Many good points, though I'd take exception to this line:
incidentally, it should be a big red flag for growth when the brightest young people start going into finance, since they aren’t actually creating any more wealth, just redistributing it
A modern finance system does more than "redistribute wealth" - or rather, perhaps better phrased, redistributing wealth is fundamentally important to growth and wealth generation. Wealth isn't generated in a vacuum - it's a product of capital and work. The capital can be in all sorts of form, and a modern finance system does its best to keep that capital liquid and keep it in the place where it gets the best return.
Having a faulty banking system would be a bit like having a faulty memory allocation system in a computer program. It may not be the most directly related to performance/growth, but if memory is poorly allocated (e.g. a method that should use just one memory allocation call has to use 10 billion calls), performance will suffer.
Of all fields, technology, with its VC, capital-fuelled madness, should have a pretty clear understanding of the importance of capital allocation.
That said, overall the article is very sensible, or seems so to me. I'd only add that this is not just a US problem, it's a world problem. The whole world is connected together now, and any worthwhile solution cannot be purely US-centric.
We must figure out ways to make growth happen on a global scale, for all countries taking part in "the game".
I'm not disputing that what the finance sector is supposed to be doing is good for the economy.
But the line is about the brightest young people going into finance. When your brightest people are going into allocation rather than the actual invention and building of things, because it's soooo, sooo much more profitable, you've got a structural problem.
HFT makes markets more liquid and efficient. I think people oppose HFT because it prevents small investors from competing with algorithms and bigger players. However, the function of market shouldn't be job creation, it should be used to determine true market prices.
If all traders are replaced by HFT algorithms, that would be fantastic news. Opposition to that is ludditism.
In theory you're right, but in practice, it breaks the mechanisms which ensure that investors actually want to participate in the market.
The function of the market is not job creation, however one of its functions is to incentivise investors to invest rather than store their money under the mattress. HFT hurts that incentive, that's why it's functionally bad.
The purpose of the market is to get all that capital out of the mattresses and into the economy, not to be liquid or efficient. Those are secondary objectives. To get investors' money, it needs first of all to be perceived as fair.
I prefer to think of "finance" (to the extent that its myriad subfields can be subsumed under that label) as the oil that lubricates the machine. That is, necessary for proper operation, but incapable of providing a motive force by itself.
On a related note, it's easy for "financial types" to fall into the trap of equating GDP with the creation of wealth (indeed, some people define it this way), and during economic booms structural problems are often glossed over by citing increasing GDP as a sign of growing wealth. But at the end of the day, improving living standards have a subjective component that can't be fully captured by measuring the total value of the goods & services produced each year.
Couldn't you say the same thing about the USSR? All the smartest people should work for Gosplan because correctly allocating capital is key to creating wealth, and to achieve that all the people working in and running Gosplan should get paid the most.
And ... even those who are producing "goods" aren't creating durable (physical) goods. We're selling each other more and more software, services, media, et cetera but if it all comes crashing down, you're going to worry about food, shelter and clothing.
And what's the problem with selling services instead of physical goods? The automation of manufacture means that there's less jobs to produce goods and more to crete all kinds of services and information. If a factory needs 80% less people to produce the same number of cars, then that's a good thing.
Those people currently producing food and clothing are not going to disappear if the economy crashes.
incidentally, it should be a big red flag for growth when the brightest young people start going into finance, since they aren’t actually creating any more wealth, just redistributing it
A modern finance system does more than "redistribute wealth" - or rather, perhaps better phrased, redistributing wealth is fundamentally important to growth and wealth generation. Wealth isn't generated in a vacuum - it's a product of capital and work. The capital can be in all sorts of form, and a modern finance system does its best to keep that capital liquid and keep it in the place where it gets the best return.
Having a faulty banking system would be a bit like having a faulty memory allocation system in a computer program. It may not be the most directly related to performance/growth, but if memory is poorly allocated (e.g. a method that should use just one memory allocation call has to use 10 billion calls), performance will suffer.
Of all fields, technology, with its VC, capital-fuelled madness, should have a pretty clear understanding of the importance of capital allocation.
That said, overall the article is very sensible, or seems so to me. I'd only add that this is not just a US problem, it's a world problem. The whole world is connected together now, and any worthwhile solution cannot be purely US-centric.
We must figure out ways to make growth happen on a global scale, for all countries taking part in "the game".