As always, a thought provoking piece by Professor Brands!
I think the term "finance" is being used quite broadly. I agree that banks - and bankers- that are taking in money and lending it out for car and home purchases, etc. are performing a necessary and productive activity.
Where banks fail is when they start getting out of that lane as they did in 2008-9 crashing the economy.
Another aspect to "finance" are literally unproductive, harmful to the economy are private equity, short sellers, and similar Wall Street vultures- yes I use vultures to denigrate these people and activities.
Nobody should be able to bet (yes gamble) on stocks going down in value. That is a ridiculous activity.
Private equity is largely responsible for leveraged buy-outs- another "finance" activity which should be illegal. In the retail sector, over 40% of companies bought by PE in leveraged buy-outs have filed for bankruptcy at some point after their acquisition, according to Retail Dive’s analysis. PE firms borrow the money for the purchase then put that debt onto the company they bought. And if the company was already struggling this adds more pressure.
"Finance" also creates new 'instruments' which again should be illegal or heavily regulated. Collateralized debt obligations (CDOs) should be illegal. Quoting from an article on LinkedIn: "CDOs played a significant role in the 2008 financial crisis through several interconnected mechanisms: Many CDOs were heavily exposed to subprime mortgages, which began defaulting at alarming rates as housing prices declined."
These CDOs sever the link between the home buyer and the bank or lender. If I run into trouble making my mortgage for example, I can go to Huntington Bank and negotiate payments or refinancing. But if my loan is now bundled with some Wall Street package of so-called investments, who do I talk to? That's why many people simply walked away from their homes during the crisis.
Not all "Finance" is equal or value added to the economy- they are simply "rent seeking" in economic terms-getting rich without adding productivity to the economy.
By the way, "rent seeking" largely disappeared from economics lexicon for decades until brought back by Thomas Piketty in his master work "Capital in the 21st Century." Fantastic book!
As always, a thought provoking piece by Professor Brands!
I think the term "finance" is being used quite broadly. I agree that banks - and bankers- that are taking in money and lending it out for car and home purchases, etc. are performing a necessary and productive activity.
Where banks fail is when they start getting out of that lane as they did in 2008-9 crashing the economy.
Another aspect to "finance" are literally unproductive, harmful to the economy are private equity, short sellers, and similar Wall Street vultures- yes I use vultures to denigrate these people and activities.
Nobody should be able to bet (yes gamble) on stocks going down in value. That is a ridiculous activity.
Private equity is largely responsible for leveraged buy-outs- another "finance" activity which should be illegal. In the retail sector, over 40% of companies bought by PE in leveraged buy-outs have filed for bankruptcy at some point after their acquisition, according to Retail Dive’s analysis. PE firms borrow the money for the purchase then put that debt onto the company they bought. And if the company was already struggling this adds more pressure.
"Finance" also creates new 'instruments' which again should be illegal or heavily regulated. Collateralized debt obligations (CDOs) should be illegal. Quoting from an article on LinkedIn: "CDOs played a significant role in the 2008 financial crisis through several interconnected mechanisms: Many CDOs were heavily exposed to subprime mortgages, which began defaulting at alarming rates as housing prices declined."
These CDOs sever the link between the home buyer and the bank or lender. If I run into trouble making my mortgage for example, I can go to Huntington Bank and negotiate payments or refinancing. But if my loan is now bundled with some Wall Street package of so-called investments, who do I talk to? That's why many people simply walked away from their homes during the crisis.
Not all "Finance" is equal or value added to the economy- they are simply "rent seeking" in economic terms-getting rich without adding productivity to the economy.
By the way, "rent seeking" largely disappeared from economics lexicon for decades until brought back by Thomas Piketty in his master work "Capital in the 21st Century." Fantastic book!