The ethics of financialization

I was having a conversation with a friend about what I find crypto investing” to be so unethical, and my position comes down to thinking it is wrong to earn money without doing work. This doesn’t exclude earning via capital, as in renting out an apartment since that’s also work. Putting money into crypto” is glorified gambling, which is not work.

Going deeper down this line of thinking, my issue is with financialization, or making things into abstractions with no tether to any real value.

There’s a great lecture from John Kay explaining this concept, and if you’re into this sort of thing it’s worth watching in full. It bears pointing out that Kay is about as mainstream as it gets, isn’t screaming for the end of capitalism, or some other such non-sense. It gives me hope that there are viable ways to make huge improvements to our current economic system.

My main takeaway from the lecture is that we need financial services as an industry for two main reasons:

  1. Wealth management: meaning that you have access to capital for studies, buying a house, and retiring, which are events far removed from your highest earning years.
  2. Pooling risk: if everyone has homeowner’s insurance, a freak storm won’t ruin an individual.

Banks historically made reasonable profits on these things, but not the insane amounts that we associate with Goldman Sachs. And so banks turned to the category of casino-like products that are pure gambling. Then the banks started selling these to each other at ever more ridiculous profits. And you can often get away with it, and assume that your luck was a result of your brilliance.

Where it gets pernicious is when these casino-like financial products get passed off as pooling risk or thrown into individual’s wealth management portfolio. The most famous case of that being sub-prime mortgages.