But what is the financial industry accomplishing today that they didn't accomplish 25 years ago? As far as I can see, the most useful innovation has been the ATM machine (which is indeed quite useful). The rest of it? Is the economy running better? Does the financial system allocate capital more effectively? If not, then why are they taking home so much more money?
I'm not going to argue that they're not smart -- they're plenty smart, I'm sure there are a lot of people in finance who are smarter than me. It just seems that those smarts have been applied towards rent-seeking and value extraction rather than "building things people want".
Businesses have far more tools to hedge various risks (FX, commodities, etc) - thanks to the financial sector, Apple is in no danger of dying should the RMB spike.
Retail investors are capable of trading for $8 or less, and the bid/ask spread has lowered significantly.
It's now drastically easier for retailers to sell goods on credit, and it's vastly easier for customers to pay electronically. 10-15 years ago, you couldn't swipe your ATM/credit card at the grocery store.
ETFs are undercutting mutual/index funds, drastically reducing the cost of saving for retirement.
Structured products allow far more people to trade with each other than ever before.
Microfinance [1] is available to lower income people, albeit with relatively high default premiums. (Admittedly, many people criticize this.)
It's not necessarily running better - there have been harmful changes as well. The Intel IPO could no longer happen today, for instance, and in the future far more companies to go public Facebook style than Intel style. But that doesn't change the fact that the financial industry has accomplished a lot.
(Of course, I'm not denying that they also rent seek.)
[1] Maybe "minifinance" is the appropriate term. Payday loans tend to be 10-100x bigger than third world microfinance.
Microfinance is a rounding error, and structured products almost put us in the Oklahoma dust bowl about 18 months ago.
... wait, you're extolling the virtues of payday loans? As if loaning money at a high interest rate to financially unsophisticated poor people on bad terms is a new idea?
Goldman and many others make money off prop trading. Goldman mostly does market making (trying not to hold positions for a long time), others take longer positions (Lehman, Paulson). They do a much better job of speculation than in the past - as an anecdote, Warren Buffet claims value investing based on technical analysis is almost impossible these days. I.e., there are far fewer undervalued companies than there used to be.
I have no strong opinion on microfinance/payday loans. They seem to fill a consumer need, and as far as I know they didn't exist in the past. (I also really wish people would stop being inconsistent about it - if you think Grameen bank is good but EZ Cash is bad, at least explain why Bangladeshi poor deserve it but US poor don't.)
...structured products almost put us in the Oklahoma dust bowl about 18 months ago.
You'll have to educate me on this one. Structured products cause topsoil depletion?
On the flip side, credit cards are currently riddled with serious, yet solvable security problems. Identity theft is one. ATM skimmers is another. There are also pretty grim privacy implications to the way things work. Finally, banks used to do some rather ridiculous things with penalty rates and fees until they were prohibited by law.
This system probably did people some good in the 90s, but right now it seems inefficient and dated. I believe that with modern technologies it's definitely possible to create something much better.
I clearly remember doing so 15 years ago.
Regardless, you certainly didn't do it in 1986 (which is jbooth's timeline).
Whether cheap money is a good or a bad thing in the long run, I guess that has yet to be seen.
We'd be far better off if fewer people had been able to "afford" to buy houses in the last 10 years.
Maybe they've made some bookkeeping and overhead improvements that allow them to add a point less or something like that, but it's not like they had some genius idea that allowed them to lower from 18 to 5.. it's just tracking the inflation rate. (and/or the fed funds rate which is related to inflation).
(Side note: my ATM snark was stolen directly from Paul Volker, who was the guy who stopped inflation in the late 70s early 80s by jacking up the fed funds rate. Credit went to Reagan of course. Better hair.)
In fact, the lower the rate, the more we all borrow and bid up prices for things. Most of that inflation since 2001 has been in things that the government likes to overlook, such as oil and housing. But the inflation does actually exist, whether they wish to ignore it or not.
Going to market rates would go a long way to fixing the distortions, to be sure. But many things would not survive in that environment and have only been viable because they've been able to shift the true cost via inflation to the larger economy.
Credit went to Reagan for selecting Volker and letting him do his job.
As far as how many permits you need to open a bank, the answer is "a lot less than you did 25 years ago", due to continued lobbying pressure. I'm all for phasing out obsolete or poorly considered/implemented regulations, of course, but it seems that the regulations everyone wants to get rid of are those that limit risk. So they can be more "dynamic" in their search of profits. Then when they go belly-up, we're stuck with the tab.
Buddy of mine estimates that he was personally responsible for a fraction of a % of the housing meltdown. He got out in 2007. Hasn't had to work since then. Good thing regulations didn't stop him from making all that money while the getting was good :)
