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November 16, 2014

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Stevenclarkesblog.wordpress.com

@Chris

I have 'The New Financial Order' on my 'To Read' pile. I believe it will cover some of the material in 'Macro Markets', but should I read that first?

When you talk about social benefits diverging from private ones, we are in the realm of positive externalities - which introductory economics talks about and suggests as a legitimate role of government.

I've recently been reading Mancur Olson. In 'The Logic of Collective Action' he shows how hard it is for groups to provide public goods without some selective incentives or State compulsion of some kind.

In 'The Rise and Decline of Nations' he shows that groups can more easily form distributional coalitions which distribute resources their way at social cost. Perhaps the financial services sector is one of these coalitions - ripping off others at a huge cost to others (i.e. recessions.)

In that book though, he does suggest that some instability is good for weeding out these coalitions. In exposing the bad behaviour of banks, and perhaps in spurring corrective responses, some good may have come out of the crisis.

Icarus Green

I guess libertarians would argue that since the financial sector is basically socialised from a risk point of view there's no incentive for useful innovation, just more rent seeking behaviour masquerading as competition.

One of the papers they passed around in work recently makes the cogent point that most financial engineering is actually legal engineering.

Whole swathes of the industry creating structured products and derivatives to clients looking to avoid taxation and of course, the creative accountancy of audit firms and the routing of cashflows through various shell companies and jurisdictions. It makes sense, you often get superior returns from minimising tax than investment decisions or taking on more risk.

Another factor is of course, the concentration in the industry and complete lack of competition.

It makes me laugh when bankers say they're the fighter pilots of capitalism when actually they're closer to civil servants than a market stall trader. Expecting innovation from these people is expecting too much.

If we're looking for genuinely useful innovation in the financial sector, it'll probably come from outside the decrepit industry in the technology sector. Volcker was dead right when he said the ATM was the best thing finance has done in the past few decades.

PS

Many financial innovations are dark because they are invented to circumvent sensible regulations.

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