*If you life in a first world country and come from at least a lower-middle class background
You are talking about money. Not modern wall-street finance.
> huge amount of human progress is owed to modern-day financial institutions.
Like synthetic credit default swaps?
> Like a software system, it's extremely naive to think that complexity is a sign that a system is rotten.
Complexity that can't be coped with is rotten! The Linux kernel is quite complex but each part of it is well understood and there are a lot mechanisms in software to reduce complexity.
> But the vast majority of financial innovations are deeply ingrained in the good life that you get to enjoy every day.
Tell that to Greece people that got into the Euro because of clever CDS from Goldman Sachs or the masses of people that are stuck in debt from their education or credit cards.
> Sometimes we make products that we don't always completely understand until later.
That does not stop you from selling them and acting like you do. However recent financial crises have shown that banks offering these products for the most part understand them... the persons buying them don't.
> Funds the massive philanthropy expenditures that help those in need everyday
That shouldn't be needed in the first place if there wouldn't be such a huge inequality. Philanthropy is not a good idea for a good-working society. There are laws and a justice system that is more fair than a few far too rich persons with a selectively good cause.
> Finance is an art, not a science.
And it should be a tool not an art. A means to an end.
Like any financial product, CDS is not perfect, but it's also intellectually dishonest to argue that it doesn't offer any benefit to society. For example, CDS is used widely by the insurers that the parent noted help individuals protect themselves and their property.
> Complexity that can't be coped with is rotten! The Linux kernel is quite complex but each part of it is well understood and there are a lot mechanisms in software to reduce complexity.
You apparently assume that the financial markets are too complex to be managed but poll people on a busy street in any major city and many will probably tell you they feel computer software is unmanageably complex too. Should we call software rotten because some people who used it have suffered some loss as a result?
> Tell that to Greece people that got into the Euro because of clever CDS from Goldman Sachs or the masses of people that are stuck in debt from their education or credit cards.
It takes two to tango. It would be unfair to pretend that some of the near countless individuals and companies active in providing financial services have not acted immorally or even illegally, but it's intellectually dishonest to pretend that every person who has taken on more debt than he or she can manage is a victim who was coerced into making financially imprudent decisions.
This applies to countries too.
> However recent financial crises have shown that banks offering these products for the most part understand them... the persons buying them don't.
Save for Lehman, which was allowed to fail, the large banks were bailed out. If they were as savvy as you seem to think, why did they need bailouts?
CDS are not bad but the capital reserve requirements are way to low. If selling a CDS required a 1/3 capital reserve then they would be priced at reasonable levels and actually be wotprth something. Instead upper mid level employees used CDS to make a classic bet, in the worst case the company fails so it does not really matter how much it fails therefore my average expected downside is limited and the upside is unlimited, therefore lets go insane.
>The Linux kernel is quite complex but each part of it is well understood and there are a lot mechanisms in software to reduce complexity.
Well understood by experts, as is the appropriate section of the financial system. You chose to learn about the kernel, someone else chose to learn about asset backed securities. The guy who learned about Bach probably considers both to be very complex.
I have to say that the complexity of finance is more like the artificial complexity of Java EE, a regular developer can get a grasp of the Linux kernel by reading "Operating System Concepts", finance is more like a AbstractSingletonProxyFactoryBean.
Isn't that an example of complexity that is being successfully coped with, thanks to the abstractions provided by the various industries and institutions that provide raw materials, processing, shipping, etc?
The fact that every man in the street doesn't understand the mechanisms of these product doesn't mean they can't be copped with. In fact the most benign parts of banking are most likely completely obscure to most people (payment systems).
I don't think the 2008 crisis was caused by complexity. Most actors on these structured credit markets understood well the products. It was rather caused by over leverage and complacency toward credit risk.
And it will happen again. Hopefully the banking system is much stronger now, and the legal mechanisms are in place to limit the cost of a failing bank to tax payers. But the excess of liquidity as a result of money printing has starved investors for yield, and I believe that they are investing in places where they would rather not, like in 2005. Then it was subprime and commercial real estate. Now most likely emerging markets.
For people wondering about complexity of financial products, and if individual banks and traders did or did not precisely understand the implications of what they were doing, i wholeheartedly recommend everyone read Dit kan niet waar zijn (This cannot be true) by Joris Luyendijk. He spent about a year doing “anthropology” in the London financial sector, and it's a fascinating, horrifying read. I'm not sure if that book has been translated into English yet, but otherwise his column at the Guardian makes for equally good reading [1].
I've been reading it as "Grokked," as in 'understood.'
Cause it aint "coped," as in "they could handle it."
Copped would be more like they got some of something on the sly, possibly through sleight of hand ( copped a feel. )
In this case, accidental understanding of a system?
> Like synthetic credit default swaps?
You mean a synthetic CDO? CDS don't need to be synthetic.
>Tell that to Greece people that got into the Euro because of clever CDS from Goldman Sachs
The people of Greece (and their political leaders) wanted to get into the Euro. They spun their own fiction.
You are talking about money. Not modern wall-street finance.
> huge amount of human progress is owed to modern-day financial institutions.
Like synthetic credit default swaps?
> Like a software system, it's extremely naive to think that complexity is a sign that a system is rotten.
Complexity that can't be coped with is rotten! The Linux kernel is quite complex but each part of it is well understood and there are a lot mechanisms in software to reduce complexity.
> But the vast majority of financial innovations are deeply ingrained in the good life that you get to enjoy every day.
Tell that to Greece people that got into the Euro because of clever CDS from Goldman Sachs or the masses of people that are stuck in debt from their education or credit cards.
> Sometimes we make products that we don't always completely understand until later.
That does not stop you from selling them and acting like you do. However recent financial crises have shown that banks offering these products for the most part understand them... the persons buying them don't.
> Funds the massive philanthropy expenditures that help those in need everyday
That shouldn't be needed in the first place if there wouldn't be such a huge inequality. Philanthropy is not a good idea for a good-working society. There are laws and a justice system that is more fair than a few far too rich persons with a selectively good cause.
> Finance is an art, not a science.
And it should be a tool not an art. A means to an end.