Skip to comments.Is The Financial Sector Gobbling Up The U.S.' Would-Be Entrepreneurs?
Posted on 04/13/2011 6:49:50 AM PDT by SeekAndFind
Meet a banker today, and you can be certain that within minutes he will be complaining about the epidemic of "banker bashing." How unfair it is of politicians and media populists to blame the financial industry for the Great Recession. Don't they understand what it is the bankers bring to an economy? Not just all the financial products, which grease the wheels of global business, but also all those jobs and all that wealth.
Take a drive through Greenwich, Conn., the home of the hedge fund industry, and see for yourself what a formidable service the financial sector has done for the town's roofers, pool builders and hedge trimmers.
There can be no doubt that a healthy economy and society depend on a healthy financial system. But what do we mean by a healthy financial system? Is it one that provides simple intermediary services to the so-called "real," or nonfinancial, economy? Or can it be more than that without cannibalizing the rest of the economy's vital organs?
Any visitor to a college campus in recent years can tell a story of talented students in engineering, technology or even liberal arts seduced away from these professional paths by the financial lures of banks, hedge funds or private equity firms. Brilliant computer scientists forgo the risks and opportunities of building the next Google, for the surer bet of designing algorithms for a hedge fund. Gifted physicists abandon research to build multilayered derivatives for Goldman Sachs. These employees no longer serve the rest of the economy, but rather spend their time engineering products to tilt the markets in their favor.
(Excerpt) Read more at forbes.com ...
* Between 2003 and 2006 the percentage of graduates from MIT going into financial services rose from 13% to almost 25%.
* Harvard graduates in the early 1990s entered financial services at a much higher rate than they did in the 1970s.
* Financial services hiring among Harvard Business School's M.B.A. class fell from 40% to 30% between 2007 and 2008, but was back up to 34% last year.
* A mere 12% went into general management roles, supposedly the purpose of the school's curriculum.
* Between 1997 and 2007 the gross output of finance and insurance in the U.S. rose by 97%, outpacing the 70% across the rest of America's sectors.
* Since the end of World War II, the financial industry as a percentage of GDP has quadrupled to its present 8.4%, offering spectacular rewards to those capable of profiting from it.
* (MY PERSONAL OBSERVATION), a lot of talented engineering college grads that I see ( e.g. Computer Science, Electrical Engineering, Math, Physics ) opted to go to the financial industry ( designing exotic financial instruments and derivatives based on sophisticated mathematical models ) rather than do real engineering or physics work. Go to Wall Street and chances are, you will see lots of engineering grads working there.
The old saying “Go where the Money is”... Financials is all about where the “Money is”.
1) Big money in financials. This an attractive force, and many smart people go there when they see the possibilities.
2) Engineering salaries are kept artificially low through H1-B visas. Also, age discrimination is a problem in engineering. Manufacturing is very tough in the US. Starting a business is very tough due to regulations and taxes. Staying with technology, and really trying to make a career out of it is a pretty thankless task.
Financials are attractive, but the engineering environment is a bit repulsive due to so much government meddling. Smart people see this.
But I'm a capitalist so my view is, if they can get people to pay them those big bucks then they deserve them.
The problem is that to extract the kind of money they do from the system for salaries and bonuses they cannot rely on what we would normally call profits for their companies. They are taking capital out the system. Stock Market Goes UP: Commissions are paid. Stock Market Goes Down: Commissions are Paid. Credit Default Swaps are issued: Commissions are paid. Credit Default Swaps are called and the money isn't there - it went to salaries and bonuses rather than reserves. That was the AIG experience. We bailed them out. That bailout replaced the lost CAPITAL that went to salaries and bonuses. So it was CAPITAL that AIG was paying out not profits. Ditto, I think, the other failed financial institutions that were in many cases bailed out by U.S. government. We replaced the CAPITAL used for the salaries and bonuses that were not really justifiable with taxpayer money and printed up FED bucks. This is a theft of CAPITAL not a claim on honest earnings.
This process is facilitated by Moody's and others who apparently will allow these companies to buy a good AAA rating on total crap investments.
My advice: Let it rip. Let them all fail and then let the stock/bond/derivative/CDF buyer beware. Government regulation has just led to a corrupt Old Boys Network where we rotate the Goldman Sachs chairmen in and out of Treasury and the Fed. The Fox guarding the hen house has never worked.
RE: Stock Market Goes UP: Commissions are paid. Stock Market Goes Down: Commissions are Paid. Credit Default Swaps are issued: Commissions are paid
Reminds me of this scene from that great movie — TRADING PLACES.
Two Commodity Brokers (Played by Ralph Bellamy and Don Ameche) making a bet that a street smart bum (Eddie Murphy) can understand the business of commodities trading.
Ralph Bellamy : Ah, William Valentine, my boy. Right on time.
Don Ameche : Come in, come in. Sit down, have breakfast.
Eddie Murphy : No thanks, guys. I already had breakfast.
Ralph Bellamy : This is not a meal, Valentine. We are here to try to explain to you, what it is we do here. We are commodities brokers, William.
Now, what are commodities? Commodities are agricultural products. Like coffee, that you had for breakfast. Wheat, which is used to make bread. Pork bellies, which is used to make bacon, which you might find in a bacon, lettuce and tomato sandwich. Then there are other commodities like...
frozen orange juice...and gold. Though, of course, gold
doesn’t grow on trees like oranges. Clear so far?
Eddie Murphy: Yeah.
Ralph Bellamy : Good, William. Now, some of our clients are speculating that the price of gold will rise in the future.
We have other clients who are speculating that the price of gold is going to fall. They’ve placed their orders with us
and we buy or sell their gold for them.
Don Ameche to Ralph Bellamy : Tell him the good part.
Ralph Bellamy : The good part is that no matter whether
our clients make money, or lose money, Duke & Duke get the commissions.
Don Ameche: Well, what do you think, Valentine?
Eddie Murphy : Sounds to me like you guys are a couple of bookies.
Don Ameche to Ralph Bellamy : I told you he’d understand.
The problem is not that people go work on Wall Street, the problem is when confronted with a destructive gov reg, instead of reporting back to the gov that one of their regs opens the system to toxic assets, they choose to not do that. Instead they take a defective reg and use it as an openning to make money despite the destructive long term effect of their actions. Example when bankers discovered that UST/SEC were not enforcing or auditing debt ratios for loans and made it easy for them to sell it off, bankers encouraged their loan officers/originators to generate as much loan applications/approvals as possible in order to earn the points/fees upfront and with no intention of holding the loan sold it off to unsuspecting investors with inaccurate prospectuses claiming the mortgage backed securities were AAA investments with full documentation (ala possession of titles/deed/mortgage notes). All that imploded in late 2008. These young bright workers were the subordinates and staffers to management giving the CEO daily briefings and assurances that all is well while they carried out the dastardly scheme for short term lucrative profit and planning to bail out before the scheme implodes leaving everyone else (taxpayers) holding the bag. The problem is the working culture and ethos fostered by the investment banker environment that allows for such fraudulent and “leave the other sucker holding the bag” mentality of all involved that is appalling. What is frightening is these schemers did not come from poverty dog eat dog neighborhoods or schools, rather many come from upper middle class families and upscaled ivy league schools which are suppose to represent some of the best and brightest of our society. If this rot is not eliminated, then the only way this will be resolved is violent revolution from the abused taxpayers and citizens. Forbes article misses what is wrong with Wall Street and corporate America and why Americans are growing to hate them.
Interesting comments. I’m not the only one apparently who sees the conundrum that results from including the finance sector in GDP calculations. Really spending in financial sectors acts more as straight overhead on goods producing sectors of the overall economy.
The problem is the epidemic of bankers.
It is like what was once said about lawyer jokes. The problem with banker jokes is that bankers don't think they are funny and the rest of us don't think they are jokes.
You have your finger on the problem and the only real solution is to end the bailouts (and perhaps send of a few Moody's executives to jail for fraud.) Let the CEOs and brokers/salesmen who watched their companies suck the capital out of the system lose their jobs and their companies. If that lesson is never taught then we will see endless repeats of what happened in 2008.