Does it seem to anyone else that the finance industry is increasingly distracted from actually matching up capital to fundamentally productive companies, especially new companies?
Looking at the stock market, there are few IPOs, and after IPO, being public only provides access to limited access vis issuance of new stock...
Some capital flows to VCs, but it seems the more capital flows to large VC funds, the more the criteria becomes look for a sure thing and filter more for large scale opportunities - all while small scale fundamental development receives poor access to the vast amount of capital sloshing around (and settling in places like unused real estate...).
To me it seems that investment in direct development of productive tech and/or process is competing against profitability of short term financial manipulation - and causing a drop in overall delivery of new productivity improvements to the general economy. But even further, the very financial industry isn't really creating or maintaining a channel for money to open opportunities to develop that kind of company - certainly not a large scale needed or possible today.
>Does it seem to anyone else that the finance industry is increasingly distracted from actually matching up capital to fundamentally productive companies, especially new companies?
This is somewhat controversial to posit, but I believe the corruption in the financial industry is extraordinarily entrenched because of the Fed. Before you call me a lunatic, smart and good people from Aaron Schwartz to Sanders have said things like this: that it should be eliminated, or that it is nothing more than socialism for the rich while hurting the poor.
The most obvious problem with it is that it creates astronomical moral hazard by protecting and guaranteeing the big banks.
After the Fin Crisis Krugman was talking a lot about making banking boring again, and run like utility companies. You can still have VCs, hedge funds, or whatever you want--but it's not funded by and guaranteed with anything other than the money you put in it, and it's separated from vanilla banking, ie Glass Steagall.
But then we had Dodd Frank and sometime after Krugman never went back to talking about that again.
Unfortunately, the dogma about the Fed is so entrenched in mainstream economics--so much so that speaking against it is immediately written-off.
Nearly 1.5 centuries ago, all the banks were actually betting against Lincoln to lose his war. So he used the constitutionally-granted right to print the nation's own currency, and won the war with it. The point is, there's no reason we can't do this if we really wanted to (and if you care about poor and working class, and eliminating cronyism from the world, you should want to).
Corruption in the financial industry is extraordinarily entrenched because of deregulation, not because of the Fed.
Allowing banks to merge and become huge conglomerates, the elimination of Glass-Stegal (which eliminated the distinction between normal banks and investment banks), and lax regulation of derivatives / dark money are all very direct causes.
However while you may not agree the Fed is a problem, unfortunately the Fed and central banking has an aura of group think around it that is usually only available for religious groups. I mean the fundamental concept of the fed's mandate: price stability and employment targeting--yea they sound great, but at what point do you question the ability to create value out of thin air just by playing with money. It is by definition financial alchemy.
And yes, I'm already familiar with Keynes' arguments in his General Theory, which is the historical work that set the precedent for this.
It's useful to stop and ask yourself what exactly do central banks do that is so harmful.
The US situation of those bailouts and "too big to fail" is certainly problematic, but most people pushing that line are really against fractional reserves, but those don't really seem to have the effects people attribute to them. (And if they do have that effect, it's the central bank that sets their fraction, so it's entirely a matter of policy, not structure.)
Most of the damage the Fed causes is due to artificial manipulation of interest rates, disrupting the time coordinating function they would serve when driven by natural market forces. This time discoordination is the source of the boom-bust cycle.
The Fed doesn't have the power of setting any useful interest rate, and even the one they do set they seem to follow the market instead of setting it. (What seems to repeat on every country, because the market has more money than the central bank, and the later must avoid bankruptcy.)
Central banks do have the power of controlling the amount of money in circulation on most countries, what does indirectly impact important interest rates. But the US is an exception here, as the Fed decided long ago to let fractional reserves run as low as the banks are deciding the fractions on practice, thus abiding from any control.
Schwartz said verbatim the Fed should be eliminated. Sanders has said much negative on the Fed, specifically that it's 'socialism for the rich, and rugged individualism for everyone else,' and variations along the lines of 'fix the Fed,' but Schwartz is who said to completely end it.
You're saying we should get rid of the financial industry? What, because we're all so good at managing our own money?
Guaranteeing the big banks can't fail is how we keep the economy going. If a bank fails, everyone that is owed money by that bank fails too. Is that acceptable? Would you be fine with your employer going belly up because the bank they rely on can't pay out money?
Guaranteeing the big banks can't fail is a source of moral hazard, removing the cost of being wrong from those taking the risk and transferring it to the general public. Make the banks responsible for the negative consequences of their actions with no potential for bailout, and watch their behavior change.
Just to address the above poster: vanilla banking could still be guaranteed. By contrast, in essence the Fed is guaranteeing the banks' risky investments.
I think this is something of a serious issue, but I was thinking more of problems in the operation of our financial markets in a straightforward legal sense.
The first part is sarcastic. It's a shame that you have to resort to "preventive self-denigrating" when voicing valid concerns about the FRS, which is basically a facade for a bunch of crooks who usurped the control over US money supply.
You're not limited to stock. You can purchase options or futures, or play around with foreign exchanges. IPOs show up more rarely because it's SUPPOSED to be hard to start a new business. You can approach companies to try and buy into their model by investing your cash - nothing is stopping you.
As for VC companies controlling the cash, that's not the whole picture. Being dependent on "free cash" from VC's is a pretty poor way of conducting business. It isn't all about the money - it's the product. VCs don't want to invest in junk just because one person is ecstatic about their idea. They really do want more sure things. A TON of VCs were hurt back in the early 2000's because companies were producing NADA and IPO-ing all the time. A lot of trust was lost.
My point is once the stock on the exchange, all the churn, the purchases and sales, the futures and options have an increasingly tenuous link with encouraging capital to select for better fundamental productivity. Worse, by the time a company is publicly traded, you're really often just in the 'execution' phase of expanding an already established process. This isn't terrible, it's useful - but my main concern is capitalization of fundamental improvements in our economy at an earlier stage than a stock is 'bottlenecked' at the moment and so the financial market has a limited set of options of truly productive places to apply excess capital.
Part of that is large companies (with a handful of exceptions) perform optimization focused on accounting measurements and predictions to maximize their existing margins. This makes perfect logical measurable sense, except that over multiple decades of refined MBA practices, it makes almost all them good some local optimization, and increasingly bad at new ventures(or fundamentally changing their approach to existing ventures). Then to break out of that local optimization, some increased investment is required that large companies are punished for if/when their profit margin drops.
So local optimizations are explored to a endpoint, and capital starts chasing higher returns - we get rentier behivior, or capital flows into bubble assets that pop up or get chased around the world in various categories - all while produtivity and growth slowly flatlines... or at least misses its potential.
This has been recognized for a while w.r.t large companies, and so the generally accepted approach is for many of them to acquire new companies to get new capability. So we get to VCs. They don't want to invest in junk, but when VCs apply quantitative filters to because they want a sure thing investment - but moving the same quantitive model to uncertain ventures just moves that some of same 'large company' problem to an earlier stage. I'm not saying to get rid of VCs, they perform a reasonable function now, but something feels off.
I'll leave off a whole discussion of where new companies can come from outside of VCs, but there are some factors holding that back (and others helping), but in general it think that's in decline and that our larger markets depended on that creation more than they realize.
So to me, it feels like the overall financial system is missing opportunities - and that part is possibly hinted at in data, at least at the gross productivity growth falloff of the economy.
Looking at the stock market, there are few IPOs, and after IPO, being public only provides access to limited access vis issuance of new stock...
Some capital flows to VCs, but it seems the more capital flows to large VC funds, the more the criteria becomes look for a sure thing and filter more for large scale opportunities - all while small scale fundamental development receives poor access to the vast amount of capital sloshing around (and settling in places like unused real estate...).
To me it seems that investment in direct development of productive tech and/or process is competing against profitability of short term financial manipulation - and causing a drop in overall delivery of new productivity improvements to the general economy. But even further, the very financial industry isn't really creating or maintaining a channel for money to open opportunities to develop that kind of company - certainly not a large scale needed or possible today.