I’ve said several times that finance is really just code. Like software, it’s an abstraction skin pulled over physical features. One can feel a bit disembodied if their formulation of the world for 8-12 hours a day are prices. Prices that collapse all of human enterprise, from the dirt under its fingernails to the sunrises and sunsets between now and some expiration date, into some Excel number format.
Just as software intermediates for less, financial innovation lowers the cost of go-betweens. In finance, the things went-between are people paying to offload risk to people looking to get paid for warehousing risk. In software and finance, skimming a tiny bit of rent on those transactions is lucrative.
How good or bad we can feel about the degree of skimming depends on how much surplus is created versus the higher friction model. The value of information liquidity is fairly obvious so Google enjoyed a positive reputation for at least its first decade in business. Meanwhile, finance feels like a constant barrage of “what did Wells Fargo do now?” or words that rhyme with Fonzi. People outside finance can be excused for having a dim, albeit biased, view of the profession since nobody reports on people doing an honest job.
With that in mind, I leave you with Mitchell’s understandable question:
— Mitchell Rosenthal (@M1tchRosenthal) February 26, 2022
Here’s my quick response:
Let me try.
If there was no insurance, risk stays on books of less efficient holder.
Insurance = risk pooling
Speculator = efficient risk pooler who understands correlation
Efficient risk allocation = lower cost of capital for primary investment