Finance is Not the Economy
Mervyn King, formerly of the Bank of England, in &quot;The End of Alchemy&quot; has a great parable of an island populated by fishermen. It starts with a pretty basic need of financing the nets and boats to do the fishing, where the lender then gets slowly repaid with the fish caught.<p>At some point a finance person steps in and introduces a credit lending facility, which overall is a good thing for the health of the economy. Then, in decision to not take on too much risk, the said finance person offloads the loans in a securitized fashion to other wealthy islanders who then benefit from fishing booms and receive below average returns in years that are dry.<p>Then another finance person figures out the futures contracts, which act as insurance to fishermen and guarantee a reasonable price even at times of market over-supply.<p>At some point trading the loan securities and fishing future contracts starts paying more than humble fishing, which means that the best and brightest switch into finance, creating a stigma for fishing as less desirable occupation for under-achievers. Majority of island&#x27;s GDP is now comprised of fishing-related loans and futures, with fishing itself occupying a relatively small niche.<p>This, of course, collapses at some point, but the problem is that it&#x27;s hard to point out that one step that&#x27;s completely irrational and bonkers - everything created by finance industry has found some demand among fishermen and simplified their lives.