The future of finance

This week's Economist has a really interesting 14-page supplement all about The Future of Finance, as well as a front page looking inside bank's toxic assets.

It immediately caught my attention, as I'm a sad git who gets more excited by magazines with covers that mention banks than I do with ones that have half-dressed women on the front, so I immediately grabbed a copy and wrapped it around my monthly Nuts mag to read on the tube.

Trouble is that my eye was caught by some of the articles and so I recommend you read the whole supplement as it has some great content, opinion and discussion, as well as some great stats and quotes, such as:

"In America, savings fell from around 10% of disposable income in the 1970s to 1% after 2005."

"In America the share of household and consumer debt alone went up from
100% of GDP on 1980 to 173% today, equivalent to around $6 trillion of
extra borrowing, according to Martin Barnes of BCA Research, a Canadian
investment-research firm."

"The financial-services industry is condemned to suffer a horrible
contraction. In America the industry’s share of total corporate profits
climbed from 10% in the early 1980s to 40% at its peak in 2007. Its
share of the stockmarket’s value grew from 6% to 23% ... at the peak, the
industry accounted for only 14% of America’s GDP and a mere 5% of
private-sector jobs."

"In 1970 Goldman Sachs had about 1,300 people. At the end of last year it
had roughly 30,000. In 1971 Morgan Stanley had about 3,500 people; at
the peak, in 2006, it had 55,000."

"A trading room
of, say, 1,000 people. Fifty of them might be over 40 years old and
just ten over 50. Their typical career might peak after five to seven
years."

"An internal investigation into $38 billion of mortgage losses at UBS,
ordered by the Swiss Federal Banking Commission, blamed the disaster on
a push for growth in the bank’s fixed-income business ... at its peak the CDO (Collateralised Debt Obligation) desk had only 35-40
people, but it amassed around $12 billion of write-downs in 2007,
two-thirds of that year’s total."

"Benoît Mandelbrot, the mathematician who invented fractal theory,
calculated that if the Dow Jones Industrial Average followed a normal
(standard deviation bell-shape curve) distribution, it should have moved by more than 3.4% on 58 days between
1916 and 2003; in fact it did so 1,001 times. It should have moved by
more than 4.5% on six days; it did so on 366. It should have moved by
more than 7% only once in every 300,000 years; in the 20th century it
did so 48 times."

This is why: "When David Viniar, chief financial officer of Goldman Sachs, told the Financial Times
in 2007 that the bank had seen '25-standard-deviation moves several
days in a row', he was saying that the markets were at the extreme tail
of their distribution. The centre of their models did not begin to
predict that the tails would move so violently. He meant to show how
unstable the markets were. But he also showed how wrong the models were." (see blog from way back then)

All in all, it's well worth the read.

Mind you, the most telling quote is this one:

"I [suspect] we are throwing more and more of
our resources, including the cream of our youth, into financial
activities remote from the production of goods and services, into
activities that generate high private rewards disproportionate to their
social productivity. I suspect that the immense power of the computer
is being harnessed to this ‘paper economy’, not to do the same
transactions more economically but to balloon the quantity and variety
of financial exchanges…I fear that, as Keynes saw even in his day, the
advantages of the liquidity and negotiability of financial instruments
come at the cost of facilitating nth-degree speculation which is
short-sighted and inefficient."

That one came from Nobel laureate James Tobin ...

... in 1984.

Must be something Orwellian in that?