Bankers contributing to society?
I was reading atlas shrugged, and I was thinking about why our marvellous capitalist system is so marvellous. It's because people are motivated by money, so they do work to get money. In the process of doing work, they contribute to society. This is the reason why American is such a great country with a great economy (compared to most countries) and the home of many great innovations. All those contributions that made America so great were motivated by profit. Bill Gates brought computers to everyone because it was profitable to do so; the new drug that cures diseases was produced because it's profitable; farmers produce the food we eat because it's profitable; doctors become doctors and help people because it's profitable. For example, if doctors weren't paid so much, we wouldn't have many doctors, and life would suck if you got sick.
There's a general correlation between how important the job is to society and how much you get paid. Doctors, engineers and presidents get paid a lot because they contribute the most to society. With that in mind, why do bankers get paid so much? We don't contribute anything valuable to society. It feels like as if we're just leeching off the productivity of others, "looters" as Ayn Rand would call them. What justifies the banker's high salaries?
I know that actors and professional athletes don't contribute much to society, yet they get paid a lot. Do you agree that, if society's most useless professions were also the most lucrative, eventually society would deteriorate?
I'm not reconsidering banking, I'm just another player in the game, seeking profit just like everyone else. If banking pays well, then I'll do it. But I'm just wondering, what useful purpose does banking serve to the world?
I'm a capitalist and I just want to maintain the integrity of the capitalist system, could banking be a loophole?
Think about it...if banking pays more than engineering, and an disproportional amount of smart kids went into finance instead of engineering...what's America going to become?
Don't you know we do god's work according to GS?
Banking isn't what it used to be. Bankers get paid so much SOLELY because you can quantify your contribution.
What does a teacher do? Easy to see, hard to quantify. What does a trader do, hard to see, easy to quantify. Trader making 100k in a day for his company can say, give me 20% or I leave.
Not to mention the risk side of things. If a kid fails an exam, does the teacher get fired? You screw up a trade/fat finger/whatever you're out. Higher Risk = Higher Reward. (for reference less than 20 teachers were fired in the entire of the UK last year, for comparison out of hundreds of thousands).
So true, we know the impact of the field of finance. I do think we need to recognize we are facilitating growth and creating value. The firms that are financed and traded by this industry have products and services for customers. Without these products and services blue and white collar workers created there wouldn't be much of for a bank to finance or the need for a stock market for trading the equity. But then again I'm not looking down from the top....
Yes, higher risk does equal higher reward. I'm not sure about your "quantifying" argument though. Is it easy to quantify a doctor's, politician's, or lawyer's work? About as hard as quantifying a teacher's work. Yet the former three still get paid more.
This is such a profound question, do you expect a good answer in the space allotted?
Short answer, the market is not perfect. In my view, most bankers don't deserve what they're making. To be perfectly honest, most very wealthy people don't really deserve a large portion of their wealth, because it comes largely from externalities and things that aren't really related to "work".
That being said, can you think of a better system? I've found that usually the more the government meddles, the worse things get. That's not to say we should be totally laissez-faire, but regulations regarding wealth and income should be simple and judged solely based on trying to make the market more perfect. This is why I think income taxes for the sake of income taxes don't make sense. Instead, I think stuff like estate taxes make sense, because in a perfect market each individual should start out from a level playing field; giving millions to lazy trust fund kids is bad for us, as is overpaying individuals relative to their contributions.
Dude seriuosly?? Deserve is not a word in economics.... and thank god they got rich by exploiting some anomalies in the market and the system, otherwise nobody would have fixed the gaps and the system would grow more inefficient. Profit is not a reward for work.. its a reward for fixing the inefficiencies.
If I work my ass of digging a hole in a forest every day for 12 hour, i've done loads of work but nobody's gonna give me a dollar for it. The economy doesnt care how much you sacrifice of yourself.
Not necessarily. The world isn't a utility maximization problem where you can look at the result and say, "That was the best answer/solution."
The efficient market assumes there is perfect competition, in a frictionless market with free information flow. Unfortunately, that is not the case.
There are many policies which provide a large number of benefits to certain corporations (bb banks being some of them, but there are many others) which guarantee the system to not be efficient and for behavior that is likely inappropriate/careless/excessively risky to be encouraged and overpaid.
Additionally, there is a substantial amount of fraud and activity that would hardly be considered 'ethical' by most of society that goes against what is require for the EMH to hold true.
Investment bankers certainly contribute to society. They help businesses raise capital, which in turn allows those businesses to bring new goods and services to market. It is no coincidence that the countries with the most expansive financial systems tend to also be the most developed.
There are a number of factors that drive the pay of individuals in a market economy. If you feel that entertainers add no value to society, then how would you feel about tobacco companies? Supply and demand determine wages based on people's preferences.
It could be argued that banks are able to exploit economies of scale and scope to make more profit. However, you should not be worried that bankers add no value to society. The answer to this question is complicated, so I'd recommend researching the topic further.
banking is classified as a service - m&a and recap's are very narrow and specific
its harder to compare versus "core" professions like business, medicine, law, engineer
The assumption you are making is that it is possible for you, by yourself, to determine what is really best for society. If this were possible, then central planning would work. But it's not possible. So how do you really know that society would be better off if engineers spent more time making things than working in finance? The idea behind a free market is that the market is better at determining that. Second, utility is a subjective thing; just because you don't see the value to society in paying a sport star millions of dollars, it doesn't mean that lots of other people really do want to be able to watch a sport being played extremely well. It's a matter of preference; who is to say that they are not making the right decision, it's what they enjoy doing.
As for asking what would become of society if there were no engineers, you just said it. If that ended up being a problem, then things would deteriorate for lack of engineers. As this continued, the need for engineers would push engineering salaries up, and if it still kept going, then other things, like banking, would start to suffer and banker salaries would go down. Eventually, good engineers would start to work in engineering again.
Yeah you're right. Efficient markets hypothesis. The market is the best at pricing things, so bankers must get paid a lot for a reason.
This is a bit off topic, but honestly, I think people inflate the average engineers' importance in society. Most engineers I've talked to describe it as very mind-numbing, office space-esque work. The few engineers (ie the Steve Jobs, Bill Gates, etc.) of the world who really do create something revolutionary are paid as such, but the average coding for a tiny part of the new Microsoft OS system contributing something revolutionary to society seems like a stretch to me. Aside from that, financial managers are paid a lot of money because they do have a large role in society. Someone has to take a leap of faith to either give capital to these revolutionary startups, buy them out, or even manage its finances or else the startup would never remain profitable and give society the revolution it created. That's where the CFOs, bankers come in, and that's their role in society.
"bankers don't contribute anything to society blah blah blah blah" heard it before yawn.
Bankers make markets more liquid. Liquid markets fuel growth. Guess why Facebook gets the best engineers lately and thus provides the world with an excellent social network - because the programmers get equity in FB, which they will be able to sell after an IPO managed by an investment bank in markets where bankers connect them with those, who want to buy. The best employees get stock options, products created and underwritten by investment banks. These employees will try very hard to be innovative, so that they can maximize the value of their options. If a company needs to raise capital, either in equity or debt capital markets, to increase R&D activity the banks will do that for them. When 2 drug companies are working on similar drugs, combining these companies by a merger, done by investment banks, will create value. The two groups won't waste time making the same discoveries twice and will be much more efficient. People with deseases will get to live longer. I can go on and on and on. Investment bankers are working so hard to make our society a much better place. Without investment bankers, there would be a lot less innovation and everybody's lives would be worse. Investment bankers contribute in a more subtle way to society than say engineers. But their impact is huge. That's why investment bankers earn every penny.
FYI, can't sell usually for 90 days post IPO. SEC rule 144... IPO raises new outside capital, if an IPO was just the public market buying the shares from the owners, no new money would be raised and the company would not gain any new capital...
Imagine the world without bankers. Unconceivable. We cannot live without bankers, i.e. people whose job is to handle capital.
allocating capital efficiently is critical for optimal performance of a market-oriented capitalist system.
Might want to go read Atlas Shrugged again because Ayn Rand is not particularly fond of most bankers, who are generally viewed as scummy paper pushers, middle men, and people stealing from both sides (the public and the people who are actually innovating and contributing to society).
Bankers, traders, and many others in this industry benefit a great deal by perpetuating a market that is not efficient. It is easy to be able to have sick trading groups when the worst that can happen is the bank getting bailed out..... or when corporations are forced to go through certain groups and banks because of various regulations..... or when national monetary policy is determined by individuals with very strong ties to a select number of banks.
There is certainly a contribution to society, as there is with anything, and probably moreso than many other professions. Is it greater than that of a teacher/doctor/etc. because they may get paid more? Pretty laughable to use solely pay to measure contribution--the nepotism in the industry alone should give you a heads up of what a crock that argument is.
TL;DR version---go re-read Atlas Shrugged and you-pick-it of Barbarian at the Gate/Liars Pokers/House of Cards/etc. and try to make a better argument next time.
Actually, isn't it the renowned banker in Atlas Shrugged who starts the society John Galt and the rest of them move to? She also portrays him very well when he is described deciding not to invest in the business of a man dagny meets at some point? Don't remember the bankers name though
You may be thinking of Midas, who acted in pretty much the opposite manner of what every banker of the last decade has done.
Bankers are integral to society as they are market makers. There would be no liquidity in the world without them. You are wrong to correlate the salary of a job with it's importance to society. Efficient markets hypothesis does not apply anymore and you cannot trust it to accurately price the salary of a job. The market is full of failures as black swans and fat tails occurring readily. If you look a few decades back, banking/trading was not even close to being a lucrative job. The pay was mediocre at best. Leveraging, relativity in fees, and new financial instruments contributed to the huge compensation that we see in the financial industry today. You should not worry about too many fleeing to banking, because people's tastes change all the time. One day people will realize that working 100hrs/wk, having no social life, and making less hourly than a McDonald's worker will not be worth the sacrifice.
This is one thing that has astounded me while working in finance. That so many buy into the gobbledigook, bullshit, naive, fantasy based textbook theories of economics. I would think it'd be obvious how economics actually works to those in the field. It works much like the rest of society. Dirty, depraved, backstabbing, and winning at any cost.
I realize why many buy into it the bullshit side but at times I question whether they repeat the lie so much that they start to believe in it.
If you want to see how real economics works then look at any developed black market. Regulated/ above board markets operate in the same manner except they have a veneer of legitimacy which glosses over the shit. At least on the surface.
Do bankers contribute to society? Yes. So do drug dealers and gun runners and brothel owners. There's a good side and a bad side to any market.
A better question is; what type of Bankers/ banking contribute to society (in a positive way).
youre right about the black market, but you're sort of contradicting yourself, the black market is the perfect place to see economic theory without interference. It is naive trying to put our economy in theory it's much too complex with the regulation and what not... but the black market is just raw, no politics, no social bullcrap, just economics like ricardo and friedman saw it
Regulated markets are no different at the core. They might be a little glossier on the outside and you may not be able to literally kill your competitors but past that it's all the same.
If you've been at the core of any business with significant cash flow then it's easy to see. It's dirty. Not dirty in the sens of illegal (some may be or borderline) but dirty in the sens of strategy. That's not saying that there aren't many above board and righteous aspects to all markets. There are. it's not all dark. When it comes to the money aspect, it is though. The product/ service development parts are usually much cleaner.
the black market does create some monopoly like situations though.... but they fall apart faster than any normal monopoly that is supported by government regulation or caused by accident
This has been extensively debated on Harvard FML to nauseating results:
http://harvardfml.com/post/4296495813/many-of-our-most-talented-most-vi…
After reading that link, I'm tired of people saying, "Don't go into finance, they're all just evil, greedy people who want to make money." What the fuck is wrong with making money? I'll say it without shame: "I want to make a fortune and buy a ton of shit." Now stop looking at me like as if I said I wanted to kill someone. Welcome to capitalism, people. This country is becoming way too socialist. Next thing you know, everybody is stealing from the rich and giving to the poor, and America turns into 1970s Communist China
I really hate all the ideological bullshit that this sort of discussion entails.
Just think about all the flak restructuring guys are getting... the average American sees a newspaper story about slashing 1,000 jobs in Ohio or Wisconsin or somewhere. My counter: so a company doesn't close its under-performing plants and renege on its pension agreements. Then what? It survives for a year, maybe 2, then all 20,000 employees lose their jobs while the company goes through Chapter 11. Awesome.
i personally believe that US americans are unable to do so because.... some people out there in our nation dont have Samuelson's Economics.... and i believe that our educations like such as south africa and the iraq and everywhere like such as ..... and i believe that they should... our education over here in the US should help the US or should help south africa and the iraq and the asian countries so we will be able to build up our future forward
Welcome to reality my friend. And I can give you the answer to that question: America is going to become more uncompetitive.
High finance pays more than engineering everywhere in the world. This is certainly not whats going to set America apart from the rest of developed nations.
Even in America the median finance job pays less than the median engineering jobs.
Pay is not equal to value contribution as laid out before. Can you explain your comment I dont see how that relates to economic competitivness?
Bankers do contribute. Businesses basically have two options when considering expansion: organic growth or M&A/Cap raising. Bankers provide the later of the two. If business can't grow how do you expect them or rather what is their motive to hire additional workers.
HAHAHA @marvelous capitalist system. If you think the system is marvelous (or even capitalist) think again. Right from the get go, the Federal Reserve controls short term interest rates and the money supply. That action alone is anti-capitalistic (shouldn't the money supply be controlled by market forces?!?). So the "money" you claim that we chase is controlled by a body which is not freely elected, nor has controls on any of their actions, nor any personal accountability. That right there should force you to think twice about the system.
As for bankers being paid well, its a matter of being able to give companies access to capital. Its not like medicine or law where superior knowledge is the value-add of a professional. An investment bank's greatest value add is the access to capital. Most company's (some even do this) could probably just have an in-house M&A department or use an advisory firm if they didn't need capital to complete deals; being able to tap the markets for money is the real value-add of an investment bank (and hence, the bankers that work for them).
I hate all the free-market worship on here. Not because I hate the free-market, but because so many clowns on here don't realize that our system is not a free-market system at all. Get a reality check my friends.
The markets aren't free, but the system is still capitalist. You're right about the fed controlling shit, which basically means that the system isn't laissez-faire capitalism. It's just regulated capitalism.
lol @ Thor, I got it..
I think the answer can be summed up by two things: 1) Providing liquidity/making the economy more efficient and 2) Raising capital.
Also, I disagree with the OPs statement that actor's and athletes don't contribute much to society and are therefore overpaid. Both groups provide entertainment, aka happiness, and isn't that the end goal anyways? In a way, they conribute much more directly than an engineer or scientist. Maybe Michael Jordan didn't provide as much "utility" as a doctor for any certain individual, but he provided a sufficient amount for millions, which adds up.
The other reason they are paid so much is specialization/replacement value--millions of people have what it takes to be an engineer or doctor...only 1 person has the ability to be MJ. As shown by the millions of shoes/jerseys and commercials sold because of him, society clearly values his superiority over other bball players. (I will admit that I wonder if companies really profit from some of these huge endorsement deals, but that's another issue) Also remember that these are businesses also, so the owners/producers obviously know that the stars are worth their salary compared to no-namers.
yeah, that was pretty funny Thor
Note that many important things do not bring profits, or at least they don't bring quick profits.
How does banking serve the society? Here is my two cents:
Banks make it possible to concerntrate large amount of capital, which is crucial to other industries. Banks are similar to the vascular in our bodies.
You got all the industries producing their products and delivering their products. Bankers make sure they can pay their staff on time, expand by buying new companies and starting new plants and projects, find solutions to diversify like oil and gas company buying a materials firm or utility. Bankers make sure that the owners of the firm get the most for their investment and invest in the firm again. They make sure that the firm makes its move (raise debt) at the right time and with ample marketing. The firm focuses on producing while bankers help the firm stay liquid. Bankers contribute a lot and it is easy to see how stale the world would be if bankers did not exist. Hence, the high compensation, which does sometimes gets out of hand as bankers should not get paid if they fail (like in 2008).
By Bankers i mean all bankers: investment bankers, retail bankers, commercial bankers, traders
Don't think bankers are necessary?
See: Markets, Credit. 2008-2009.
Think about how banking expands the yearly output quality and quantity of new products and services by efficiently "recycling" the earnings of successful prior innovations. Technological progress rests on prior achievements, as a ton of goods and services work toward future innovation (robots and computers do biotech product development and research better than a human can, for example). Every product plays a role in overall progress - even a better, ultra-comfortable chair frees up innovators' minds from the nagging need to invent a better chair and they go on to work on different products. Finally, real synergy, not artificial synergy used to substantiate bad deals, is a boon to production and innovation and the deals that get synergy right are essentially doing a great service to all members of the economy, even the poorest consumers.
If you consider all the effects of the financial system, it is accelerating technological progress and accessibility (more innovators getting capital, more consumers getting goods). Isaac Newton said he stood on the shoulders of giants, in the modern world it is the financial system that is making and helping these giants stand up on shoulders faster and more efficiently than they otherwise would. Technological singularity baby.
ITT: People dramatically overestimating the benefit of "providing liquidity."
that kind of talk will get you liquidated...
Let's skip all of the efficient markets analyses and just look at how banks get paid for a second - a bank raises $500mm for a company and gets 2% of that; does a $1bn M&A deal and gets 1% of that. If a deal does not happen, the bank DOES NOT GET PAID.
How can one argue that bankers don't contribute to society when they don't generate any profit unless, BY DEFINITION, a contribution is made. We can analyze what the reasons are behind why companies do these transactions, but that's almost irrelevant; they want to do these deals and banks provide them a service that's in demand - and they only get paid if that service actually gets fulfilled, and then they get paid a fee that's proportional to the quantifiable contribution. This is almost perfect (albeit highly simplified) capitalism here.
Banks aren't a passive actor in the deals though. Often they will have a huge hand in ensuring the deal happens, and often to the detriment of both companies. Negative expected value/utility in a lot of cases.
Come again? I agree that lots of M&A deals are overpriced and value-destructive, but I have yet to see a banker strong-arm a CEO of a major company into doing a deal that he did not want to do. My barber will give me a stupid haircut if I ask for one. The chef at Smith & Wollensky will still grill my steak well-done if that's what I want.
Bankers are overpaid, period. Anyone who thinks otherwise is seriously delusional. Yes, we contribute to society and yes, we are important. But to say that somehow an MD at Goldman Sachs who makes $10 million a year contributes 50 times to society what the engineering head who makes $200,000 a year is ridiculous. Yes, the market allows it so it is technically a fair market price. But the markets are not perfectly efficient and in my opinion this is a prime example of that. How much special skills does a banker bring to the table that a giant chunk of the population cannot? Very little - valuation and industry "expertise" is not hard to learn. Doctors, scientists, etc. can do what bankers do quite easily, but the reverse cannot be said.
Don't give me the smart/100 hours a week/etc. BS either - a medical residency is just as hard, the first couple of years in law school are just as hard, and getting into med school/law school is harder to getting into a good investment bank and rising up. Startup, nonprofits, etc. are not easy 40 hours a week jobs either. A ton of them are extremely stressful. We always think we're special in that way when we're not
Of course, I'm gonna be taking my banking paycheck anyway, but no way in hell am I gonna think I am worth that amount of money.
Dude you're a clown
wow you suck at economics... hope you work in ops or IT and nowhere close to FO (if you're in macro research your bank is doomed) although i imagine your valuations would be hilarious to look at
sorry, I'll be working in M&A/restructuring at Blackstone/Lazard/Evercore. I just don't buy some of the bullshit we sell
Agree.
Your grasp of economics is terrible.
Compensation (the cost of labor) is a function of: PRODUCTION and COMPETITION.
Bankers PRODUCE an incredible amount of revenue for their FIRM. That is the basis for their compensation. NOT some impossible to calculate "value creation" for clients or "societal good." Good bankers are good bankers because they generate revenue for their firm/shareholders.
Bankers are in a highly COMPETITIVE labor market. Wages are bid up. Numerous opportunities for alternative employment (peer companies, buy-side, start your own specialty shop, etc). These alternatives increase the wage a bank must pay to keep the banker PRODUCING revenue for the firm.
If you read the title it asks whether banker compensation is fair from a societal contribution point of view and not an economic one.
and who the hell are you to decide who's overpaid and who's not... i'm not saying anything about contribution, because it is a non-issue
it must be epic to feel as self-righteous as you do... would you perhaps share your metrics for contribution? or your insight, you are obviously capable of observing every single multiplication effect of an economic action of a doctor and GS MD.
cool story bro. u mad?
u jelly?
Very intelligent point. Why is it anyone's business how much money someone makes?
my my aren't you witty
^^ hear hear
Define: fair Define: societal Define: contribution...
then we can talk
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