Meet John. John majored in aeronautical engineering at a top university where he was #1 in his class. He’s nerdy as hell, and he loves rockets. He always wanted to be an astronaut someday, or at least involved in the design of rockets and their components.
But John won’t go to work for NASA. In fact, the closest he’ll ever get to space is living vicariously through Luke from the Star Wars trilogy. John is headed for Wall Street.
Meet our next guy, Dylan Ratigan. Dylan Ratigan, like most people, believes his opinion is valuable on subjects he can’t fully comprehend.
As such, he’s a frequent critic of the financial markets, and routinely bashes derivatives, speculation, and other financial industry buzzwords of the day for sheer populist appeal. It works for him. People tune into his show, even though what he says is entirely off base.
Regardless, Mr. Ratigan is a leader in promoting the concept of “brain drain,” or the belief that Wall Street siphons off the smartest and most talented people from more productive uses in research, especially in developing lifesaving diseases. (Step 1 for finding an illogical argument: look for the appeal to sick and dying people.)
Mr. Ratigan believes that John (the guy above) is wasted talent on Wall Street. His appreciation and understanding of aeronautics means he’d be better suited for NASA, not for Goldman Sachs. And standing firm in this belief, Mr. Ratigan also believes that the financial markets not only siphon off IQ points, but also productive capacity of the economy. That is, in Ratigan’s world, all this wealth is being plundered because speculation or something somehow destroys all things tangible—I don’t know, I think he’s just another loudmouth on TV.
In his professional life, John is sure to become what people call a “quant,” or “Quantitative analyst.” John’s job as a quant will be vastly different on Wall Street than it would be at Cape Canaveral. On Wall Street, John will work to find the price and value of everything, based only on his mathematical models and assumptions.
A typical problem for John might be finding how an extra inch of rain in Topeka, Kansas will bring higher than average corn yields, which will exert downward pressure on pork bellies, and ultimately result in higher than expected earnings in the 3rd quarter for Bob Evans Farms Inc. In doing so, his employer can underwrite bets on the weather with confidence, knowing it can arbitrage the different in risk pricing between the derivatives market and Bob Evans stock options.
For Dylan Ratigan, the productivity ends here. See, John, that perfectly smart and capable person is now just a stupid white collar financial guy who only wants to make money. But what Mr. Ratigan and so many others miss isn’t that John is making a ton of money, but that John’s job is insanely productive.
Someone else took the short end of that one-inch rain bet. Maybe it was a homeowners insurance company, or a city government hedging the financial risk of a levee failure and flooding. Maybe it was an outdoor party planner that sees a linear drop in business equal to 3% of revenue for each additional 1” of rainfall. Who knows. All we need to know is that reducing risk is good as it allows us to leverage up production and turn a safety net into another avenue for growth.
And Ratigan, come on; it’s about time you realize that financial services are the largest US export. That trade surplus tells me we have the comparative advantage, why not let us work it? Clearly, manufacturing isn’t doing it any more.
Too long; didn’t read:
- Wall Street doesn’t create brain drain, but it does create serious productivity
- Financial services is one of the country’s best exports, so why do we hate it so much?
- You don’t actually have to make something that you can hold in your hand to be productive
Dylan Ratigan seems like the type that would try living without money. Not that there’s anything wrong with that…