Chapter 1. Too Much Cost, not Enough Value

Let me begin with this wonderful old epigram from nineteenth-century Great Britain:

Some men wrest a living from nature and with their hands; this is called work.

Some men wrest a living from those who wrest a living from nature and with their hands; this is called trade.

Some men wrest a living from those who wrest a living from those who wrest a living from nature and with their hands; this is called finance.

Even today, these strong words continue to describe the realities of the relationship between the financial system in which I've spent my entire career and the economy at large.

The rules under which our system works—which I call, after Justice Louis Brandeis, "The Relentless Rules of Humble Arithmetic"—are ironclad:

  • The gross return generated in the financial markets, minus the costs of the financial system, equals the net return actually delivered to investors.

  • Thus, as long as our financial system delivers to our investors in the aggregate whatever returns our stock and bond markets are generous enough to deliver, but only after the costs of financial intermediation are deducted (i.e., forever), the ability of our citizens to accumulate savings for retirement will continue to be seriously undermined by the enormous costs of the system itself.

  • The more the financial system takes, the less the investor makes.

  • The investor feeds at the bottom of what is today the tremendously costly food chain of investing.

The essential truth, then, that ...

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