Tuesday, June 02, 2009

Productivity & the Financial Industry

Last night I watched a recorded episode of Real Time with Bill Maher and I heard a casually tossed comment that I hear all too many times these days. I am paraphrasing here, but Maher's position was that the financial industry is not productive - it doesn't create anything - it simply moves money around. Shuffling papers, if you will. To be honest, I think that this statement says more about Maher's ignorance than it does about the financial industry. However, let me go on the record with my own position on the subject.

The Crucial Role of the Financial Industry - ready? Here it is. The financial industry fills a critical and highly productive role in a capitalist economy: that role is resource allocation. Banks and other financial institutions may not build houses or churn out new cars, ships or jets, but they are the ones who allocate resources to all other industries. They are the ones that look at countless project proposals and decide whether or not each of these projects is worth the financial risk. In fact, financial institutions are the beating heart of capitalism. They are the crucial link between those who have money and those who need to borrow it.

Now, that's not to say that the financial sector did not grow overly large and bloated, and this has nothing to do with whether some insanely bad decisions were made (enough bad decisions were made to power a mid-sized African country for 300 years), all I am saying is that a healthy financial industry is vital to capitalism and anyone that doesn't recognize that simple truth needs to augment their financial and economic education.

Here are a few posts about the economy from other members of the PF community:

Consumerism Commentary explains what the GM bankruptcy means for you. For me it just means that the government is throwing yet another $30B of tax payer dollars at a company that should probably go extinct.

My Wealth Builder talks about government assistance as the new welfare program. Right on. See my point above.

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Traciatim said...

"that role is resource allocation." - I think you meant, dictating who succeeds and manipulating so as to extract as much resource as possible from society.

"They are the ones that look at countless project proposals and decide . . . [which one of their friends to align with to extract the most wealth while crushing many others attempting to achieve the same goals]" . . .

Yes, that's better.

Rob Bennett said...

I agree with the point being made in the blog entry. The Finance Industry adds something important to our economy.

I also think that the Finance Industry went so wildly off the mark with the massive promotion of Passive Investing that it can fairly be said today that the system is broken and that we need to get it fixed before it can be said that the Finance Industry is making a positive contribution again.

We are to blame. That's my belief. We all should care about the workings of our economic system, just as we all should care about the environment. It's not somebody else's job to fix the problems. It's our economy. It's our job.


asgreen said...

I completely agree. Saying that financial institutions are useless (or just push papers around) just shows someone's ignorance.

On another note I recently watched Bill Maher interview someone on a topic of a small country that I happen to know a lot about. I was not impressed at all. You could tell he had not done his research and he actually allowed false information to be stated without challenging it. I was not impressed.

Finance Phi said...

I have mixed feelings about this post. While I know that the financial services industry contributes a huge amount of money to the US each year as a business and a profession, sometimes I think that the results were for naught if higher finance people screw it up anyways.