Turning bankers to engineers in a generation

Ok so I warned you that I will have some non-infosec postings on this blog, this is one of those: how do we fix this situation where most of the talent wants to be bankers to make the money and a lot lower percentage of truly gifted people want to be an engineers, scientists and entrepreneurs - you know those people that actually contribute to advancing the world?

Here is how...


Ok so just some background on me (so you can call me biased or hypocritical - but please do it in the comments so I can reply): I work in information security (a science/technology) field, I don't actually produce anything either (although I am working some new applications for the iPhone and Android), but I do advice companies on how to secure their systems. If I do my job well I add to some social good by increasing public trust in the internet and technology. This is by reducing the transaction costs which result from security incidents and the fear of security incidents. Well that's what I tell myself anyway :), in reality I have just found niche that gives my family and I a good lifestyle, doing work that I enjoy and with people I generally like.

I am also not rich, I'm comfortable but firmly in the middle class, I hope to be in the new rich, but I have yet to launch my muse. The importance of this is that I of course am jealous of the people I will criticize (maybe not jealous of the hours they work or their personal relationships) but jealous of their money. So this will of course colour my argument. As I said above I am also not a model for how to fix this but hopefully I am not as bad a who I write about, I also have some ideas on how to fix the problem but I am not running for office to do this myself but I will send the link to this to my elected official in the hope they listen.

I also have nothing against capitalism, however as I detailed in my security ROI article,  I believe that that the only role of government is to minimize social negative externalities and maximise social positive externalities that would otherwise result in market failure. I do also believe that this cannot be fixed in less than a generation, but I have always believed that just because it is a hard problem does not mean you cannot take the first steps to improve it: "think strategic act tactical". All it that it takes is the political will (which I think there is now) and some positive first steps.

What is the current state in 2010?

The perception firmly is that what job / industry do you go into if you want to make an absolute "£$%^&23" of money? At the moment there is only one:  Banking / Finance. The perception is that there is just no other job on earth that can make you the same amount of money for the time invested (tROI - Return On Time Invested). The only exception is of course scalable professions (i.e. sports, acting, publishing etc. but those are actually a lot harder to get into and have a lot higher failure rate and most people know this).

If you are good at maths, have decent people skills, are male, tall, and good looking or just good looking if you are female, aggressive, want to make as much money as possible in as short time as possible, want the lifestyle that money gets you (i.e. trophy wife/husband, sex, travel, cars, fancy houses etc.) then look no further than the Banking / Financial service industry. Ideally as a trader, sales, portfolio/funds management, investment banking, anything in front office etc. If you are currently in College/University and fit the above criteria your only choice is the above job. If you are in High School and you fit the above criteria your only choice is to do an engineering/maths/finance degree and then work in the above. If you are a parent/guidance councillor and you want to guarantee your child is in the best possible financial situation (and looks after you in your old age - if you are that naive), then directing them to the above path is what you want to do. If you don't believe just Google trader salaries/bonuses, my friend an Investment Banker bought his first Austin Martin (imported of course) for cash from just his first year bonus.

So what is the problem?

The problem with this situation is that a lot of the talented people that could have invented or done something that really benefited society are becoming bankers.

This is not a good thing for humanity - it means that the inventors, innovators, builders, engineers, scientists are instead being channelled into something that does absolutely nothing for society. I don't buy the argument that bankers provide funds that drive venture capital and IPO's, they do that but there is a far greater proportion of the industry that simply speculates and moves money around. It is absolutely nothing more than high stakes gambling with other people’s money. And before hedge funds existed (such an iconic name for highly leveraged funds), individuals and corporation were able to get money to commercialize their ideas and drive society forward. What has happened in the last 30-40 years is purely greed.

The current banking and financial services industries are an evil and bigger threat for society than drugs, prostitution, terrorism, poverty and hunger combined. Ok slight exaggeration but you get the idea

It assists to turn the world into more of a consumption rather than production driven economy. This is not sustainable - to advance we must produce and save more than we consume. That is the only way the world continues, the environment survives and inflation (which is the single biggest threat to all economies) remains within acceptably levels globally. What America has done (borrow Chinese money to buy goods from China - effectively selling IOU's to buy consumer goods and services and print money to pay them back, using FUD to keep the Chinese YUAN from increasing) is not a sustainable model. It eventually has to fail - this is an accepted fact in most of the industry, this is why the US $ has resumed its 25 year decline, why long term US treasuries are at record highs and why the market is still really worried about the US deficits.

Why is this the time to fix this?

First things first - there is no easy overnight fix to this situation. There are more people that have a vested interest in allowing this to continue than there are oil companies that want to keep down alternative energy or portfolio managers and traders that don't want to believe in power laws. There is an immense political and financial lobby that will use Fear Uncertainty and Doubt (FUD) to stop this. It will also take at least a generation (30 years plus) to improve this but we badly need to take the first steps.

However this is a great time to do something about this situation. Why? We have a perfect storm and are in a far better place than any other time in the last 10 years due to the financial crisis. There is now a major incident and thus the political will and capital to do something about this. In the UK the FSA is being reformed, the US has just passed their first part of the financial reforms bill and fined Goldman Sachs $500Million, Australia is on the brink of an election and hopefully the emerging markets of China, India, Latin America and Africa will learn their lessons of the western countries. Japan has never had this problem due to their culture and heroes (they have a many other problems just not this one).

What is the vision and objectives?

The vision is a world where:
    Engineers, scientists, entrepreneurs, innovators, inventors are the highest paid industries / jobs The majority kids growing up wants to do one of these jobs The world on population based weighted average has environmentally sustainable economic growth of 3-4%, inflation at 1-2% (or lower), employment at 5-6% and the world reserve currency or is a basket (e.g. SDR's) rather than a single currency (ideally backed by gold or lithium)
How do we get there?

What practical steps can we take to start the journey? What do we need to do?

Government incentives (the carrot) - encourage the positive social externality and correct market failure:
    Incentives to the right business:
      The government will pay 75% of the first year salary (market benchmarked and CPI indexed) to any business that hires engineering graduates, 50% of the second year salary and 25% of the third year salary as long as the business produces a tangible product or an exportable service The government will pay 30% of the first year salary (market benchmarked and CPI indexed) to any business that hires science, maths and business graduates, 20% of the second year salary and 10% of the third year salary as long as the business produces a tangible product or an exportable service
    Incentives to students:
      The government will pay the price your entire University / College undergraduate and post graduate degree in engineering as long as you work for a company that produces a tangible product or an exportable service in your first 5 years after you graduate (if you don't - you pay the money back) The government will pay 50% of the price your entire University / College undergraduate and post graduate degree in science, maths and business as long as you work for a company that produces a tangible product or an exportable service in your first 5 years after you graduate (if you don't you pay the money back)
    Incentives for innovation and entrepreneurial initiatives:
      300% tax rebate for Research and Development expenditure for business in their first 5 years of operation that  produces a tangible product or an exportable service 300% tax rebate for cost of commercializing anything developed/invented first in a University for any business that  produces a tangible product or an exportable service Governess will guarantee creditors and angel investors unto a maximum of £100k ($150k US) for any new business where the directors have has had 3 or less bankruptcies for a business failure within the first 5 years of operation for any business that  produces a tangible product or an exportable service
    Incentives to students and schools:
      In the final 3 years of high school all students must sit an independent government administered test on Maths at the relevant international standard for the year level (test approved and overseen by a reputable independent government body). A pass mark of 80% is required or the test has to be resat. Three attempts are allowed before the student is not allowed to proceed to the next high school year. Country statistics of scores and pass rates are anonymously published internationally on the Internet All schools are required to have an entrepreneur come and talk to the entire school for a minimum 1 hour at least 4 times per year
Government taxes (the stick and how you pay for the incentives) - discourage the negative social externality and correct market failure:
    Dis-incentives to the wrong business:
      All bonuses are taxed at a 20% penalty to the maximum marginal tax rate of the individual Anti-avoidance measures are in place - if you try and get around the bonus tax (e.g. paying it in base salary, options, benefits in kind) there is an additional 20% penalty tax on the individual and the corporation The total package (base, benefits, allowances, options, average bonus) of the highest paid individual in any company cannot be higher than 300 times the lowest paid individual. Both these numbers must be published quarterly with the financial statements for public corporations All trading / speculative financial transactions and trades on a position held less than 6 months attract a 0.01% tax on the settled amount
Conclusions

I am not a policy, tax or legal expert (obviously) so these ideas probably could be improved lots and there are probably a lot better ideas and plenty of problems I have not thought of. If you have any of these please add it as a comment

5 comments:

  1. You could try run with this rubbish against me Rakks but the oil companies that fund me have too many friends in corporate finance, our FUD campaigns will bury you.

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  2. Wow, that's quite a vent. I'll write up a few replies, though I'm not sure if I'll run afoul of any word limits in a comment post ;)

    I'll start with saying that I generally agree with your premise, that is if all that mattered was making money, then generally the easiest way of going about that is going into the financial industry. So now that's on record, here comes the observations about how you make your argument.

    Firstly, there is nothing to back it up. A quick read of the Forbes rich list will show almost none of the wealthiest people in the world are actually investors (bar Warren). In fact most of the real weatlh is still coming from far less glamorous professions. It'd be interesting to see the actual stats on investment banking as compared to say the average income of a medium to high level executive in a large corporation. I suspect that they would be roughly similar. In fact I'd go so far to say that the issue with the finance sector is that the high earners are very high earners but also very flashy with it, this gives an impression that the entire industry is as successful. Averages are key here. I'd also question the statement you make about there being nothing else with a higher tROI. I can think of a number of jobs that given even LESS criteria return as much on average and in many cases have the potential of returning more. For starters there is any start up company, and I can back that up by pointing at the rich lists that are all largely made up of company founders like Microsoft, google, etc etc. Another job is the aforementioned senior management of any large company, roles that often pay huge amounts as a base and while the bonus might not be as good as investment banks on average (though retirement funds etc are another matter) they have massive amounts of benefits within the company that easily make up the financial difference. I don't think that you make a good case for your initial premise, that being that there is actually a problem in the first case or that there are no other jobs that give as good tROI. Putting aside the tROI question I think you're also missing a couple of key points.
    Firstly while many people may be motivated by money, a large percentage of the population is not, in fact I'd argue that most of Australia is more motivated by having a "good life" more then anything else. Now it's a correct statement to say that you can probably have a good life if you've got enough money, it's also fair to say that you don't have to have a LOT of money to have a good life, especially if your priorities are about spending time with family and friends doing comparatively cheap things, for example having a bbq ;) The point I'm making is that I don't think anywhere near as many people as you think are actually motivated by money, and even amoungst the percentage that are, the amount of work you'd need to do to be successful is an inhibitor (even if it does have a tROI, you still have to actually do work).
    I was going to write a bit more but I'm running out of time so I'll just touch on another aspect that I think you overlooked, that being the arts. All of your solutions, and indeed your fundamental premise around what is wrong, seems to overlook the entire branch of arts. Your solutions in particular so heavily bias the non arts that you'd probably end up marginalizing arts to the extent that it would pass out of the curriculum. Firstly I think that arts is massively important to a culture and society, and without disciplines like philosophy and the like we wouldn't even know how to measure what we think and therefore how to progress efficiently, thus having a direct tie in to thinks like your R&D. Secondly I think that again underestimate how many people simply don't care for maths / science and would prefer to pursue a career in arts, even if it means that they will be financially limited.

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  3. This comment has been removed by the author.

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  4. Appreciate your detailed feedback mate

    Just to address a few points:
    [+] The main point I wanted to make about the financial services industry is the perception that traders etc make a hell of a lot of money. This is want encourage the talented people to go to this industry e.g: http://bit.ly/9GI0tI

    [+] I agree with you that the actual pay in Financial services may not necessarily be higher than other industries (especially per hours worked): http://bit.ly/ALU5t

    But because you asked some figures on IB/Trading salaries and bonuses:
    http://bit.ly/dyWKcp
    http://bit.ly/bFvENR
    http://bit.ly/ORksq

    Remember like working on most revenue sides of the business you get most of your money as commission / bonuses for hitting targets

    [+] I have no doubt that plenty of people are not entierly motivated by money but plenty are. Again economics has shown us that where there is more money there is more talent

    [+] I have no doubt on the value of arts and I would encourage anyone who has the risk appetite to attempt a scalable profession (writing, acting etc). I see the incentives as a positive discrimination, people will still do arts but there is no positive social externality in encouraging the majority of talented people to do arts

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  5. More replies, wish I had a quote function for the comments, I'll have to fake one for you!

    Rakkhi Wrote:
    > Appreciate your detailed feedback mate

    Welcome! You wouldn't guess that I'm stuck with a browser and nothing to do right now ;)

    >Just to address a few points:
    >[+] The main point I wanted to make about the >financial services industry is the perception >that traders etc make a hell of a lot of >money. This is want encourage the talented >people to go to this industry e.g: >http://bit.ly/9GI0tI

    Aside from the fact that I can't understand your second sentence at all, I think I get the point. You did say though "how do we fix this situation where all the talent wants to be bankers to make the money and no one wants to be an engineers, scientists and entrepreneurs" and I'm saying that there is no evidence for that and in fact I'd dispute that.

    >[+] I agree with you that the actual pay in >Financial services may not necessarily be >higher than other industries (especially per >hours worked): http://bit.ly/ALU5t
    >But because you asked some figures on >IB/Trading salaries and bonuses:
    >http://bit.ly/dyWKcp
    >http://bit.ly/bFvENR
    >http://bit.ly/ORksq

    These figures prove my point, ie that traders don't make that much money, especially compared to many other roles. In fact two of the links prove how little the average trader earns. Taking the highest earning trader is not a fair reflection of the overall industry.


    >Remember like working on most revenue sides of >the business you get most of your money as >commission / bonuses for hitting targets

    Not any more in theory, with the changes to how bonus's will work. Even still though the same can be said of Sales and High level execs! We can only work with the numbers that we do have and the numbers we do have don't prove that traders earn massively more then many other professions nor is there much evidence that it is at the expense of engineers / scientists or entrepreneurs.

    >[+] I have no doubt that plenty of people are >not entierly motivated by money but plenty >are. Again economics has shown us that where >there is more money there is more talent

    I'd dispute that. Think of the largest contributions to our culture and society that come to mind. How many of them were made by people that were doing it for money or who had a lot of money. Think of the Manhattan project, think of the Renaissance, in fact every example I can think of shows that smart people are everywhere, and certainly no more prevalent where there is money then where there is none.

    >[+] I have no doubt on the value of arts and I >would encourage anyone who has the risk >appetite to attempt a scalable profession >(writing, acting etc). I see the incentives as >a positive discrimination, people will still >do arts but there is no positive social >externality in encouraging the majority of >talented people to do arts

    Getting off track, but how would you define our culture and society if not by it's arts?

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