Unlike some of the posters, I do not have a clear opinion or understanding of exactly finance does for us, especially the part of finance that is done by MIT graduates. I have heard two opposing claims which I put into two opposing categories.
* Finance is a fraudulent game designed to fleece others out of their money using complex financial instruments that cannot be understood by those who have the responsibility to prevent fraudulent activities in our financial institutions.
* Finance more efficiently distributes money into investments in our economy so that our resources are more efficiently organized to maximize productivity. Complex financial instruments are used to distribute risk and allow creators of goods and services to protect themselves against risks which would otherwise potentially destroy their ability to provide those goods and services.
The problem is that I believe each of the above statements are true at least to some extent. What I don't know is the percentage to assign to each category or to some new category in between these two polar opposites of categories of results. In particular, I do not how mathematical financial engineering is distributed among these categories in terms of effective output.
If the best and brightest are being hired merely to create profit for the few and have no positive impact on the wealth of the many, then I believe that is wrong and I cannot see justification for this as a moral good. I cannot see any essential difference between this and successful recruitment efforts by the Mafia for new well paid enforcers. An enforcers job might be fun, have good comradeship, work with the "best", and be well paid, but it still does not make it a morally acceptable choice of occupation.
So for me, the key question is whether the mathematically complex part of finance is actually performing in the way capitalism is intended to perform or are the complex algorithms used to better enable parasites to enrich themselves at the expense of the larger body politic. Factual information on this is actually somewhat hard to come by. Certainly I have seen a lot of claims about CDOs, risky mortgages, investment pools, arbitrage and the root causes of recent failures. But when I try to dig a little further, real information based on real data is quite hard to find.
I'll give an example. One typical trick for extracting unfair money from others is to design an investment that pays better than average as long as a seemingly unlikely event does not occur. You get others to put money into the investment by lying or disguising the true risks about whether the event will occur. You then take a portion of the money that investment as your own (as a "fee") and then create a complex derivative to bet against the investment by buying "insurance that pays off if the event occurs". How much of the profit made by financial companies is made from tricks of this sort?
In particular, what percentage of the recent instability was caused by CDOs that packaged risky mortgages and how well did some of the principal players understand the true nature of the risk? Again, I can get vociferously stated opinions on this but I am finding it hard to find real fact. However, in defense of the financial industry, it seems very few were aware of the true risks of the mortgages and many of them lost considerable money (maybe not as much as they should have) after the crisis. But there were some who knew what was going on and many (even though ignorant about what was truly going on) who profited while the times were good who did not suffer proportionally when things went bad (the "private profit" and "socialized risk" that a couple of posters alluded to).
I do have one more thing to say. There is an old saying, "Democracy is the very worst form of government with the exception of all others". I have a similar opinion about capitalism. Capitalism is prone to "bubbles" that grow and burst and this seems to be inherent in its nature. When seen this way, the recent mortgage crisis can be seen as just another one of those "bubbles" and it is not clear to me that the finance industry really deserves the blame that is heaped upon them. It feels a bit to me as if they are being used as scapegoats for what is otherwise a fairly predictable phenomenon. Of course, many in the financial industry like to claim that they are smarter and wiser and know how to protect your investments against such risks and for that they should be culpable when they are proven wrong.