I'm trying to form an opinion on these people (don't ask why, I just want to I guess). Types who have jobs like Madoff (but doing it legally)--they still have a very high income I'm sure. Or maybe just Wall Street investors and such in general.
What, if anything, does Austrian theory say about this type of "work"? I'm asking because I'm not sure, I don't have a solid opinion yet.
On one hand it seems to me they may be like professional athletes, or CEOs, doing something that (supposedly) few people can do, and providing a service which wouldn't exist without their labor. Okay, this would be legit.
On the other hand, are they more similar to a lobbist, snake oil salesman, or a leech enabled by the state, sucking wealth from people who are actually productive, contributing members of society?
So which is it? Is Wall Street a pack of blood sucking scum, or do they provide a needed service that enables business investment and industrial progress?
Actually I just recalled a section from Empire of Debt where the authors pretty severely seem to place modern Wall Street types into the scum of the Earth category--so I think I am leaning in that direction. Does anyone have any thoughts or links to thoughts on the subject?
Aww, come on, I was hoping for at least one opinion. Did I answer my own question here?
Maybe the answer isn't so simple? I guess it depends on what type of investor you're looking at. Investing correctly like Peter Schiff does I don't see anything wrong with... but the day trading stuff and other tactics that seem like people more trying to get money for nothing or from other people, yeah sounds fishy to me. They can't say they're providing a valuable advisory service for real long term investment targeting actual economic growth...
I would say that Wall Street is rigged to an extent, as in, Wall Street getting bailed out and so forth. What's wrong with day trading? I can't do what I want with my property, specifically, my stocks?
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Daniel: I would say that Wall Street is rigged to an extent, as in, Wall Street getting bailed out and so forth. What's wrong with day trading? I can't do what I want with my property, specifically, my stocks?
The problem with encouraging day trading is that most investors who do so end up getting killed by the market, doubly so because of capital gains taxes. Remember, brokers take a cut everytime you make a trade, and when you combine this fact with the fact that most day traders get killed by the market, it is brokers who benefit by encouraging their clients to trade more heavily.
Morally, that doesn't sit so well, although they should be free to do what they want.
But as you are talking about, the much bigger problem with the financial industry as a whole is that they make the majority of their profits from bubbles - bubbles that would either be much smaller or wouldn't exist at all in a 100% free market in money and banking. And as recent times have illustrated, oftentimes these profits aren't even real, when you subtract the inevitable losses during the downturn. Any financial company that doesn't earn long term profits is really just riding the central bank created bubble, skimming off the top, and leeching from the rest of the economy when they run for bailouts.
As Nassim Nicholas Taleb, the author of the Black Swan, shows - all of the profits of the banking sector (from all of US history) were wiped out in the late 80s largely because of bad loans to latin American countries. Then there was the S&L crises, and now there is the current crises, which has easily eclipsed the previous ones already. So financial companies as a whole don't make profits (at least when measured in the long term), take out huge salaries and bonuses that are only possible thanks to bubbles created by the Federal Reserve, and then prey on taxpayers and dollar holders for massive bailouts.
In a real free market, banks and other financial companies would create value over all.
But we don't live in that kind of world.
A bigger problem than day trading is that millions of Americans are into the stock/bond market. The government forces millions of workers into 401ks IRAs and all these "retirement plans" that force then into the stock/bond market. Then the market tanks and the workers lose half their retirement. They lose money they could have had saved.
Another problem with day trading, or even most of the short term trading that goes on in US markets, is that it's kinda like the housing market. "Profits" largely depend not on actual increases in the value of the business (through improved productivity, profits, expansion, etc.); they depend far too much on hoping that a "bigger idiot" will come along and pay an even higher price for the overvalued stock you just purchased, thus driving the price even higher. In Peter Schiff's view the US market is generally overvalued and based more on price speculation like this (gambling that a price will go up) rather than investing in a company over a longer term to enable the business to improve or expand. Crash Proof, or maybe his latest book, are good to read if you're interested in investment from a competent investor's perspective.
I got the idea of the financial industry (Wall Street etc) being a worthless scam industry from the end of the book Empire of Debt. It's a hilariously scathing attack on the idiocies we have to put up with from the government and "establishment", I definitely recommend it (the authors had me laughing out loud often).
I'm not sure I'd classify *all* of the financial industry in that category, but yeah after recalling some of what I read in that book I think most of this industry is probably about as worthless as a fortune teller, and no more qualified.
Daniel: A bigger problem than day trading is that millions of Americans are into the stock/bond market. The government forces millions of workers into 401ks IRAs and all these "retirement plans" that force then into the stock/bond market. Then the market tanks and the workers lose half their retirement. They lose money they could have had saved.
When the stock market is inflated via credit expansion, sure, people can lose a lot of money. But the only way besides precious metals for most people to save (long term) in today's world is the stock market. Bonds get killed in any kind of fiat money system, over a period of time. The stock market often survives even hyperinflation (although gets wiped out completely if the country completely nationalizes business).
Guess what I'm saying is that with the current system (and any system, really), the stock market is the best place to grow and protect your wealth long term. But as Ansury says, the good buys are not to be found in the US today. Peter Schiff is right on in his analysis of the current situation, especially given current prices of stocks abroad versus here.
Long term value investing spread out across bargain priced stocks in countries with the cheapest markets (and where the gov't isn't dead set on destroying the currency) is the way to go. Most day traders get their asses handed to them. And people who believe 100% in efficient markets end up buying into expensive markets and watching their savings disappear.
Are Wall Streeters a pack of blood sucking scum, or do they provide a needed service that enables business investment and industrial progress? Well, both. Look at the clowns who help destroy the economy and then expect bailouts - complete parasites. On the other hand, investment managers provide an essential service - connecting people with savings to those who need capital.
As far as what Austrian theory says about this type of work, it seems to me like there's a very entrepreneurial aspect to being an investment fund manager. They're assuming (some) risk and directing capital to sectors of the economy that will best satisfy consumers. This is a fundamental role in a successful economy.
Wall Street and investment managers assume this role, to be sure. But there's all of that other stuff. you mentioned that make them less than respectable. What would Wall Street look like in a free market? You might see a different set of people, as Wall Street's current close ties with government reward political skills rather than financial. Of course, there are many who are very talented investors, but there are also a lot of very talented bullshitters. Until we have a free market, though, I'll appreciate what most of them do in the same way that I appreciate the government for providing police and court services. There are many talented people who would probably do the same jobs in a free market and do them well; the system in which they work is the real problem.
WisR:When the stock market is inflated via credit expansion, sure, people can lose a lot of money. ...
Yes. They would lose a lot more by buying at the peak and then selling when once the recession hits and they lose their job.
WisR:Guess what I'm saying is that with the current system ..., the stock market is the best place to grow and protect your wealth long term.
You make my point. The government sets the rules and, thereby, forces workers int the stock market. Most workers don't know how the stock market works and they shouldn't be in it.
Daniel: WisR:When the stock market is inflated via credit expansion, sure, people can lose a lot of money. ... Yes. They would lose a lot more by buying at the peak and then selling when once the recession hits and they lose their job. WisR:Guess what I'm saying is that with the current system ..., the stock market is the best place to grow and protect your wealth long term. You make my point. The government sets the rules and, thereby, forces workers int the stock market. Most workers don't know how the stock market works and they shouldn't be in it.
Hey Daniel - Totally agree with you that the government and central bank are forcing people into the stock market, that the system is broken, and that it deprives most people of a way to easily save money and not have its value destroyed by others, people who usually do very poorly in the markets.
But the market is still one of the best ways to grow and protect your wealth if you know what you're doing.
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