I don’t see why I should expect real costs to be lower here.
In cases where there are real savings, it’s usually pretty easy to point to the kinds of resources being saved. Efficiency gains in real goods, such as just-in-time supply chains, allow for less warehousing of goods, which means we don’t need to make as much stuff, in order to have stuff when we need it. I think the burden of proof here is on the claim that the financial savings in financial engineering correspond to real savings on net.
This kind of financial engineering allows banks to do something closer to just-in-time lending, reserving less against losses—the effect should be similar to lowering reserve requirements for banks. But with a managed fiat currency, it doesn’t cost any real resources to warehouse money, so there are accounting savings due to MBS but no less actual stuff being moved around and consumed or people employed per house financed.
In a world that’s exogenously liquidity-constrained, financial engineering on MBS creates liquidity, which can be very good. IIRC the original MBS were a US government backed program to achieve specific policy goals (government-guaranteed assets for banks to hold, more liquidity in the housing market) without massive overt subsidies. In a highly regulated banking industry with a fiat currency like the current US (and to a lesser extent global) system, it’s not obvious that arbitraging slight inefficiencies there via financial engineering solved any real problem, while it very clearly created systemic risk.
Insofar as there are real rather than just nominal savings here, they’re lower transaction costs for consumers and risk-pooling for investors, at the expense of reducing skin in the game, offloading to the US government the tasks of oversight and maintaining the underlying trust that lets the system work. These costs aren’t accounted for financially, and offloading them to an entity that has little in the way of short-run competition and gets little short-run feedback on whether it’s doing a good job seems likely to erode the relevant institutions in the long run.
I’m not saying we should never take advantage of economies of scale. I’m saying that if participation in large-scale activities is massively subsidized e.g. by the state, it’s not clear that the financial savings from increasing dependence on that system are meaningful.
Ok, I think this story of why MBS might not be a good thing makes a lot more sense. The question then becomes, how good is the US government at picking policy goals that have more benefits than costs (including implementation costs and increased risks). If it’s not very good, then the existence of a highly developed financial industry might make things worse by tempting the government into adopting more bad policy goals than it otherwise would have (i.e., by providing the government with a tool that it thinks it can use to do good). Does this seem right to you, and do you see any other major critiques of the financial industry that doesn’t fall into this category?
I think this is the main problem. And for domains like finance that concentrate wealth a lot (enabling capture of the political decisionmaking system), the system has to be designed extremely well to avoid runaway alignment problems.
I don’t see why I should expect real costs to be lower here.
In cases where there are real savings, it’s usually pretty easy to point to the kinds of resources being saved. Efficiency gains in real goods, such as just-in-time supply chains, allow for less warehousing of goods, which means we don’t need to make as much stuff, in order to have stuff when we need it. I think the burden of proof here is on the claim that the financial savings in financial engineering correspond to real savings on net.
This kind of financial engineering allows banks to do something closer to just-in-time lending, reserving less against losses—the effect should be similar to lowering reserve requirements for banks. But with a managed fiat currency, it doesn’t cost any real resources to warehouse money, so there are accounting savings due to MBS but no less actual stuff being moved around and consumed or people employed per house financed.
In a world that’s exogenously liquidity-constrained, financial engineering on MBS creates liquidity, which can be very good. IIRC the original MBS were a US government backed program to achieve specific policy goals (government-guaranteed assets for banks to hold, more liquidity in the housing market) without massive overt subsidies. In a highly regulated banking industry with a fiat currency like the current US (and to a lesser extent global) system, it’s not obvious that arbitraging slight inefficiencies there via financial engineering solved any real problem, while it very clearly created systemic risk.
Insofar as there are real rather than just nominal savings here, they’re lower transaction costs for consumers and risk-pooling for investors, at the expense of reducing skin in the game, offloading to the US government the tasks of oversight and maintaining the underlying trust that lets the system work. These costs aren’t accounted for financially, and offloading them to an entity that has little in the way of short-run competition and gets little short-run feedback on whether it’s doing a good job seems likely to erode the relevant institutions in the long run.
I’m not saying we should never take advantage of economies of scale. I’m saying that if participation in large-scale activities is massively subsidized e.g. by the state, it’s not clear that the financial savings from increasing dependence on that system are meaningful.
Ok, I think this story of why MBS might not be a good thing makes a lot more sense. The question then becomes, how good is the US government at picking policy goals that have more benefits than costs (including implementation costs and increased risks). If it’s not very good, then the existence of a highly developed financial industry might make things worse by tempting the government into adopting more bad policy goals than it otherwise would have (i.e., by providing the government with a tool that it thinks it can use to do good). Does this seem right to you, and do you see any other major critiques of the financial industry that doesn’t fall into this category?
I think this is the main problem. And for domains like finance that concentrate wealth a lot (enabling capture of the political decisionmaking system), the system has to be designed extremely well to avoid runaway alignment problems.