8th January: The Financial System is Overhyped

8th January, 2 pm – 4 pm, Humanities Room, NUS High School

Attendance: Lim Yi Fei1, Lee Si Yuan1,2, Gideon Lee, Wu Xiao Yue, Tan Sern Yang, Ephraem Tan Wen Kai, Chau Pearlwe, Sun Meijia, Wang Anqi, Wang Xueyuan, Yu Qiyao, Lim Pei Ying, Dejoy Shastikk Kumaran, and two others.

Absent (with reason): Ng Ri Chi, Zhou Ruo Hua, Tran Thuy Linh

[1] Denotes moderator, [2] Denotes record keeper

AGENDA

We aimed to educate participants by introducing them to the concept of a financial industry, as well as its purpose. Following that we would discuss on damage brought by the financial services sector (most notably the Lehman Brothers’ collapse and the Eurozone crisis) as well as the situation in rapidly booming economies. Finally we would wrap up with discussing future trends and their possible implications.

BACKGROUND

Today, a large proportion of top students in the student cohort joins the financial industry, which may result in loss of talent in other sectors. Too much focus on these conventional routes to success may prove detrimental macroeconomically. It is well known that the financial industry is an upcoming and continuously booming industry, not only here in Singapore, but also in much of the developing and developed world alike. The reasons for this growth can vary significantly according to region, but the most common argument would be that “a robust finance industry provides businesses with new ways to lower the cost of capital, stimulates global investment and trade, and presents investors with a broad array of products and services to increase return and manage risk”. Other benefits would include generating jobs, and the fact that it is known to be of low physical but high mental capacity would make it even more attractive to countries like Singapore, since it provides high-paying white collar jobs which are in high demand by the growing number of undergraduates. Given that it supposedly helps provide for economic stability, increased GDP growth and decreased youth unemployment for white collar jobs, it is no wonder that Singapore has an increased emphasis on this industry. In fact, a well-read person would know that a key goal of the Marina Bay regional development is so that Singapore can stand out as a financial hub in Asia.

Currently, in the United States, around a quarter of graduates from the Ivy League start their careers in the financial industry. Needless to say, the financial sector is incredibly popular with graduates in Singapore, with nearly 7000 applicants for 60 places in 2 DBS programmes here. In Japan, graduates favour jobs in the financal sector over engineering and science, despite the former having a major part to play in its recession, while the latter was in fact what led to its rapid post- World War II rise.

People first began questioning the value of the financial sector to society during the 2008 recession.The chair of the UK Financial Services Agency, Adair Turner, asserted that a significant proportion of the activities of the investment and banking industries had no useful social purpose. He believed that speculating with money to create money and gambling on future events like the rise or fall of share prices (or anything at all, in the case of many financial speculators) did not create value for the bulk of those in society – except for a small group of the wealthy.

Not only that, the financial sector cost the US economy over $2 trillion in the year 2007, and that was more than the country spent on health care, construction, food, utilities and transportation. It should also be noted that the financial sector was directly responsible for the recent financial crises in the US and Eurozone, due to the lack of a central bank to keep track of the activities of some countries or major financial institutions. Examples would range from the Lehman Brothers’ in the US, to Greece, Portugal and Italy in the Eurozone, where Greece had negative real GDP growth rates since the year 2008. Even after major debt restructuring, Greece, Italy and Portugal still had government debt to GDP ratios of 160.5%, 130.3% and 127.2% at the end of the first quarter of 2013.

Economic interests aside, it is also commonly argued that increasing emphasis on the financial sector’s development would lead to other sectors being neglected. This is especially so for areas like scientific research and development of which the advancement of humankind is attributed to, the medical profession, which society’s health depends on, and last but not least, the teaching profession. Thus it seems ironic that the financial sector receives so much more attention that it seems to deserve.

PROCEEDINGS OF MEETING

Since the topic question reads, ‘The financial industry is overhyped.”, the discussion was kicked off with a self-introduction of all participants, followed by an introduction to the development of the financial sector. Handouts of the research materials were passed to every participant, and they were given some time to read through it so as to better understand the topic. Nigel from the SDYC commitee spoke on the ideological background of the issue, which dated back to the 1980s when the political right was gaining power in the Western world. The boom in the financial services sector resulted from a combination of economic surplus, desire for economic growth at all costs, and not to mention an unwavering faith in neoclassical “trickle-down economics”. The mentality that whatever benefits gained by the rich from this sector will ‘trickle-down’ to the poor as the rich can afford to spend more and pay their employees more (oversimplified summary here). Needless to say, this economic theory did not hold, and spelt economic troubles in later decades.

The chairs then got some participants to give their opinions on the matter, as to why Singapore is fostering the growth of this very sector as well. Participants generally agreed with the reasons proposed by the chairs. From the microeconomic standpoint, it provides for a sufficiently challenging, dynamic and well-paying white-collar jobs that is much desired by local undergraduates, whereas for the macroeconomical standpoint, it provides jobs that require little physical labour while greatly increasing GDP figures if done right. Considering these factors, it makes rational economic sense that financial centres like the Marina Bay area are still under development.

Several participants with parents in the financial sector have also shared their experiences on the matter. 2 of them who had such parents mentioned a lot about how their parents lead high-stress lives, rarely getting to spend time with their families due to extensive traveling and irregular work hours. Contrary to what some may believe, a job in this sector may not be as secure as it seems. A parent of a participant talked about how her mother nearly got retrenched during the financial crisis, while Yi Fei spoke of a certain taxi trip which left a lasting impression. The taxi driver had once worked in the financial sector in the past, before several factors including stress and the financial crisis caused her to lose her job. Surprisingly, she feels that although the life of a taxi driver is definitely hard, she enjoys her life more now that it is more slow-paced and less stressful. This is incredibly ironic for some undergraduates who may be inclined to take up a career in financial services, thinking that it is less stressful and more stable and lucrative than other white-collar jobs.

Many other topics were discussed briefly, including how the education system may have led to this phenomenon. The mindset that school’s purpose is to produce students with outstanding academic results, so that students can work in high-paying jobs in future, would inevitably lead to more understanding graduates working in the financial sector as it is a common conception that it helps them earn money more quickly. The lessons on civic and moral education have limited effectiveness in changing this mindset. Although it is commonly taught that one should aspire to benefit society with their careers, and to pursue a career which they are passionate about, the concept of society is rarely defined clearly, let alone the underlying reasons as to why they should place society before themselves. Passion about a career is also subjective, as people can be driven by money, power and presteige before benefiting others. Even many of those who pursue careers in areas like medicine might be more driven by the stable pay and presteige and not the desire to benefit society, thus the impact of education does have quite a major impact on all the hype surrounding several careers, notably those in the financial services sector.

Further examples of the impact of education were raised by the participants. For instance, in countries like Greece and Spain with a comprehensive welfare system commonly have people exploiting the system. Even in Singapore, an interesting example raised by a participant would be of 2 rich Singaporean parents who retired early, having made enough money. Since their child is studying in our school, and they currently make no income, they are entitled to a 100% subsidy for school fees although they don’t need it. These examples only serve to better illustrate the previous points.Unfortunately, we do not see a turning point anytime soon.

The discussion then deviated significantly from the intended topic question, onto the other impacts of education, its implications on social mobility, impacts of social mobility, discrimination, and even the judical system. Seeing that a direct link to the original topic was impractical at that juncture, the chairpersons called for a 5-minute long break, afterwhich everyone present watched the video “Money and Life”, and discussed its content. The participants generally agreed that whilst money might not have been essential in the era preceding the rise of capitalism, it composes the very essence of capitalism. This made for an effective link back to the original topic question, afterwhich the meeting was wrapped up by summing up the key points again.

FURTHER THOUGHTS

It is worth noting that some people enter the financial sector truly out of passion, and are driven to beneft society. For instance, Si Yuan raised an example of his friend Maurice Mok, who felt that the financial sector would provide more of a challenge to his mathematical and strategic talents, in contrast to a career in engineering. Interestingly, a side reason as to why engineering graduates may start developing an interest in finance is due to the structure of their education itself. Engineering lectures in Singaporean universities are reputed to be incredibly dry in the way content is delivered (though we haven’t had first-hand experience so this can’t be confirmed), causing students to lose their passion gradually. Engineering students typically have  to take up a semester of introductory economics, as well as plenty of mathematical courses. Should they wish to switch career to finance, they would likely have a much easier time than many students studying social sciences who know little of advanced mathematics and might completely neglect economics.

It is also interesting to observe the economies of the constitutionally (though not strictly) socialist Eastern Bloc nations during the Cold War. The flaws are well-known, with inefficiency, poor planning, clampdown on innovation and over-emphasis on heavy industry. However, since the central banks there enjoy exclusive monopolies , there is little room for financial bubbles to grow big and pop to cause economic instability. Hence, although the people living there could not enjoy goods of similar quality as their counterparts in the Western world, and had little freedom of self-expression, problems like economic instability and bankruptcy were almost completely foreign to them. The USSR’s healthcare system during the Khrushchev era was indeed world-class due to the availability of doctors emerging from their education system, and this legacy lives on in Cuba today, which has a doctor for every 170 residents as stated by the World Health Organization, a ratio only second to Italy.

Ironically, the main problem with the Eastern Bloc economies outside of the bureaucratic central planning seems to be that they have emphasized too much on a particular sector and paid no attention to the development of the services industry. If anything, they actively repressed the financial sector, although whether they were just following the same train of thought as their first leader Lenin (that financial industries create economic stability and add little value) can be disputed. This resulted in a self-sufficient but static economy in the USSR and the Eastern Bloc. One does indeed wonder – if the engineers, doctors and teachers here received higher pay than the bankers, given our societal mindset, would we have arrived at the same problem? That is quite an interesting question to ponder on.

LEE SI YUAN

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