other sectors have shrank.
That's not the general trend, however, that's just a blip caused by the recently ended recession.
[edit: can't respond to your post, but June 2009 is also the time period when industrial production and retail sales started growing, and when the stock market recovered.
Funny - according to the very report I just quoted that positive GDP growth in 2009 is due only to growth in the financial industry which makes up for the declines other sectors are still seeing.
Finance was being discussed as a percentage of GDP. Every sector can't increase as a percentage of GDP. That should correct to a fair amount for the general growth in all industries.
If you see finance as infrastructure to help other businesses grow (as I do), then it's growth should result in the growth of other industries. Instead what we see is finance growing and other industries declining. To me that suggests a general dysfunction in the role of finance. It simply isn't doing the good it's supposed to.
Well, I don't know that I find that very persuasive. Industries rise and fall all the time, for many reasons; the world is a complex place. Perhaps a useful financial instrument now is keeping things from getting worse somewhere else. Or perhaps it will bear fruit in a decade, as one would generally expect with an investment. Such an argument seems hasty without a good understanding of what the relative growth rates of different industries under different conditions should be -- a rather tall order.
I do certainly see the moral distinction between George Soros' currency manipulation and Warren Buffett's shrewd investment, despite the fact that both men made their money with money. But I don't think it would make sense to reckon their true productivity by comparing their fortunes. Likewise, if one is going to suggest general dysfunction in the financial industry, I'm much more interested in what you think it's doing wrong specifically -- where the growth that you think is unhealthy is coming from -- than how big it is.
To talk in concrete terms, I think I read elsewhere that a lot of the recent growth in finance has been in insurance. It seems sensible to me that if a lot of people have lost money, insurance, and its role in mitigating financial risk, would be more important. Without it, we might see people completely unwilling to take on financial risk at all until they had more money, which would be devastating. At a first glance, I don't see anything unhealthy about such an industry's growth being decoupled from the rest of the economy--or even inversely correlated.
And as for the auto industry - they shouldn't have been bailed out either - that doesn't somehow make it better that the financial industry was.
Oh, indeed, I am not arguing that. Both were terribly bad. I was arguing only that a bad, but specific, historical event doesn't make the industry as a whole fundamentally bad. No one would say, "The government bailed out the auto industry -- making automobiles is fundamentally parasitic on society!" I mean, making those particular automobiles, sure. But all automobiles ever? That's overblown. But people do seem to take the financial bailouts as evidence that the industry as a whole is amoral.
What would have happened if the US government did not bail out GM? Would other auto manufacturers fill the void? How many american workers would be out of jobs (both from GM and from their suppliers, and their supplier's suppliers, etc.)? We would still have Ford, either way and most imports.
Contrast this with the finance sector. What would happen if Goldman was not bailed out. What investment banking firm would still be standing and what would it look like?
Of course there are benefits to the finance industry as a whole, but that doesn't mean the world couldn't do with letting the air out of its tyres a bit.
This is an industry that has an increasing percentage of our smartest minds. Add to that its extreme proximity to all money anywhere. The result? It's obvious that this industry is going to drift towards increasingly smart ways of capturing as much of our money flow as possible.
The finance world seems to become increasingly centralized, where very few companies become better at leveraging their size to increase their share of smart minds, money and power. That is the opposite of what competition is meant to do. With all these advantages, it seems insane that the industry needed a bailout.
It's not a few companies being bad. It's a market structure that can only result in bigger banks needing to pay their staff bigger bonuses to compete with each other, getting more power, extracting more money from everybody else. How could it be otherwise?
The issue with finance is that people are using huge amounts of leverage to place bets. If they werent allowed the level of leverage that they are using (i.e. 1:30) there would be a whole lot less "money" in the system. The financial system is allowing people to assign value to intangible assets 3-4 times removed from an actual physical asset. The main issue with that is that it has the capability to take us all down.
You do realize companies that provide those valuable goods can grow faster, hire more people, and grow our economy's GDP much quicker, with more capital, correct?
No. Not correct at all. There is no evidence whatever showing that the current size of the financial industry caused faster growth, more hiring or GDP growth other than the financial industry itself.
And since we're on the subject of evidence - what do you think of this:
The private goods-producing sector value added fell 6.4 percent in 2009, after a 4.2 percent decline in 2008.
The private services-producing sector declined by 2.1 percent, after a 0.4 percent increase in 2008.
The finance and insurance industry grew 6.1 percent in 2009, partially offsetting the widespread economic decline. The increase was primarily driven by the strong recovery of the insurance carriers industry.
From a December 2010 report from the government's bureau of economic analysis.
