Horrible economic news. This makes me sad

Maybe someone else -- Ragu, Doctorquant -- can give a better answer, but here's my simplistic take on it from a thread the other day:

 

It's silly to dismiss finance as completely worthless. As to whether to the most recent development in finance have actually been socially beneficial, that's a different story. Many of them have contributed to tremendous instability for not all that much benefit. You can't get rid of risk-you can only push it around to different places.

 

Not to dive too deep into this, but my brother, fresh out of school, just started working @ UBS in July. 21 years old, way better man than I, and he might be a 100 percent innocent casualty of all of this. So to all those dancing on the graves of the people in the company who aren't bonus babies, shame on you.

 

The big boardroom boys announced today that they'll be reducing tips at restaurants to 3 percent.

According to one, who spoke on the condition of anonymity, "hey I started out as a paperboy. No one game me tips. I had to work my way to where I am."

 

This is the fucking magic bullet theory turned on its ear. The first $2.3 billion dollar bonus pool that was targeted strictly for the Lumpenproletariat. How convenient.

UBS should be shucked and cleaned and disassembled pronto. Two unbelievable fuckups in three years. The company is rotten to its core. And for my own personal sob story, one of my best friends from my first job out of college started working there two years ago.

And rogue trader, my ass.

 

And just as a simple example to show the benefits of finance (but also the inability to eliminate risk), take your bank account.

You put money at the bank. You gain because you don't need to worry about where exactly to invest . In addition, you're able to access your money on demand.

The bank loans this money out at a rate of interest higher than what it pays to you. It is able to do this in part because, in theory, it better understands which investments will be profitable.

But the returns don't just materialize out of thin air-they create risks for both parties.

You take on counterparty risk. That is, the risk your bank fails and you can't get your money out.

The bank takes on a number of risks. First, it obviously has credit risks: that is, borrowers can't repay their loans. Second, it has liquidity risk: depositors can take their money out at any time, but the bank can't demand borrowers return money at any time--this is part of the reason banks are able to make a profit--maturity transformation--but also the reason they are susceptible to bank runs.

The FDIC/Fed obviously take care of some of these problems. You don't need to worry about what bank you save in-the FDIC insures you no matter what. Similarly, banks don't need to worry about bank runs, because: 1.) with FDIC insurance, people have no incentive to rush to take out their money from an unstable bank; and 2.) assuming the bank is solvent, the Fed will lend to them to ensure liquidity.

But again, no risk is being eliminated. It's just being moved to another set of people. Here, that's other savers--whose banks pay into the insurance fund--and the U.S. taxpayer.

Some of these parties maybe better at handling risk because of their expertise or risk-tolerance, making finance beneficial. But because the risk will always exists, there will be costs.

 

Your brother should have found a firm with better ethics.

 

Hey Ragu, let us know what the "rogue trader"'s bonus was last year.

He lived in a penthouse big enough for 10 bedrooms.

http://www.dailymail.co.uk/news/article-2038668/Kweku-Adoboli-Rogue-traders-1-000-week-apartment-pictured.html?ito=feeds-newsxml


We need more of these 'rogue traders' to wipe out a few more of these firms. Capital can be put to much better use than paying these jackalopes.

 

I hope your brother keeps his job, but if he doesn't, I can relate to him. I lost two in less than a year. The first was probably more painful because the paper closed and everybody I worked with lost their job too. (The second time I was laid off with a handful of others.)

It doesn't seem like anybody's dancing on the graves of people such as your brother. To me, it just seems like commentary on the disproportionate amount of pain felt by some executives when financial catastrophe hits. When the suits came in to deliver the bad news at the first job I lost, they told us, as editorial staff, that we "didn't do anything wrong, but the business model changed."

Yet nobody was responsible for the implementation or execution of the business model lost their jobs.

Maybe it's self-serving bias or simplistic for me to assume what the exec said was true -- maybe we, as an editorial staff could have done something to save the paper, and maybe we did things to hurt it -- but his words and the company's actions are, I think, the type of thing many here have a problem with.

 

Horrible management
Horrible risk management
Horrible internal controls

 

Well, every newspaper has a set of community crackpots that cheer our demise because we're too liberal or too conservative or pushing our own agenda or whatever the latest conspiracy is. So, in a way, I guess we do have that.

 

So, clothes, TVs, stereos, computers, shoes, and virtually every other item that is now made in China, India, Vietnam, etc., and is sold in the US was originally manufactured in Peru before production was moved overseas? Thanks for clearing that up.

And the local HP workers who've lost their production jobs to Singapore, India and Ireland, or the Fisher-Price workers in my hometown whose jobs were outsourced, will be thrilled to know that too.