How can we market our services?

As a society, how could we decrease the size of the financial market so that more money and talent is directed to goods and services that add to society?

• Financial markets are basically a zero sum game. The longer than money circulates there, the more value is lost directed to non-productive goods and services. Capital markets exist to best allocate money to create the maximum amount of value for society It seems to me that the ideal capital market would be one where the number of steps and people involved in applying the money to business creation or business growth is kept to the absolute minimum. Basically, how would you create the ideal capital market, eliminating waste from non-productive capital market activities? This is a follow-up question to .

• Answer:

  Eliminate perversions of risk and reward. Money seeks the highest rate of return.  Under any rational system, higher rates of return come with higher risk.  The current financial sector is grossly bloated because it has been able to capture returns while distributing risk, suffocating ordinary businesses whose returns more normally conform to risk/reward distribution. What would have to change?  You must get rid of the systemic perversions of capitalism that set the system wildly out of balance.  Here are a few ideas: 1. One asset, one riskholder, one insurance policy - Under state laws, if you "overinsure" a property and experience a loss, you can only collect once.  With certain derivatives (like CDOs) you can buy and sell insurance on assets you are not taking risk on.  Make it so that in order to hedge the risk, you must own the risk. 2. One asset, one short (no naked short) - Shorting a stock (borrowing shares, selling them, then buying the stock back later at a hopefully reduced price to return to the owner) works only if the agent shorting the stock actually borrows and sells it.  A naked short is where the agent sells the stock without borrowing it.  This perverts the market's pricing mechanism.  If every short requires a share, then the amount of demand would raise the cost of borrowing.  You could take a risk, and short something with a low borrowing cost, assuming the market is wrong.  But that is risk.  You could also jump on the bandwagon and short something with a high borrowing cost to reduce risk, but that limits the reward. 3. Cheap money should be there to lubricate capital markets, not to create liquidity for trading (i.e. bankers don't trade) - Trading can be incredibly lucrative, but it is also very risky.  For the most part, it can be self-controlled as long as the trader is betting with house money.  You screw up, you run out of money.  Banking, however, has some structural advantages that are very tasty for traders.  They can borrow a lot of money extremely cheaply from the Fed, making bigger trades with higher profits (or lower loss) because of the lower cost of capital.  4. Tax Hedge funds - Hedge funds are extremely tax advantaged based on their particular construction, allowing them to generate returns for their LPs that are not commensurate with risk.  Fix this. 5. Bet with your own money - This is related to #3, and basically means that capital pools that are required to be no- to low-risk: pension funds, state and county treasuries, etc. cannot be used for high risk behavior.  This means loans, bonds, mortgages with regulated reporting, compliance, and management.  No derivatives. 6. Create more players - This is the most important.  Creating monopolies or near-monopolies always distorts the market.  We need mortgages that are cheap not because of Chinese capital reserves, but because mortgage lenders compete and their efficiency creates value.  We need more than three credit card issuers so that fees match value.  We need insurance competing against, not combined within other forms of financial services. We now have a system with a small number of franchises that have astonishingly low cost of capital and no productive means of creating actual wealth.  As such, they are extracting the embedded wealth of our country, its brands, its consumers, its pensions and governments.  If you want it shrunk, you have to get capitalism working again.