Finance and Rents

[KrazyHorse]

It's funny that this character thinks we're extracting rents NOW when margins for all of our businesses have come down DRAMATICALLY in the last 25 years...

[Al B. Sure!]

Financial firms hire too many non-majors... what's the point of Universities even offering Finance as a major if firms hire science, engineering, and math majors just as often.

[Kuciwalker]

Because some people know they want to go into finance from year 1, and some people don't know until year 4. Science, engineering, and especially math degrees are powerful signalling tools.

[KrazyHorse]

Financial firms hire too many non-majors... what's the point of Universities even offering Finance as a major if firms hire science, engineering, and math majors just as often.

Because most finance majors have pathetic math skills.

The marketplace has decided, sweetheart...

[Al B. Sure!]

Oh well. At least we Finance majors tend towards having more soft skills than the science, engineering, and math crowd.

oh well... there's always law school.

[Jon Miller]

This is interesting, but does not address all issues.

http://pages.stern.nyu.edu/~tphilipp/papers/pr_rev2.pdf

This concludes that the high pay rate to the finance industry is partly because it went from a low unemployment risk to an unemployment risk similar to the rest of the private sector. The rest is concluded to be some sort of unobserved skill level difference in the labor force. This seems to be an artifact of their model.

The concluding questions reflect the other issues "First, does the increase in skilled labor in the financial sector lead to more innovations in this sector? Second, how do financial innovations affect the rest of the economy? Finally, what are the welfare consequences of the shift in the allocation of talent?"

JM

[KrazyHorse]

Jon, one thing I'd like you to think about is how much more dynamic the economy has become over the last 50 years. I don't have real numbers, but I think it's fair to state that the number of new companies exploding from nothing and old companies shriveling away is higher now than ever before. This is welfare-enhancing, as new ideas reach the largest market possible faster.

Who facilitates access to the capital markets for these new companies? Who ensures that you can buy a piece of a company and sell it on demand at any moment for only a fraction of a percent less than you could buy it for? Who relentlessly strips away idiosyncratic risk, making more and more things fungible over time?

To make the pace of creative destruction we now enjoy possible, there is the need for a large and dynamic financial industry. Both the volume of transactions as well as their complexity has gone up tremendously to facilitate this economic dynamism. Some of the slack has been taken up by automation, but the process of automating is itself dependent on very similarly-skilled individuals.

Are you surprised that the sector has grown and the salaries increased? God help us if it ever enters a sustained decline. That will only happen if and when stagnation sets in.

[Dinner]

I'd like to see backs which are to big to fail broken up so that there is no systemic risk to their collapse. Also we do need a lot more competition in the bank sector especially since so many banks went bust and got rolled into the to big to fail banks. An easy way to inject immediate competition would be to allow the small local banks to operate under the same rules as the national banks and actually recharter them as national banks. Suddenly we'd have thousands of new nationally chartered banks increasing competition.