A Brief Thought on the Incentive Structure of Modern Finance

A problem of modern finance, the derivatives business, and hedge funds as they relate to the rejuvenation of the American economy is that these firms’ business models are not dependent on a robust, upwardly mobile, middle class.  Their reach is global and their profits are generated via complex, algorithmic, hedging/betting architectures that are dependent not on the strength of industry, but rather via comparative advantages in information gathering and analysis between other like firms.  Their models are dynamic enough to generate profitable outcomes from both the successes and failures of average Americans.  

Thus these firms don’t have the stereotypical incentive structure of American business.  The middle class does not need to succeed on their watch, because middle class incomes do not feed their machine.  Moreover, their outlook is global and so successes in developing markets are of equal value.   

I’m not arguing that this structure is bad.  It just is. And as the debate over tax structure continues in the years ahead, the public should be aware of this new dynamic, and how it may color the opinions and motivations of our corporate and political leadership.  It’s just a very basic thought, but one worth sharing, and one I hope will continue to evolve via this blog in the months ahead. 

JNOMICS