Sunday 6 September 2009

What Does the Financial Sector Actually Produce

Considering the billions that have been poured into the world financial system to stabilise and cancel out all the bad bets that the financial whizz kids made, you have to ask what does the financial sector produce.

Go back 40 years, before the Big Bang and the stock market did a good job of allowing companies to raise money via share issues. While it was a bit of all old boys club and insider trading common place, decisions made on the markets didn't reverberate as much as they do today. That money would be used to invest in more plant and machinery and ideally employ more people.

Skip forward to today and what happens to the trillions flowing around the system. While some is still used to invest in new plant, you do wonder what the money invested in credit default option and swaps was for and for whom.

Add into the fact that a lot of the investments were made by banks on their own accounts and you start to question the actual benefits of the financial services. They were too blind or stupid to see the huge risks they were taking, yet we had no choice but to bail them out as otherwise they would have taken us all down. According to the Observer today, the FSA was hours from shutting down cash machines

Their defenders will point out all the tax they have paid over the years, but surely this is no where near the money we have paid out to bail them out.

One last thing - just think of the worlds problems we could have made a start on solving, if all the brain power that went into building algorythmic trading systems went into looking at the issues of global poverty, clean water and climate change

1 comment:

Michael Feiner said...

Well, I only partly agree with you Charles.

These sophisticated credit derivatives create liquidity in the market that if used *correctly* can benefit companies by better leveraging their assets (gosh, I should have been a banker).
So I do think that the financial sector creates more value than just the tax revenue.

The key word here is correctly. Clearly that hasn't happened. The problem, in my opinion, is greed. Greed is pushing these "financial whiz kids" to reckless behaviour.

The banks don't seem to be able to control themselves. And by bailing them out we've actually created a dangerous precedent.

That's why I'm slightly baffled by Alistair Darlings' position towards the French/German initiative to curb excessive pay structures in the financial sector.

I guess there are political considerations that even a Labour government cannot ignore.

If only all that money went into developing the world? Unfortunately, we (the developed world) seem to be too selfish (and greedy).

But there is a greater travesty - all that money we spend on military armament. We could have eradicated poverty, cancer and boldness at one fell swoop!