I am not an economist but I have owned a couple businesses and consider myself a reasonably practical person.
I have always believed that the vast majority of today's financial instruments have been invented out of thin air for no reason other than to ultimately ensure the employment of bankers and brokers.
Actually, probably not. I suspect (I'm a programmer by nature, so my experience with code may apply here) it's more of each institution and "network" offering redundant services until multiple institutions mature to the point where these services collide and become confusing.
For example, lots of people have a checking account, savings account, credit card, personal line of credit, HELOC, brokerage account, and more.
That wasn't true one generation ago. My parents had only a checking acount, savings account, and credit card.
I see absolutely no reason why a single account could not offer all those features.
With the advent of computers and networks, now it is possible. But 20 years ago? Not possible.
How would a bank know how much equity you had in your house? How would your credit card company know how much you had in the bank? How would your mortgage company know what your investment amount was?
Today, you actually have one company that handles all of it (and in cases where they don't, they can still trade information). So now I can have a HELOC, personal line of credit, credit card, savings account, etc, all tied together, in that credit from one reduces the amount of credit available on another, and all paid from the same account.
The only reason you "need" all that is because the banks created all these funny rules so that they could introduce more and more products and services.
In this case I actually disagree. Different people have different had different "collateral", so different kinds of credit were available to them. That explains why different products exist. Someone with a house vs someone with a strong credit rating vs someone who had lots of money all had access to different products. Now a single person has access to all of them.
This is done so they can charge you more for each of those things, and also to differentiate them from their competitors.
Besides consumer banking, can somebody explain to me why we NEED "commercial paper"? Yes, I've read the wikipedia page and I know how it's used, but I don't understand why it's needed. If you can't make payroll then you're pulling from your credit one way or another - why do we need separate instruments for a 2 week loan versus a longer term loan, or a credit card, or whatever?
As before, commercial paper was "invented" before credit cards (or business lines of credit or whatever) existed. It satisfied a market need that probably doesn't exist today.
And don't even get me started on real estate lending...
It's like freaking starbucks - you can get your banking services just as special as an upside-down triple no foam half calf non fat 160 degree two splenda mocha. But it's one thing for a coffee company to cater to every individual snowflake's desire, and quite another IMHO for something as important as our financial system to become as absurdly complex and fragile as it is.
It's this statement that brought me to this answer. Software is flexible (soft), so it can be molded quite easily to different needs according to different usages. The problem is that after four versions needs have evolved, but the original code has not, so now you have something complex and fragile that was originally quite simple and straightforward.
As for the people who are really benefitting from all this complexity - well, it's only during recession that we all collectively take a good hard look at who's making a contribution to society and who isn't.
So like software, it's only when something breaks when it's actually worth fixing the code. To fix the code before it breaks is almost a waste of effort as you are more likely to break it in the process!
Unfortunately the powers that be think they can beat a recession by tweaking some rates, stealing from taxpayers, or shuffling money from one hand to the other. That's just going to hurt us more in the long term. We need to clean this shit up now - get rid of unnecessary products and overhead, and let the unproductive companies go bankrupt. Let the UAW strangle themselves to death. Just get it done.
I'm not sure how to fix this, however, as there are still people I know that don't own credit cards, don't have savings accounts, don't have checking accounts, don't have homes, etc, so there still remains a need for HELOCs for people with homes, checking accounts for people with paychecks, savings accounts for people with a little money, credit cards for people without lots of money, personal lines of credit for people without homes, etc.
