I remember having an interesting conversation with one of my friends who works in the finance industry. We’ll say that his name is Ray, for the purposes of this story. I bluntly asked Ray, “What type of value does the finance industry provide to society which justifies such exorbitant salaries and bonuses?” (These are the nerdy things that I talk about with my friends).
Eager for some intellectual sparring, the response that I received was both disappointing and disheartening. Expecting a detailed, witty, and informative response – all that I received was a jumble of words, stutters, and “That’s just the way it is”. That’s it? That’s all? That was the best you can come up with?
Anyways, it got me thinking . . .
What value does the finance industry provide to our society?
My conclusion was none.
Alright scratch that, maybe some value. But let’s define value here. By value, I mean some type of tangible service or product.
So, financial institutions (financial institutions being defined as entities like hedge funds, private equity firms, banks, etc. which make up the financial industry) do serve the purpose of keeping assets (assets being defined as a type of product or service) liquid, or having the ability to be sold off quickly. Financial institutions also provide capital for businesses to expand. Follow the economic ecosystem and you’ll realize businesses need money, so thank you finance. I guess.
But what does this entail really? Financial institutions don’t create anything that adds tangible value (value and assets being synonymous) to our society today. No financial institutions are providing a service, or building a product for society to consume and better our lives. Now, if you can find a financial institution that does that, please write below in the comments and I will delete this post and forever hang my head in shame.
You might say, well what about liquidity, which you mentioned before?
Liquidity, or the ability to sell something fast, is something that banks provide. But how good is that really? If you look at banks from this perspective, possessing the ability to liquify assets (assets being defined as some type of product or service) and assigning monetary value to them, then really banks are merely middlemen. If banks didn’t exist, we would just have a barter system, liquidity isn’t a value to society in this respect. It’s more of a channel to set and trade values values as opposed to actually creating value.
Well, what about creating capital for businesses?
How many IPO’s have there been in 2012? Less than 100. The number of small business loans that have been given out? Not enough. So, no, financial institutions are really not creating capital for businesses. Which leads you to wonder not only what type of value that the finance industry provides, but what business are they even in? Mark Cuban writes an interesting article about how the finance industry is really just a bunch of hackers. I agree. The finance industry has become a network of software terminals that set and trade values at such an astronomic rate in order to churn out profits. Profits that are being derived from the values that have been originally set by the very financial institutions that are trading them!
Recently, Nicholas Thompson wrote a great article citing the fact that there is a talent drainage in the Finance industry. Instead of talent taking an exorbitant amount of money to work for a financial instutition, swapping around intangible value – they are going towards other industries which are actually creating something of value.
What we need right now in society is people and companies that are going to create tangible value. We live in a time where people are constantly asking the question, “what value are you bringing to the table?” Everyone has to prove themselves. Either by creating something, executing an idea, or providing a service. It’s a rather easy question to answer as well. Much like a good business idea, it shouldn’t take more than two sentences to explain and a five year old should be able to understand it. But, even professionals in the industry cannot answer this question simply. If this is the case, then many finance institutions need to hire MUCH better PR and marketing professionals.
John Cassidy asks the best question, “What good is Wall Street?” And the article certainly made me wonder. I’m not here to bitch and complain. Merely looking at an industry and trying to understand where it fits in and how it contributes back to society. We live in a connected world where giving back and giving value is everything.
So I ask again, what value does the finance industry provide to society?
Images via Flickr, Wikipedia, 401 (K) 2013