EPTFinance is a Game - Page 2
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Primadog
United States4411 Posts
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searcher
277 Posts
On March 04 2012 14:15 Otolia wrote: You summarize it well : "It is not a zero-sum game". Meaning that you are trying to create money out of the work of somebody else. I think it tells you my take on that. I'm curious though, do you think you know how a market works ? Edit : I'm adding this because my intentions were unclear. You have a particular opinion and seem to be assertive on certain things. My question is there to judge if I can trust your opinion. It seems you don't know what you are talking about. If a bank lends money to someone to start a business and collects interest on that loan since the business is successful, it is not creating money out of the work of somebody else. Its work was to lend the money to that person in particular as opposed to someone else who would have had an unsuccessful venture. Obviously all the profits from the new successful business are not solely due to the entrepreneur because he or she relied on the capital provided by the bank. It is unfortunate that with all the problems finance creates for our society the vast majority of people still choose to believe in their crackpot ideas about what is wrong and how to solve it, whether it's StorkHwaiting's conspiracy theory nonsense or Talin's confusion about how the most basic elements of the economy work, or Ron Paul's wish to abolish the Federal Reserve. These distractions de-legitimize real attempts to bring about change, and serve to distract from the real issues that can be solved. | ||
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sicnarf
Canada39 Posts
On March 04 2012 14:44 searcher wrote: It seems you don't know what you are talking about. If a bank lends money to someone to start a business and collects interest on that loan since the business is successful, it is not creating money out of the work of somebody else. Its work was to lend the money to that person in particular as opposed to someone else who would have had an unsuccessful venture. Obviously all the profits from the new successful business are not solely due to the entrepreneur because he or she relied on the capital provided by the bank. It is unfortunate that with all the problems finance creates for our society the vast majority of people still choose to believe in their crackpot ideas about what is wrong and how to solve it, whether it's StorkHwaiting's conspiracy theory nonsense or Talin's confusion about how the most basic elements of the economy work, or Ron Paul's wish to abolish the Federal Reserve. These distractions de-legitimize real attempts to bring about change, and serve to distract from the real issues that can be solved. Except under fractional banking you aren't really risking any money since 1) you don't have the money you lend out in reserves, so you make profit on money you don't even have (with compounded interest, a crime on it's own) 2) you privatize the profits but when banks fuck up and shit goes down the drain, you socialize the losses and taxpayers bail you out. Modern banking is pretty much a scam on humanity, no matter how legit the brainwashing you've underwent in school made you think it is. I've seen it first hand when I completed my bachelors (Intl Political Econ). | ||
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targ
Malaysia445 Posts
One thing I would like to ask your opinion is: you say that finance is not a zero-sum game. I agree in the case of investment in enterprises. But for currency trading or derivative trading would you say they are zero-sum? | ||
thedeadhaji
39489 Posts
On March 04 2012 14:37 Primadog wrote: US has some of the the lowest capital gains tax rate in the world since 2003. Do you think that's fair? Being in the high tech industry, I'd personally be worried about the impact it would have on Venture Capital funding. Some history: The maximum capital gains tax rate was 25% until the late 1960s, when Congress increased the rate to 40%. The rate was boosted again in 1975 to 49%. During that time, venture-capital investment fell well below $500 million a year. "The impact . . . was devastating," Zschau and his House colleagues said in their letter to Reagan on Tuesday. "The venture capital needed to start and finance the growth of young companies all but dried up and caused many companies to stop growing, go deeply in debt, or--in the case of technology companies--sell or license their inventions to foreign competitors." By contrast, government figures show that, when the capital gains rate was cut to 28% in 1978, new capital investments exceeded $1 billion in 18 months. After a further tax rate cut to 20% in 1983, new capital investments reached $4.1 billion. The government figures also showed that, while the capital gains tax rate declined, total revenue from capital gains taxes climbed from $8.1 billion in 1977 to $11.9 billion in 1979, the first year of the reductions. http://articles.latimes.com/1985-02-15/business/fi-3341_1_gains-tax I'm not sure what kind of effect an increase in the capital gains tax would have on (a) VC funding, and also (b) equity investment overall. A small hike would probably have a relatively small effect, but a large one could definitely see capital flow affected. Not sure what the exact consequence would be, but there's no way there'd be zero effect. It changes the risk/reward profile of equity to one degree or another, and that will inevitably be accompanied by a reaction in the market. Whether the effect is clearly observable amid the market noise, or whether the effect would be large or small, I have no way of knowing. | ||
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Otolia
France5805 Posts
On March 04 2012 14:44 searcher wrote: It seems you don't know what you are talking about. If a bank lends money to someone to start a business and collects interest on that loan since the business is successful, it is not creating money out of the work of somebody else. Its work was to lend the money to that person in particular as opposed to someone else who would have had an unsuccessful venture. Obviously all the profits from the new successful business are not solely due to the entrepreneur because he or she relied on the capital provided by the bank. It is unfortunate that with all the problems finance creates for our society the vast majority of people still choose to believe in their crackpot ideas about what is wrong and how to solve it, whether it's StorkHwaiting's conspiracy theory nonsense or Talin's confusion about how the most basic elements of the economy work, or Ron Paul's wish to abolish the Federal Reserve. These distractions de-legitimize real attempts to bring about change, and serve to distract from the real issues that can be solved. I thank you for your attempt at patronizing. However I'm going to give you a few pointers : All you references you compare me to are totally irrelevant to me because as it's said beside my pseudo, I'm french; the basis of money lending is to profit from the work of somebody else by allowing them to do something they couldn't do without your money. The sole work of the lender is to determine if the venture is sure, profitable etc. It is work in itself but it's not creating anything. It does not add value to something that is produced. It's merely an evaluation. However that's only a part of finance and certainly not the part people loathe; the part people hate is speculative trading. I am, by no means, an expert on finance, the laws and its intricacies. Still I know how hard it is build a coherent model for a complex system. Economy and particularly financial market is modeled through complex systems. It really astonishing to hear a lot of people stating they 'understand' how the market works when some of the most brilliant scientist of our time spend decades studying much simpler complex systems without ever pretending to know how it works except under the condition they have run tests on. Knowing what you don't know is the first towards enlightenment. Edit : typos | ||
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Boblion
France8043 Posts
On March 04 2012 14:44 searcher wrote: It is unfortunate that with all the problems finance creates for our society the vast majority of people still choose to believe in their crackpot ideas about what is wrong and how to solve it, whether it's StorkHwaiting's conspiracy theory nonsense or Talin's confusion about how the most basic elements of the economy work, or Ron Paul's wish to abolish the Federal Reserve. These distractions de-legitimize real attempts to bring about change, and serve to distract from the real issues that can be solved. Stork and sicnarf are the two people who displayed the highest level of comprehension of the word "money" in this thread. Sadly sicnarf (and Otolia) seems contamined by an unhealthy and reactive view on life (i.e: Pseudo marxist theories) and Stork's troubles with his own Chinese American identity cloud his judgement. Nah evil yankees are not conspiring against China, most politicians are just genuine idealists/idiots/incompetents. The current mess is not the result of a plot. The rest is pseudo maths lol. | ||
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contraSol
United States185 Posts
On March 04 2012 18:20 Otolia wrote: I thank you for your attempt at patronizing. However I'm going to give you a few pointers : All you references you compare me to are totally irrelevant to me because as it's said beside my pseudo, I'm french; the basis of money lending is to profit from the work of somebody else by allowing them to do something they couldn't do without your money. The sole work of the lender is to determine if the venture is sure, profitable etc. It is work in itself but it's not creating anything. It does not add value to something that is produced. It's merely an evaluation. However that's only a part of finance and certainly not the part people loathe; the part people hate is speculative trading. I am, by no means, an expert on finance, the laws and its intricacies. Still I know how hard it is build a coherent model for a complex system. Economy and particularly financial market is modeled through complex systems. It really astonishing to hear a lot of people stating they 'understand' how the market works when some of the most brilliant scientist of our time spend decades studying much simpler complex systems without ever pretending to know how it works except under the condition they have run tests on. Knowing what you don't know is the first towards enlightenment. I think this post provides quite a bit of fodder for discussion, so let's break it down point by point. All you references you compare me to are totally irrelevant to me because as it's said beside my pseudo, I'm french So what? The French are somehow outside the realm of comparison and criticism? the basis of money lending is to profit from the work of somebody else by allowing them to do something they couldn't do without your money. The sole work of the lender is to determine if the venture is sure, profitable etc. It is work in itself but it's not creating anything. It does not add value to something that is produced. It's merely an evaluation. This is a very narrow view of what a bank actually does. Primarily, yes, the purpose is to lend money that allows somebody else to do something they couldn't otherwise do. However, it is not simply "evaluation". Evaluation is always the first step, but once a bank determines that the borrower is credit worthy, a relationship is developed between the bank and the borrower. This relationship involves everything from managing payroll to guaranteeing payments made by foreign suppliers. Beyond that, bankers have the ability (and the prerogative, since success of the company translates into us getting paid) to offer assistance with industry specific information, potential acquisition targets, and other financial information that would otherwise be unavailable to the company. Think about it like a nice restaurant. Most restaurants don't grow the vegetables or slaughter the cows, but we pay more for fine dining since the restaurant has access to ingredients that we don't have sitting around the house, the chef has expertise that exceeds ours, and the waiters deliver it all with a smile and the assurance that our evening will be taken care of. Is that not valuable? However that's only a part of finance and certainly not the part people loathe; the part people hate is speculative trading. Loathing an entire industry because of a small facet of it just because that's what you see on the news is no better than loathing a religion because some fanatics do despicable things. Please elevate your level of discourse. I am, by no means, an expert on finance, the laws and its intricacies. Still I know how hard it is build a coherent model for a complex system. Economy and particularly financial market is modeled through complex systems. It really astonishing to hear a lot of people stating they 'understand' how the market works when some of the most brilliant scientist of our time spend decades studying much simpler complex systems without ever pretending to know how it works except under the condition they have run tests on. This was stated in the OP: Obviously, I do not speak for the entirety of the U.S. financial industry, nor do I know everything about it. It’s a gigantic, complex system; if there was one person on this planet who truly understood the interactions of every facet of it, financial crises (like the one we’re dealing with) would be significantly less drastic. Not understanding the entirety of a system does not mean that the system is malignant or not worthy of trying to understand to the best of our capabilities. The most brilliant physicist in the world does not fully understand the physics of the universe, but do we not defer to his expertise in questions of physics? Dismissing all experts in finance because no one truly knows everything is tantamount to the abandonment of knowledge acquisition. A note for this and future responses: I may disagree with you whole-heartedly on your opinions, but I'll only ever lose respect for someone who insists upon identifiably false information. You're free and clear in that regard :p | ||
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contraSol
United States185 Posts
On March 04 2012 17:59 targ wrote: I did corporate finance in college, and am still quite interested in the topic despite now being in another field. Hope you keep writing. One thing I would like to ask your opinion is: you say that finance is not a zero-sum game. I agree in the case of investment in enterprises. But for currency trading or derivative trading would you say they are zero-sum? Currency and derivative trading are done (generally speaking) for two reasons: speculation and hedging. I think speculation (what everyone seems to hate) is a zero sum game; you're either on the right side of the variance or you're not. Hedging, on the other hand, is how pretty much every global or multi-national company manages their currency and interest rate risk. For those who aren't familiar with it, think about hedging like guaranteeing an exchange rate or locking in an interest rate. To make their cash flow more consistent and their projections more accurate, most companies are willing to pay a premium to the current rate in case of drastic change. Interest rate example: Interest is generally calculated based on how much money you have loaned out multiplied by a percentage (ex. a $100,000 loan with a 5% all-in interest rate would be $5,000 per year of interest). The interest rate itself is usually split into two parts: the base rate and the spread to base. Simplified answer: the base rate is variable, meaning that it changes with the market. Today it might be 1%, next month it could be 1.5%, next year maybe 2%. The spread is constant: no matter what the base rate is, it will always be the same. So your total interest rate = base rate (variable) + spread (fixed). Hedging your interest rate means buying a derivative that locks in your interest rate at a certain level; if the market base rate is 1%, you can pay a premium every year so that it never rises above 1.5%. Currency example Essentially the same concept. If you're a company that produces goods in the U.S. and ships them to France, the exchange rate has a significant impact on how much you make. If you price your goods based on the euro being worth $1.30 and it drops to $1.17, you effectively just received 10% less in revenue. So to mitigate that risk, you buy a derivative that effectively "locks in" your exchange rate. In this way, derivatives and currency hedges are positive sum; the bank makes money by taking on the risk, while the company benefits from consistent cash flow. | ||
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contraSol
United States185 Posts
On March 04 2012 16:55 sicnarf wrote: Except under fractional banking you aren't really risking any money since 1) you don't have the money you lend out in reserves, so you make profit on money you don't even have (with compounded interest, a crime on it's own) 2) you privatize the profits but when banks fuck up and shit goes down the drain, you socialize the losses and taxpayers bail you out. Modern banking is pretty much a scam on humanity, no matter how legit the brainwashing you've underwent in school made you think it is. I've seen it first hand when I completed my bachelors (Intl Political Econ). I hope you understand why the two bolded statements are hilarious. 1) Compounded interest happens only when the interest is capitalized. It happens in your credit card account when you made purchases for which you couldn't even afford the interest payment, which is the borrower's fault, not the banker's. If you buy something you can't afford, don't blame the banker. 2) Except in extreme cases, banks are 100% responsible for non-performing loans. If a borrower defaults, banks will take the collateral, which often is worth less than the remaining amount outstanding. The loss goes straight to our bottom line. I'm not going to discuss the pros and cons of the bank bail outs based on a naked, emotional statement. Present your argument like an intelligent person and I'll respond more respectfully. | ||
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Primadog
United States4411 Posts
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contraSol
United States185 Posts
On March 05 2012 14:45 Primadog wrote: Sounds like derivatives are effectively insurance for corporate risks. Insurance industry are heavily regulated to make sure they have sufficient asset for what they underwrite, is this true for derivatives? Yes, they're effectively insurance, and no, they are not heavily regulated, which is a huge problem. The other huge problem is that most of those tasked with creating regulatory legislation (i.e. congressmen and senators) don't understand derivatives, which is made clear whenever they speak about them. In terms of financial statements, all outstanding loans, letters of credit, etc. are included on a bank's balance sheet. Derivatives and hedges are not, though they're summarized later on in quarterly and annual reporting (SEC forms 10-Q and 10-K). This opens the door for significant risk, though I fear that poorly informed regulation may cause unintended negative consequences worse than the status quo. | ||
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Yenticha
257 Posts
On March 04 2012 09:14 contraSol wrote: Good point. Taleb is brilliant, and throughout his book he gives great examples of poor preparation for and reactions to such events. I would assert that these events are part of the game, and decisionmakers need to do better in considering them as part of the risk. A 1% chance of losing $100 is the same as a 0.000001% chance of losing $1m. If we consider the former and not the latter just because it's relatively unlikely, we're not playing optimally. many things in this thread confused me, to say the least. But this? How did you come up with this pseudonumbers? How about variance? Also, what is the point of your post? I mean, saying "finance is a game" is kind of like saying "life is a game". It is true, in a way, but doesn't bring much. What are your views on the necessary (or not?) reforms about finance? Seeing that the biggest (or at least the most listened to) analysists fail big time every couple of years (or more frequently), how reliable is the whole thing? Or, put it in another way, seeing how much it cost to regular Joes when banks fail (or "lose the game"), how good are the banks to our society? A more precise question I've had for a while: we build functional planes. but we don't try to build planes made of planes, that would be the size of Spain, just because we're allowed to, and to try to carry more people, right? because it would crash. In the same way, we have small/local banks, that work just fine in lending to local businesses, create jobs, etc. So, why do we have huge banks, that bet on financial products, made of financial products, that analysists fail to understand? What are the things these big banks are the only one capable of doing? is worth it? I am not really an expert in finance, so I'm mostly full of questions, with no answers  Thanks in advance. | ||
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elt
Thailand1092 Posts
On March 05 2012 16:53 Yenticha wrote: many things in this thread confused me, to say the least. But this? How did you come up with this pseudonumbers? How about variance? Also, what is the point of your post? I mean, saying "finance is a game" is kind of like saying "life is a game". It is true, in a way, but doesn't bring much. What are your views on the necessary (or not?) reforms about finance? Seeing that the biggest (or at least the most listened to) analysists fail big time every couple of years (or more frequently), how reliable is the whole thing? Or, put it in another way, seeing how much it cost to regular Joes when banks fail (or "lose the game"), how good are the banks to our society? A more precise question I've had for a while: we build functional planes. but we don't try to build planes made of planes, that would be the size of Spain, just because we're allowed to, and to try to carry more people, right? because it would crash. In the same way, we have small/local banks, that work just fine in lending to local businesses, create jobs, etc. So, why do we have huge banks, that bet on financial products, made of financial products, that analysists fail to understand? What are the things these big banks are the only one capable of doing? is worth it? I am not really an expert in finance, so I'm mostly full of questions, with no answers Thanks in advance.I'm going to jump in here as well. I'm an Econs/Finance major in my final year right and and would like to see how accurate my view of things are. Those numbers are the same because 0.1*100 = 10 and 0.000001*1000000 = 10. It's a purely statistical exercise that's often done in economics to highlight human irrationality when it comes to making decisions. The investment banking profession has been around for a long time, for reference I'd suggest reading The Ascent of Money by Niall Ferguson. Basically, without investment banks or their like I'd think it would be safe to say we would not be where we are today. Admittedly, the boom-bust cycle seems to be becoming bigger and not smaller (in terms of magnitude, but I think that's a reflection on the increased integration of financial systems more than anything). Without it, we're back to something close to the stoneage in terms of credit. As for the mistakes that caused the GFC ... Well, to address your point in particular about analysts' failure to understand what they were dealing with and the gobsmacking assumptions that went into them. I think that's a fault that reflects modern economics more than anything: that is, the tendency to make simplifying assumptions which while useful for interpretation and construction of models, we forget that they are that, assumptions. I would hazard a guess that a major reason for the snowballing effect of the CDO, CDO^2, CDO^3 business and the way they were marketed and sold rested on the assumption that house prices will never fall. Someone can correct me if I'm wrong. In my personal opinion I think that some more rules/regulations are required when it comes to the usage of derivatives. I see nothing wrong with using them for hedging, so long as they can be backed up by short party. That said, I think moving towards a more transparent system for derivatives would be better, but I understand that having an open exchange system for the big derivative contracts is pointless because there are so few market makers. Ok I'm going to stop here in case I'm misguided. | ||
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remedium
United States939 Posts
On March 04 2012 14:37 Primadog wrote: US has some of the the lowest capital gains tax rate in the world since 2003. Do you think that's fair? I think it's quite fair. Considering the risks involved, people who are willing to keep their capital in the market for extended periods of time ought to be rewarded. | ||
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Yenticha
257 Posts
Those numbers are the same because 0.1*100 = 10 and 0.000001*1000000 = 10. It's a purely statistical exercise that's often done in economics to highlight human irrationality when it comes to making decisions. Just to say that I DO know this. To avoid further misunderstanding, I got my Msc in financial eng/optimization/electrical engineering. This means I know almost nothing about how finance works, but that I do know what an average means I was just pointing at the fact that variance should NOT be overlooked. So many people just look at the mean when they deal with big data, this is depressing. | ||
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contraSol
United States185 Posts
@Yenticha, the purpose of this post is to establish a framework for thinking about finance. It's pretty much the same thing as saying that life is a game, but I think the distinction matters, because it develops a clear objective (creating wealth, or scoring points, if you will), establishes a standpoint to discuss the game's rules (regulation), and allows for discussion of substantive theory in a manner that isn't textbook-style dry (through analogies to other games that most of us at TL understand). In short, this blog is not meant to stand alone. The rest of your questions will be answered more thoroughly in later blog posts. I think the next one will be on the bailouts. | ||
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