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WHAT IS THE FUNCTION OF THE FINANCIAL SECTOR?
I know up to this point in our history, Wall Street, with its big buildings, tough executives, and large buckets of MONEY, has developed a bit of a mystique about it. I don't know what it is, personally; all these people running around, creating, buying and selling all sorts of esoteric financial products, working absurd hours, and making more money than they know what to do with, never really appealed to me. However, in light of these new financial regulations (and more importantly, the entire collapse of our economy), I have more important questions we need to be asking ourselves.
Looking through the "myth of Wall Street," what are banks really supposed to do? Banks and the financial sector in general do not produce anything. They do not contribute to the output of this country; they provide a service, which facilitates the production of goods and services from other parts of our economy. If the financial sector merely serves as a lubricant for the rest of the economy, I have two questions that follow: is it really necessary to save the financial sector in its own right? Is it necessary that banks be run as a private enterprise?
Wednesday, June 17, 2009
"INNOVATION" AND OBAMA'S NEW FINANCIAL REGULATIONS
I just started reading an article, and I was struck by a quote from a Republican senator who feared feared financial regulation because it may "stifle innovation." I understand that as a concern when regulating most industries (although regulations might stimulate innovation, albeit only in getting around them). However, when regulating the financial industry, you have to be aware of the fact that innovation in the financial industry is what caused the problem in the first place. In fact, I might argue that part of the problem with the financial industry in general is its constant innovation, creating new and interesting ways of moving money and risk around without actually creating anything of value.
That's the key difference: innovation in the financial sector doesn't add value; it just becomes a new tool for banks to play with. People then "created" money on top of this new "innovation," which evaporated like dew on a summer day the moment the sun came out and showed everyone what's going on. Their house of cards, built on the innovation that made everyone enormously wealthy, came tumbling down.
Don't get me wrong: these innovations were designed specifically for the purpose of spreading risk around, not heaping it all in one place, but when money is created and people get wealthy without actually creating anything of value, you have a problem. That's what financial innovation does, essentially; it creates and perpetuates bubbles.
I read about this study, not long ago, in my Finance for Social Theorists class:
Pop Psychology
Some of the things I found interesting were these: first, every time they ran the experiment with the same people and the same conditions, the bubble occurred earlier, until eventually they ran the experiment and no bubbles occurred at all. Second, if they changed the conditions of the experiment, the bubbles reoccurred. What this says to me is that maybe we shouldn't want financial innovation. Maybe regulating the market to stifle financial innovation is not such a bad thing.
I just started reading an article, and I was struck by a quote from a Republican senator who feared feared financial regulation because it may "stifle innovation." I understand that as a concern when regulating most industries (although regulations might stimulate innovation, albeit only in getting around them). However, when regulating the financial industry, you have to be aware of the fact that innovation in the financial industry is what caused the problem in the first place. In fact, I might argue that part of the problem with the financial industry in general is its constant innovation, creating new and interesting ways of moving money and risk around without actually creating anything of value.
That's the key difference: innovation in the financial sector doesn't add value; it just becomes a new tool for banks to play with. People then "created" money on top of this new "innovation," which evaporated like dew on a summer day the moment the sun came out and showed everyone what's going on. Their house of cards, built on the innovation that made everyone enormously wealthy, came tumbling down.
Don't get me wrong: these innovations were designed specifically for the purpose of spreading risk around, not heaping it all in one place, but when money is created and people get wealthy without actually creating anything of value, you have a problem. That's what financial innovation does, essentially; it creates and perpetuates bubbles.
I read about this study, not long ago, in my Finance for Social Theorists class:
Pop Psychology
Some of the things I found interesting were these: first, every time they ran the experiment with the same people and the same conditions, the bubble occurred earlier, until eventually they ran the experiment and no bubbles occurred at all. Second, if they changed the conditions of the experiment, the bubbles reoccurred. What this says to me is that maybe we shouldn't want financial innovation. Maybe regulating the market to stifle financial innovation is not such a bad thing.
Tuesday, June 09, 2009
HOUSEKEEPING
I am going to try and get more involved in the social web, considering I plan on making it my job, so I'm going to try and post more here. I know almost nobody reads this, and this place has been more of a repository for my ideas rather than anything anyone else finds interesting. In the meantime, I am on Twitter (so I'm cool now). Follow me here: http://www.twitter.com/NimhOfJoy. At most so far, you'll probably see germs of ideas. If you follow me, we can discuss it before it turns into a full-fledged post.
Also, I'll probably be going through my old posts and hiding them. A lot of them are angst-y teen rants, and they're not very good. If there are any gems lurking in there you want to keep, I suggest making a copy of them and putting them someplace. I won't be deleting anything, but you won't have access to it.
Hopefully, we'll turn this into a real blog, not just something I putz around with once in a while.
I am going to try and get more involved in the social web, considering I plan on making it my job, so I'm going to try and post more here. I know almost nobody reads this, and this place has been more of a repository for my ideas rather than anything anyone else finds interesting. In the meantime, I am on Twitter (so I'm cool now). Follow me here: http://www.twitter.com/NimhOfJoy. At most so far, you'll probably see germs of ideas. If you follow me, we can discuss it before it turns into a full-fledged post.
Also, I'll probably be going through my old posts and hiding them. A lot of them are angst-y teen rants, and they're not very good. If there are any gems lurking in there you want to keep, I suggest making a copy of them and putting them someplace. I won't be deleting anything, but you won't have access to it.
Hopefully, we'll turn this into a real blog, not just something I putz around with once in a while.
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