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A conversation about the US Financial Services industry

February 21, 2011 Leave a comment Go to comments

P1: As I study more about the US economy here @ school, I have lost my respect for US economy esp. its financial services industry. It’s so ultra-capitalist working towards bridging the rich-poor divide… with zero actual economic value addition

P2: Isn’t that everywhere? And it doesn’t help that no one is regulating them. I mean, if you were allowed to do anything you wanted with people’s money, anything at all with no consequences, what holds you back?

P1: yea… but if you look at it, everything in US economy either starts with the financial markets or ends with it. Financial markets are purely wealth redistributors and not wealth creators.

P2: Yes and no. Remember, the financial industry was relatively small until around the early 80s or so. Wall street movie, milken, junk bonds etc. Before then there was a healthy dose of regulation; Reagan and then Thatcher deregulate.

P1: True. More than just a big hand — GATT/WTO, changes in banking regulations, computerization all this stuff that starts in the 70s and 80s literally creates the possibility for the financial industry to take off. I find the financial instruments they created so weird and zero economic value adding.

P2: The weird instruments are a byproduct of no regulation. Think about India — they didn’t get hit hard at all, esp. the banks as the RBI governor said, “you must be capitalized…”

P1: As I study more… the root of everything in financial services seems to be just one thing – INTEREST RATES. Every penny moves in this industry because of something to do with interest rates.

P2: Hmmm. But how does that figure with the crazy derivatives etc?

P1: All these derivatives and other similar financial instruments are based on the expected price of a certain asset… in terms of swaps, futures, options, and all these are dictated by predictions of interest rates in future… It is like a self-fulfilling prophecy… today, I sit and value a derivate instrument assuming certain interest rates in future periods estimating returns… and these interest rates are dictated by US Treasury rates as set by the Fed & Treasury. Since that is the case, everyone works towards meeting that expectation…

P2: So you’re essentially betting on interest rates going up or down?

P1: Absolutely, that’s what it is in a nutshell. There is no single financial product that I have come across in capital markets which works independently of interest rates.

P2: Huh, that’s interesting. I don’t I’ve ever heard it put that way. I’ve learned something tonight — thx! I really have to get a copy of Michael Lewis’s The Big Short. Ultimately that’s where profit must come in banking.

P1: Most probably and these profits come from information asymmetry…

P2: That’s a fancy term for lying or for holding inside information or just giving inside info to favored clients?

P1: All of the above. Since it is merely wealth redistribution… one person who has more access to info tends to profit at the expense of someone who didn’t have that info and hence bet the other side…

P2: Again, back to the idea of lack of regulation, lack of shareholders rights

P1: All these Goldman Sachs and the likes… offer so many other services to the clients they hold investments in. They end up having much more info

P2: Treating corporations in this bizarre way as individuals but not subject to laws like individuals

P1: I now see how regulation or the lack of it has a lot of role to play in this financial circus

P2: And Obama is perfectly happy to let us go back to the way we were. Almost. I wonder if Elizabeth Warren is happy with the agency she’s helped create…

P1: Or she’s also part of the same stock. And it’s the common man who’s suffering at the hands of these scrupulous people.

P2: It’s a perfect storm of ignorance and malfeasance coming together with the press and congress just not doing their jobs. The common man can’t be expected to understand the ins and outs of all this — I can barely understand any of it — but we have to trust that the people who are supposed to look out for the interests of the common good are doing so. And they obviously don’t.

P1: Its one thing for some politicians and press to be bought off but this many? Unconscionable. It seems like the whole system is gone to the dogs and anyone coming in is merely a cog in the wheel with no strength / means to turn the wheel in the right direction.

  1. Nabz
    February 24, 2011 at 2:40 am

    See Inside Job – heavily one-sided but factful narration of the financial disaster *of* the US,
    *by* the US, *for* all of us!!

    • February 27, 2011 at 5:37 pm

      @ Nabz

      Well said… “of the US, by the US, for all of us” 🙂 Awesome!!!

  1. May 7, 2011 at 9:27 pm

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