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Is the Financial Sector parasitical?


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2013 Aug 26, 2:47am   10,659 views  46 comments

by CL   ➕follow (1)   💰tip   ignore  

I've seen a lot of folks here denounce the financial sector as parasitical, but as I played the scenario out in my head I began to think I might not fully understand why. I can see why if the income and wealth is poorly distributed (and the financial sector already had too much of our capital) that giving them more would cause even more of an imbalance and hurt consumption by the lion's share of the population. In that example, they are secondary to the pre-existing inequality though.

But in normal capitalism how does it hurt, if the system funds purchases, takes a cut for the investment, then spends the investment on anything? Is it that their share of the profits is just too large? Or is it always a negative?

Thanks

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41   CL   2013 Aug 29, 6:47am  

CL says

Does someone who say, works in auto finance help or hurt GDP? Does the insurance business help or hurt GDP?

It seems to me that insurance distorts prices, especially in healthcare. It also disconnects the consumer from making cost-driven choices. Is insurance parasitical?

Would auto finance be considered so too, in this climate? Are auto companies getting the same kind of skim from their finance dealings?

42   MisdemeanorRebel   2013 Aug 30, 8:15am  

Heraclitusstudent says

And the reason why I think banks should be private is that someone needs to decide where to lend the money. This capital allocation is critical for economy. The assumption is that private people investing money at their own risk will do a better allocation than government bureaucrats reacting to various political pressures.

Bankers are people. Government Officials are people.

Either way, people are making the decisions.

CL says

Would auto finance be considered so too, in this climate? Are auto companies getting the same kind of skim from their finance dealings?

Oh yeah. No-Fault, the best thing that ever happened to Auto Insurance.

43   CL   2013 Aug 30, 8:27am  

thunderlips11 says

Oh yeah. No-Fault, the best thing that ever happened to Auto Insurance.

Can you expound? (and thanks)

44   MisdemeanorRebel   2013 Aug 30, 8:38am  

Sure. Back in the day, I think it was the 70s if memory serves, insurance companies insisted that the legal costs associated with assigning proportional blame was too expensive, and that by lowering the legal costs, customers would save on insurance.

So they lobbied for states to pass no-fault laws.

The result was a boom of fraud and bad driving, as well as rapidly increasing costs for insurance, which results in people driving without insurance they can't afford.

Since there is no legal process involved, no-fault states enjoy much higher rates of fraud than no no-fault states. Also, good drivers are punished along with the bad equally; since no determination is made as to whose fault the accident primarily was.

Similar effects happened in England as well when no-fault was introduced:
http://www.theguardian.com/money/blog/2012/feb/15/car-insurance-no-fault-claims-elephant

45   marcus   2013 Aug 31, 3:23pm  

CL says

Is the Financial Sector parasitical

In my opinion, not in general no.

I think that those who invest in real estate and other rentier type investments are parisitical, in a way. But I don't blame them. They are trying to put capital to work in the best way they believe they can.

To the extent that the financial sector facilitates rentier capitalism, by providing leverage at good rates to those who have the back up assets to participate, and then by having policies (the fed) and investment vehicles (Goldman and other inv bankers) that promote the success of rentier investments, they are perhaps also parasitical.

One might argue that the reason for our current employment depression (and liquidity trap etc), is that the cycles I try to allude to above went too far.

Also, about bubbles, it's my belief is that the boomer generation over hyped the 21st century, that is the rolling over of the calendar in 1999 - 2001. THe financial sector was very much involved in the pre 2000 irrational exuberance, that had to lead either to a depression (at some point) or to blowing other bubbles to replace the the stock market bubble. The piper had to be paid eventually.

We're still working on that. IT would have probably been better to just go ahead and have a really bad recession starting in 2001 without the huge tax cuts, wars, and housing bubble to postpone it. (not that that was the purpose of the wars).

46   rootvg   2013 Aug 31, 10:16pm  

donjumpsuit says

Cheap credit is parasitical.

In other words, if you are rich, you should have to take your assets and make bets on buying companies, goods, or capital improvements.

However, it doesn't work that way.

If you are rich, you have earned the privilege of borrowing super cheap money to grow your portfolio.

That is wrong on a number of different levels.

I've argued for some time that one of our problems as a nation has been cheap money for too long.

There is another recession coming, bad one. Why? We're getting a few Fed chairman who will be no doubt forced to begin taking away the punch bowl. There is simply no way around it.

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