Tuesday, September 16, 2008

Cycles, Jobs, Finance

This is going to be a bit long, I have a lot built up in my head.

What happened over this past weekend is nothing new. It occurred at the end of the 1980's. It occurred to a much lesser degree at the end of 1990's. In general its happened a few times and made these recessions. The problem is that moving forward, we as a society and country won't learn from our mistakes. We will repeat them again and again. What's crazy is that I don't think there is a single person out there that can tell us the ultimate consequence of all of these bubbles and crashes. We seem to bounce back every time and find a new place to invest dollars and create economic 'stability' for the short term. So in other words this is just another cycle. Sure, this is a simplification, telling someone in banking who has lost their job over this is not going to make them feel all warm and gooey inside.

We are also in another cycle of United States economics. The US over the course of its existence has on six occassions pushed into moves of nationalization or privatization. As it started with airport security in 2001 and followed by Fannie Mae and Freddie Mac in recent weeks, we are in a point of our cycle where our government will nationalize a few of the major businesses thus creating a more socialist view from an outside perspective. Considering we already have a Democratic House and Senate, expect a potential for more moves in this direction with higher taxes. But again, just like previous times its simply a cycle. We will recover, our balance sheets will stabilize, regulations will be put in place and privatization will occur again in the coming years (maybe a decade or two).

If additional regulation is created in Congress, then a tremendous amount of oversight for the financial industry will occur. This for starters will mean less wiggle room, which means less creativity, which in turn allows for less risk. There is going to be a lot of layoffs and downsizing in the financial securities industry to start with. Take a look at the following graph and notice the trend of the annual securities employment in this country:

[courtesy of Paul]

The increase in this field alone in the last 16 years is pushing over 40%. You can see the decrease show in 2003 from the 2000 bubble burst. How far down will it go this time around and for how long? This is also just the securities market, the entire financial industry has become too large of a part of our GDP. To date about 8.3% of our GDP is brought together by finance, this is all-time high, almost a full percentage point about the 1990 levels. Lets for a second imagine that we return to the 1990 levels of finance in our economy, that is essentially suggesting that $120B needs to be redistributed from finance in form of wages and profits into other industries. The gentlemen who wrote the article that I got this information from believes that engineering may be on the rise again. It is well known that hedge funds employ lots of PhDs. Take for example James Simmon's Renaissance Hedge Fund that has 200 employees over a third of whom are PhDs. These guys write the software programs to figure out the best times to buy into companies so they maximize their profit. Its a complex system of algorithms and quantitative mathematics that is put together by individuals with PhDs in Math and Computer Science. Do we really believe that these individuals are going to turn around and get back into basic engineering work.. I have a hard time seeing that. What you will see in the future is young graduates from MIT, CalTech, and GaTech (had to throw the plug) that will not be moved by financial engineering and find work in other facets of industry.

The article misses the point that most of the individuals that have their experience in finance (not to mention their paydays), will not get back into engineering just because thats what their degree is in. Realisitcally we can hope that moving forward more students around the country will pursue engineering as an college major and move the US back into the direction of positive growth of bachelors in engineering, since we have been on a downward slide for a few years now. This in turn will allow us to have a breadth of future IP in this country that is ready to create new technology (hopefully in the CleanTech space!).

I'm going to finish this post off with a quick recap. Finance party is over. Government regulation is back. Expect engineering degrees awarded to rise. Most important though, we are just riding another part of this crazy economic cycle, history will repeat itself in the future :)

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