Most of the modern financial system is a dark pattern. If we were to reinvent finance from scratch, the result wouldn’t look anything like what we have.
Yes, it’s weird to think that all of modern finance (insurance, banking, investment management) is an outgrowth of chalk boards at the 17th century equivalent of a Starbucks.
Welcome to the cutting edge of finance where the money is all made up and interest doesn't matter!
The perpetual motion machine that is the world of modern finance is either blindingly stupid and short sighted or just too complex for me to properly understand, I'm not sure which.
I’m not dodging the issue. You asked if finance played a useful role in society, and I gave concrete examples where it did.
Those services are more profitable because they are more valuable, because they are now better at transferring risk. Sure, you can say that you don’t understand the value that a derivatives product provides, and some people are buying them when they shouldn’t, but that hardly describes the entirety of an industry. Just because you can’t imagine why someone would want borrow money in a complex way doesn’t mean it doesn’t make sense to them.
Let me give you another example where financial innovation has made people’s lives (slightly) better. Many people of my parents generation bought strange investment products with very high management fees from people like Fidelity and Morningstar. Today they’re more likely to buy a low fee index fund like Vanguard. Or a target retirement fund that reduces their risk as they get older.
I argue that the financial products still existed 40 years ago, but they were more obtuse and a worse deal.
Modern finance is a process of constantly repackaging and reselling risk from people in a better position to evaluate that risk to people in a worse position to evaluate that risk. Finally, after a dozen generations when it arrives at the people least able to evaluate the risk, it crashes to zero, followed by sympathy to the poor suckers (like your local school district) and a bailout.
Hertz just cut out the middle men here and sold directly to suckers, maybe a lot of their executives were also creditors.
"Modern finance" has these features because they are at their core an old boy's network of people saying "yes this is definitely okay". On top of that, it is running on maybe two distinct networks globally, both of which are not immune to just going down.
It's then a bit disingenuous to say that it's "modern finance with features ripped out", I would say it's modern finance with a different set of priorities. Two of those priorities are reliability and verifiability, which are two features the current networks have absolutely none of.
It’s almost like the finance system we have today is the result of complex adaptation. It’s not perfect, but it seems less corrupt, more stable, more approachable, and more useful than the crypto space.
The world of finance makes these aspects of your life function:
* Allows you to get a mortgage
* Allows you to protect yourself with
health/car/life/home/title/etc insurance
* Pays for your highways/stadiums/schools and other public works
* Protects your deposits
* Pays for your retirement
* Funds the college fund that paid for your school
* ... Or the student loans that allowed you to attend school
* Supports the global supply chain that brings you your
iPhone, stocks the grocery store/your favorite restaurants with food, and puts the clothes on your back.
* Funds the growth of corporations large and small, giving you the job that allows you to buy an iPhone
* Funds the massive philanthropy expenditures that help those
in need everyday
* Pays the pensions of the elderly
Financial innovation make our lives more predictable and less sensitive to chance. One could argue a huge amount of human progress is owed to modern-day financial institutions.
Like a software system, it's extremely naive to think that complexity is a sign that a system is rotten. Finance is an art, not a science. Sometimes we make products that we don't always completely understand until later. But the vast majority of financial innovations are deeply ingrained in the good life that you get to enjoy every day.
I don't want to spend a lot of time working on each point within your post. However I do think you discount the value that finance brings. Access to capital and efficient distribution of capital are tremendously powerful.
Describing what finance does as just pushing paper is like describing the startup community as just writing useless code.
I'm just illustrating the theoretical development of banking in general to serve as an example of how finance is organically complex in the same spontaneous way biology is complex.
How much rent seeking and regulatory capture that goes on is enabled by modern finance?
What about bailouts for financial institutions that are too big to fail - the idea of privatizing the profits and socializing the losses?
Real wages are down and income inequality is up over the last several decades, coinciding with a lot of growth in the finance industry. Subprime and payday loans, 30 year mortgages backed by the government, leveraged buyouts, stock buybacks, tax havens, etc. Private and public debt levels are way higher than at any time prior to WWII. Right from the age of 18 we have kids signing large student loans, the banks don't care about their risk since the loans are federally backed and will follow these kids until the day they die.
A lot of people feel that the general public is being squeezed by financiers. Are they wrong?
*If you life in a first world country and come from at least a lower-middle class background
You are talking about money. Not modern wall-street finance.
> huge amount of human progress is owed to modern-day financial institutions.
Like synthetic credit default swaps?
> Like a software system, it's extremely naive to think that complexity is a sign that a system is rotten.
Complexity that can't be coped with is rotten! The Linux kernel is quite complex but each part of it is well understood and there are a lot mechanisms in software to reduce complexity.
> But the vast majority of financial innovations are deeply ingrained in the good life that you get to enjoy every day.
Tell that to Greece people that got into the Euro because of clever CDS from Goldman Sachs or the masses of people that are stuck in debt from their education or credit cards.
> Sometimes we make products that we don't always completely understand until later.
That does not stop you from selling them and acting like you do. However recent financial crises have shown that banks offering these products for the most part understand them... the persons buying them don't.
> Funds the massive philanthropy expenditures that help those in need everyday
That shouldn't be needed in the first place if there wouldn't be such a huge inequality. Philanthropy is not a good idea for a good-working society. There are laws and a justice system that is more fair than a few far too rich persons with a selectively good cause.
> Finance is an art, not a science.
And it should be a tool not an art. A means to an end.
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