More evidence Australia’s financial sector is killing growth

By Leith van Onselen

More and more studies are coming to the conclusion that having a large financial sector is actually productivity destroying for an economy and slows its growth.

Last month, the International Monetary Fund (IMF) released a report concluding that the larger a country’s financial sector, the bigger its drain on total factor productivity and the greater the risk of economic and financial stability:

ScreenHunter_7773 Jun. 15 12.25

…the effect of financial development on economic growth is bell-shaped: it weakens at higher levels of financial development. This weakening effect stems from financial deepening, rather than from greater access or higher efficiency. The empirical evidence also suggests that this weakening effect reflects primarily the impact of financial deepening on total factor productivity growth, rather than on capital accumulation.

ScreenHunter_7774 Jun. 15 12.25

When it proceeds too fast, deepening financial institutions can lead to economic and financial instability. It encourages greater risk-taking and high leverage, if poorly regulated and supervised. In other words, when it comes to financial deepening, there are speed limits…

In other words, there is very little or no conflict between promoting financial stability and financial development. Better regulation is what promotes financial stability and development.

This study was followed by research released earlier this month from economists Stephen Cecchetti and Enisse Kharroubi, who concluded that faster growth in finance is bad for real economic growth. From Business Spectator’s Callam Pickering:

This is readily apparent between 1980 and 2009 — a period in which employment within the financial sector across a range of advanced economies rose at an unprecedented pace. A quick comparison between employment growth in the financial sector and real GDP per worker growth shows a clear downward trend.

ScreenHunter_7770 Jun. 15 12.19

The result might surprise some readers. A more developed financial system is supposed to reduce transaction costs, while complicated derivative products were supposed to reduce risk and largely eliminate the business cycle.

But the financial sector competes with other sectors of the economy for resources. It competes for physical capital — such as land and buildings — but also for skilled workers. There is a generation of Americans, Europeans and Australians who have decided to become investment bankers rather than teachers, scientists, or even entrepreneurs.

Yesterday, the OECD entered the fray, releasing a new report arguing that the bloated banking systems in most developed countries are sucking growth out of their economies as well as increasing inequality. The ABC’s Michael Janda has summarised the results:

“The empirical analysis documents a link from financial deregulation, measured by an aggregate indicator, to credit expansion and slower growth,” the report found.

“The data indicate that credit intermediaries may have developed in most OECD countries to a point where further expansion is at the margin associated with slower long-term economic growth and greater economic inequality”.

…when loans exceed around 60 per cent of gross domestic product (a key measure of an economy’s output) then further lending actually dents long-term growth.

“An increase from 100 to 110 per cent of GDP is linked to a 0.25 percentage point reduction in economic growth,” the OECD observed.

Janda notes that the results are bad news for Australia:

According to the latest Reserve Bank data, released earlier this month, Australia’s credit to nominal GDP ratio is above 140 per cent, putting it off the scale of the OECD’s chart…

That implies that the nation loses about a third of a percentage point of economic growth due to its bloated banking sector and excessive debt levels.

There is even worse news for Australia, where it is a surge in lending to households that has driven credit higher…

“The data show that households’ borrowing has a negative marginal link with growth that is twice as large as firms’,” the report noted.

That means Australia could be losing even more economic growth due to the banking system’s overwhelming reliance on home loans…

Moreover, bloated financial sectors worsen inequality:

Financial sector workers have been found to earn a premium over workers in other industries with similar levels of education and experience.

That disparity is also believed to be one of the reasons why a larger financial sector actually inhibits economic growth.

“High wages can draw the most talented workers into the financial sector where they may not contribute as much to economic growth as compared to jobs in sectors with greater potential for productive innovation,” the OECD report hypothesised.

I won’t go over the many reasons why I agree that Australia’s bloated financial system is killing the productive economy, since these were explained in detail in Monday’s post.

All I will say is that Australia’s financial sector has more than doubled its share of the Australian economy since the mid-1980s:

ScreenHunter_7876 Jun. 19 06.55

Meanwhile, it has channeled lending away from productive business into unproductive houses (mostly pre-existing):

ScreenHunter_7637 Jun. 04 17.30

You can join the dots on that.

[email protected]

Unconventional Economist
Latest posts by Unconventional Economist (see all)

Comments

  1. Good God man. You’re not actually suggesting an economy is better off with people who create wealth rather than just shift it?
    What radical thoughts will you conjure next? The Law has little to do with justice, or perhaps we have too many levels of Government?
    Move along sonny, and let us get back to the serious business of our bonuses.

  2. “that the larger a country’s financial sector, the bigger its drain on total factor productivity and the greater the risk of economic and financial stability:”
    Not too sure why a body such as the IMF needs to spend a lot of money to conclude this. However I guess most of the economy is now the financial sector and its various tentacles so there would be no recognition of this by anyone in any position of influence.
    Again as per my post http://www.macrobusiness.com.au/2015/06/regional-cities-jobs-divide-widens/ this is now virtually impossible to reverse. Any decline in the financial will cause massive dislocation in the cities and this will not be tolerated electorally.

  3. ““The empirical analysis documents a link from financial deregulation, measured by an aggregate indicator, to credit expansion and slower growth,” the report found.”

    Hoocoodanode???????? This was all predicted, in black and white, when this whole financial deregulation and FFFFFEFR was first mooted.

  4. The AUD US78¢ plus and the latest figures show very many companies are planning to cut investment in the coming year despite record-low rates. “Guru”Glenn Stevens has reservations about how much lowering interest rates could be expected to do to boost growth.
    Some advice for the Guru who regularly collects his tax payer funded salary, Business has no faith in the long term (1 Year) prospects of our politicians and system of governance.
    With Shorten likely to die from a thousand cuts and Abbott to be knifed, in the next year, anything could occur to threaten the prosperity of a business.
    The other advisory groups tell us that technology will put 5 million workers on the footpath in the next 10 years, that it 5million consumers who will go broke. (round figures is half a mill a year to be made redundant, starting now.)
    So the business theme is: unless you absolutely need (have a death wish) to run a day to day business, stay on the beach as the surf is too dangerous.

    • Tassie TomMEMBER

      “With Shorten likely to die from a thousand cuts and Abbott to be knifed, in the next year”

      Oh please be right!

    • Its not like people have not been banging on about this for sometime, yet even just as of 2014.

      Profits Without Prosperity From the September 2014 Issue Harvard Business Review

      “Five years after the official end of the Great Recession, corporate profits are high, and the stock market is booming. Yet most Americans are not sharing in the recovery. While the top 0.1% of income recipients—which include most of the highest-ranking corporate executives—reap almost all the income gains, good jobs keep disappearing, and new employment opportunities tend to be insecure and underpaid. Corporate profitability is not translating into widespread economic prosperity.

      The allocation of corporate profits to stock buybacks deserves much of the blame. Consider the 449 companies in the S&P 500 index that were publicly listed from 2003 through 2012. During that period those companies used 54% of their earnings—a total of $2.4 trillion—to buy back their own stock, almost all through purchases on the open market. Dividends absorbed an additional 37% of their earnings. That left very little for investments in productive capabilities or higher incomes for employees.

      The buyback wave has gotten so big, in fact, that even shareholders—the presumed beneficiaries of all this corporate largesse—are getting worried. “It concerns us that, in the wake of the financial crisis, many companies have shied away from investing in the future growth of their companies,” Laurence Fink, the chairman and CEO of BlackRock, the world’s largest asset manager, wrote in an open letter to corporate America in March. “Too many companies have cut capital expenditure and even increased debt to boost dividends and increase share buybacks.”

      Why are such massive resources being devoted to stock repurchases? Corporate executives give several reasons, which I will discuss later. But none of them has close to the explanatory power of this simple truth: Stock-based instruments make up the majority of their pay, and in the short term buybacks drive up stock prices. In 2012 the 500 highest-paid executives named in proxy statements of U.S. public companies received, on average, $30.3 million each; 42% of their compensation came from stock options and 41% from stock awards. By increasing the demand for a company’s shares, open-market buybacks automatically lift its stock price, even if only temporarily, and can enable the company to hit quarterly earnings per share (EPS) targets.

      As a result, the very people we rely on to make investments in the productive capabilities that will increase our shared prosperity are instead devoting most of their companies’ profits to uses that will increase their own prosperity—with unsurprising results. Even when adjusted for inflation, the compensation of top U.S. executives has doubled or tripled since the first half of the 1990s, when it was already widely viewed as excessive. Meanwhile, overall U.S. economic performance has faltered.

      If the U.S. is to achieve growth that distributes income equitably and provides stable employment, government and business leaders must take steps to bring both stock buybacks and executive pay under control. The nation’s economic health depends on it.
      From Value Creation to Value Extraction

      For three decades I’ve been studying how the resource allocation decisions of major U.S. corporations influence the relationship between value creation and value extraction, and how that relationship affects the U.S. economy. From the end of World War II until the late 1970s, a retain-and-reinvest approach to resource allocation prevailed at major U.S. corporations. They retained earnings and reinvested them in increasing their capabilities, first and foremost in the employees who helped make firms more competitive. They provided workers with higher incomes and greater job security, thus contributing to equitable, stable economic growth—what I call “sustainable prosperity.”

      https://hbr.org/2014/09/profits-without-prosperity

      Skippy… all roads lead to Chicago…

  5. moderate mouse

    As NAB like to say……a boat in the harbour is safe, but five investment properties is safest.

  6. notsofastMEMBER

    I can’t see what the problem is with people understanding Australia’s economic predicament. If you have a country that takes away its macroprudential controls on leading for its big four banks, opens up the foreign capital accounts for the big four banks to allow them to lend at will from overseas, create highly favourable treatment for investment in housing and then say to the big four banks go ahead compete its not rocket science to work out what is going to happen?

    The countries banks are going to commence a battle for market share by reducing Loan to Valuation Ratios and increasing Debt Repayment to Income ratios of housing loans and housing investment loans and creating asset inflation in housing prices. Not only this but investment in housing is going to squeeze out investments in other productive areas in the economy as banks preferentially lend to housing investment instead of investing in those other productive areas. But the best thing about this approach is that for the foreign investors who lend to our big four banks is that their loans are effectively Australia Government Guaranteed.

    Everybody thought that Howard and Costello were economic messiahs with the economic prosperity they created but it was all a hoax. It was all based on money from constantly rising household debt being pumped into the economy, money largely borrowed from overseas and money that will need to be repaid at some point in the future.

    • It also can be attributed to the Plaza accord where the shadow sector was unleashed, which actually created a scenario where traditional banking lost its classic business model and sent seeking profits in the RE sector. But yeah… more competition is always better trope… lower prices mate…

      Skippy…. then just as the feeding frenzy starts… remove all the safety gear and features… jump in the water… its fine…

    • As Charlie Munger says:
      “A banker who is allowed to borrow money at X and loan it out at X plus Y will just go crazy and do too much of it if the civilization doesn’t have rules that prevent it.”
      … and …
      “It will be politically hard to remove from the system the evil and folly that helped create the mess, because the people who make a lot of money out of the system as it is have a lot of political power and they don’t want it changed.”
      With age comes wisdom.

      • Boom and collapse cannot be effectively legislated away. It is part of the human psyche to behave thus.

        Collapse has been delayed this time, through various forms of subterfuge and legerdemain, but it cannot be forestalled indefinitely.

      • R2M,

        What your going all esoteric too? Boom Bust has to be the most reductive over simplistic bit of narrative our species has ever concocted. I lends straight to the foundation of deregulation free market memes.

        Skippy…. the truisms are just so awful… next thing you know your going to be a rapture’ista.

  7. Its not a satisfactory answer – and doesn’t make sense. It does in one respect that if an industry pays more, people will be attracted to it… e.g. the number of geology and mining engineering graduates who will never get a job in that industry.

    But… Germans productivity has not increased over a decade, despite generous economic growth in manufacturing, record profitability – with exports making up 50% of GDP. Similarly in France, much of Europe and even the US – productivity has not increased and it has nothing to do with the finance industry. Many of those countries simply do not have a strong financial sector!

    As always it comes down to demographics and the stage of development with the country involved. Yes you would expect Poland to be more productive than Germany because its catching up economically – Ghana has a large mining industry and not much else – so its going to be poor. Japan has always been productive – but increasingly with fewer workers and now has a massive retirement funding problem.

    I am not disputing the productivity claims – just the reasons stated. And blaming the financial sector is bogus – and far to simplistic. Australia would do well to continue to develop a world class banking system – but as I have argued many, many times before, not at expense of its manufacturing or agriculture sectors. But with a strong AUD – not sure what you can do on that front. The RBA would go bust trying to lower it (aka Switzerland). And after all, we are a free trading country. We will always do well, or better than most because of it…

    • moderate mouse

      “Ghana has a large mining industry and not much else – so its going to be poor.”

      Sounds familiar. Oh wait, we have the cafe industry as well….so we’ll be fine.

    • “We will always do well, or better than most because of it…”

      With a chronic and high CAD that has now been running almost continuously for 60 years ?
      That has resulted in the sale of nearly all our natural assets and strategic businesses to foreigners to finance?
      How can you claim ‘we will always do well’? What happens when we finally run out of mines, farms and businesses to sell to finance this madness?

    • Even StevenMEMBER

      RBA would only go bust if trying to shore up the AUD – they have unlimited capacity to lower it. They simply print AUD, sell it on FX market and you’re done.

      • Steven -All that printed money just ends up back here buying our assets. So what we would end up with as a result would be more assets sold to foreigners and a fair dose of inflation. Printing money is no solution to anything.

      • Flawse,

        Come on now its not printed, its denominated in RN, private is not to be confused with HPM.

        Skippy… accuracy about this is paramount as it leads to policy choices, bad optics is as bad as being blind.

      • The printing money meme is a throw back to hard monies, as that is inaccurate, so is your concept of its international flows e.g. our money coming back to by stuff as well as your belief on inflation.

        Skippy…. if you can’t get the monetary system architecture right then all your optics are going to be off and that means your entire observation is inaccurate, which means your concept of policy’s to address issues is not on sound footing. You either leave stuff off the table or make choices on based on erroneous beliefs.

    • Researchtime,

      Just look at the comment I posted above wrt the HBR article, look at where productivity and wages diverged and countenance that by the increasing disparity in the economic divisions between the upper quintiles and those below.

      Skippy…. Its not rocket science….

      • Yes – were are going to have cycles – ups and downs… and the poor will always be with us, and we have to counter that some how -but this is a great country with great people. An idiot could run this country – and we would still be OK. The vast majority of us will still have roofs over heads – and full belly’s. Life is not all about money (although having some is a good thing). We are still a great nation – and our future is bright – and we will become greater still! I truly believe that. In a hundred years time – touch wood, Australia will still be the number one country people will want to come to.

        That is not to say that our living standard will not fall over the next decade – it will, and its a given. But again, thats life, and there is realistically nothing we can do about it – in life we all have cycles, wheels within wheels. And then we are gone and it doesn’t matter anymore…

      • We are not having a cycle – if it is it is 60 years long and still headed downwards at an accelerating pace

      • Good grief Resuarchtime,

        Are you going to trot out that AET – Miltion et al trope of boom bust aka old testament businesses cycle hand waving shtick.

        Skippy… theological research… is that how you spend your time?

      • @rt,

        An idiot actually is running this country, and to me looks like we are a very long way from okay.

        In the meantime. potentially we were the number one country that people wanted to come to briefly at the height of the mining boom, but the crown is slipping or has already fallen off.

    • “I am not disputing the productivity claims – just the reasons stated. And blaming the financial sector is bogus – and far to simplistic”

      It fit’s the data.

  8. In the second last graph you can almost spot the moment Keating deregulated the financial sector, there is real step change followed by relentless growth, that shows no sign of abating. We might want to do something about that….

  9. I spent 30 years in High Tech making a great living, having a lot of fun and taking a lot of risks but to be honest that game has run it’s course there’s just not the rewards there used to be, Risks = Yes Rewards=No . So today I have a good paying job stealing quarters from pension funds. I used to tell myself I was inventing / trading / leveraging financial instruments………truth is I steal quarters, the most embarrassing part of the job is explaining to the victims of my crime just how I organized for their money to fall into my pocket. You see theses clients have absolutely no morals, they want to invest along side me and deploy my methods to steal someone else’s quarters. So I patiently explain the details and watch as their eyes glaze over if I’m in a particularly evil mood I make a point of solving several complex non-linear equations, before returning to the real world where little $ signs morph into big $$$ signs. At this point they’re salivating so bad they’ll agree to T&C’s that only a moron would accept, Needless to say I neglect to inform them that the real serious money actually comes from roping in another clueless client.
    And they call themselves the masters of the universe

      • That letter is a great find. For example, I liked this bit a lot:

        “The low hanging fruit, i.e. idiots whose parents paid for prep school, Yale, and then the Harvard MBA, was there for the taking. These people who were (often) truly not worthy of the education they received (or supposedly received) rose to the top of companies such as AIG, Bear Stearns and Lehman Brothers and all levels of our government. All of this behavior supporting the Aristocracy, only ended up making it easier for me to find people stupid enough to take the other side of my trades.”

        If only there was some kind of way that Australians could apply this logic to CCP Princelings…

      • Per the Andrew Lahde ( Lahde Capital) link.

        “Since Thomas Jefferson and Adam Smith passed, I would argue that there has been a dearth of worthy philosophers in this country, at least ones focused on improving government. Capitalism worked for two hundred years, but times change, and systems become corrupt”

        They guy is so historically incorrect its a wonder he got a degree in the first place, oh yeah, the dumbing down of America has been ongoing for some decades. Not to mention his narcissistic apologia on fleecing others for fun and profit FU everyone I’m off to st barts and corruption shezzz does he own a mirror?

        Thomas Jefferson was a 16th century landed gentry individual that owned slaves and used his nail shack as behavioral modifier – filter to ascertain who should work in the fields, manage them or house pets. Me bragged about getting 6% interest on owning human beings which cover the costs of running his lavish house party’s [networking tool] and general overhead. That’s not to mention his arbitrary editing of his Jefferson Bible, which left the bits on the floor that troubled his mind. This is not to forget that the contextualized sociological reality at the time was the Judaic Christian social ethos of its day, quite barbaric for everyone save the wealthy landed gentry. Hell most of his ilk left England as everything was already owned and it was next to impossible to gain entry into the markets, loss of social status, marring rights, et al. So they had to evict the inhabitants by any means possible to access cheap virgin resources to export back to Europe.

        Adam Smiths invisible hand a priori is a precursor to the whole atomized society of “self interests” all net out to some ridiculous notion of equilibrium being a “natural” force which some how is likened to an all knowing supernatural influences how human beings lives since the start of time.

        Not only that but he makes a completely makes dogs breakfast of this ” Capitalism worked for two hundred years, but times change, and systems become corrupt”

        He uses Capitalism in the monolithic sense when its multifaceted, completely white washes 200 years of all kinds of huge failures interspersed with brief moments of fleeting peace or social uplift – justice and completely ignores periods of absolute endemic corruption.

        Seriously does this exceedingly high scale sociopath think people in the 16th century were well informed when engaging in their attempts divine truth solely though reductive thought exercises, like some prophet spinning mythology?

        Skippy…. and to top it off now he’s taking his loot off the table because post boom capitalism is to hard, yet during the peak fraud period it was great! You can’t make this shit up~~~ Life imitating art thingy…

      • Maybe if we’re lucky Rusty will come over and give Skippy another spanking, this time RP needs to use a little force ’cause I want to see those fat little intellectual cheeks glow in the dark,

      • Glibertarian banter should not be confused with refuting historical facts, tho its a common knee jerk when confronted with the aforementioned, sometimes foot chewing as a dessert.

    • You want to see peoples eyes glaze over, I brought back to civilisation some gold samples, visible gold in iron stone (that will put you within a coupla hundred k’s) probably 50 to 100g/ton. ) people’s eyes glazed over, funding was no problem, as much as i needed, except from the Chinese, who all they wanted to know was what about the US presence in Darwin. The US has them bluffed. WW

    • I am often struck by how uninterested in investment using their own money (of any kind) professional mathematicians and statisticians appear to be, even when their research/ professional interests involve investment strategies i.e. RE agents always seem to have a couple of IPs, but when I run into statisticians who have published on modelling (insert investment vehicle here) returns, they seldom seem to have put their own money in.

      • drsmithyMEMBER

        I am often struck by how uninterested in investment using their own money (of any kind) professional mathematicians and statisticians appear to be, even when their research/ professional interests involve investment strategies i.e. RE agents always seem to have a couple of IPs, but when I run into statisticians who have published on modelling (insert investment vehicle here) returns, they seldom seem to have put their own money in.

        Same reason lots of people who are really good at something work for someone else rather than run their own business (and conversely why lots of people running business haven’t got a fucking clue how actually works).

    • My point was not self congratulation but simply to point out that this is what has become of our Finance industry where my greedy and morally bankrupt betters are getting @#$%ed over by financially illiterate engineers, that should be doing useful work, but unfortunately can’t raise the necessary capital. It’s stupidity to a higher order yet this is 21st century reality, it makes no sense, absolutely no sense.
      I rationalize my participation in the game by simply reminding myself that excess capital (so called savings) must be destroyed before economic value will return to productive enterprises, so I’m doing my very best to destroy peoples savings and profiting from the process. How @#$%ed up is that!

      • CB, if you know some engineers with any good ideas, have them run their story by me.
        BTW, I ran some notes on why Carnegie Ceto wave technology will not make it. now I see Stonehenge ASX:SHE, is going to put in a number of buoys at Two Rocks. If the Ceto technology is so good how come SHE is not using it. (those comments have disappeared from here)
        I have a worlds leading technology for the use of waves right here on the Gold Coast. It will re-set the benchmarks.WW

      • SupernovaMEMBER

        To the Aussie government your not @#$%ed at all…….so long as you continue helping to pay the Boomers Medicare bill

      • @Supernova

        Yes kill the boomers because da market said… Die.

        Skippy… vulgar libertarians are the worst.

      • @WW it’s all a matter of generation cost per Kwh, during power peaking events and hook-up costs.
        I’d say wave power is a looser on all three counts.
        If you want the absolute lowest generation cost than co-locating generation near a coal mine is almost impossible to beat it’s why the Latrobe valley power is so cheap to produce, nothing but NOTHING will ever change this. For all other power sources their value is a function of location and availability during peaks.
        PV solar + storage is high value because it is distributed and co-located with the residential load (the most expensive end of the grid). Location therefore creates value in residential electricity generation because it enables the owner / operator to bypass the monopoly sections of the grid distribution networks.
        I’ve seen plenty of PV projections especially for the low cost thin film technologies that will have PV systems installed on residential roof’s for under 30c/W. this translates to an electricity generation cost of under $0.05/kwh. If you honestly believe that Wave power can get anywhere near this cost then go-for-it, mind you this 5c cost feeds into the section of the grid that pays upward of 30c/Kwh for power. Wave power feeds the wholesale end of the grid where you’ll be lucky to get 3c/kwh especially if you cant guarantee availability.

      • notsofastMEMBER

        What is so galling is that in terms robotics and automation we are now entering a period of change that, when we look back, I think will only be comparable to the 18th and 19th century Agrarian Revolution and changes in manufacturing that occurred in the early 20th century with the introduction of the assembly line. Australia has many of the attributes needed to succeed in this changing world. But the biggest problem I see for Australia is that our banks and much our financial system are full of people who really only know how to assess loans to the property market. The Australian Banks got rid of the people with the complex set of skills needed to make loan assessments for businesses and particularly manufacturing businesses because that wasn’t the area the banks were interested in.

      • Oh come-on Skipy, you know that come the day those invitations to Galt’s Gulch will be in real short supply you don’t want your name on any black lists
        Better life with a Vulgar Libertarian than death with a Chardonnay neo- Keynesian

      • No CB I don’t – emphatically.

        Neo Keynesians are just a Bernays marketing tool to re brand neoclassicalism which in turn is just an extenuation of AET which has its roots in St Augustine, on to PIE.

        I am post Keynesian only in the sense of the syntax and dialect used to discuss these sociopolitical matters, other wise its Royal science followed by forensic anthropology, psychology and intellectualism. MMT wrt monetary reality.

        Skippy… I don’t do belief systems isms or ologys as its like trying to concoct a theory of everything out of whole cloth in a vacuum, its absurd. Even Einstein died on his bed scribbling proofs, trying to discribe everything as – he thought – that is what the creator would do, because it would be eloquent.

      • CB, I’m not using wave motion to generate electricity, something many times more lucrative than that.
        Wave energy is too unreliable for our (Australian location) you will know what is it in good time,Truly a world first.
        But like I said, in looking at Carnegie’s Ceto techology, all they are doing is wasting money. Yours, mine and the shareholders. WW

  10. And on cue…

    The American Dream is in trouble. And Paul Volcker knows a big reason why.

    The former chairman of the Federal Reserve says the financial world has gotten “bigger than its britches.” Attempts to regulate the industry have failed, he says, and the pay of financial executives has gone way up.

    “I wasn’t born yesterday,” Volcker told CNNMoney’s Christine Romans. Since World War II, he said he has seen “20 different substantial efforts to reform the regulatory system. None of them have moved the needle.”

    While the financial industry has become bigger and more complex, Volcker thinks we have to ask: “How much has that actually contributed to the growth and productivity of the economy?”

    http://money.cnn.com/2015/06/18/news/economy/paul-volcker-bleak-view-on-equality/index.html?

  11. KlimashkinaSydney

    More and more studies, I love it. It’s like those captain obvious studies on health: exercising makes you fitter.

    My view of the world is too simplistic, but in a market economy I always though finance was about finding the right place to allocate scarce resources. When devote more resources to the job of allocation, you end up with fewer resources to allocate overall.

  12. I don’t know if the IMF and other analysts have noted that one factor behind the “growth of finance”, is distortions in urban land markets that lead to a necessity to pay much more for land and space. I would say that is 90% of the problem in Australia.

    I don’t know if the finance sector is actively involved in vested-interest activism with politicians behind the scenes, to have these distortions maintained (or even created in the first place). I think the initial conspirators are in “big property” rather than “big finance” – and it does not require a conspiracy of many property owners at all. The potential capital gains for just one large property investor makes it worth their while to fund a lot of activism. I have long noted that every second “study” advocating urban growth containment and conservation of land, has money backing it from George Soros and/or the Rockefellers. Are these people involved in property investment at all, and are they clever enough to have joined dots and know what is in their own interests? In contrast to academics and bureaucrats who are meant to be the experts, but have no track record at making squillions from their knowledge….

    • Groan…. the growth in finance was due to lobbying efforts in the first order of acts, not driven by bloody land valuations. Land valuations are a result of deregulation of the financial sector over decades.

      Skippy…. just look at the S&L debacle in Dallas as a microcosm wrt to wildly distorted RE.

      • just look at the S&L debacle in Dallas
        Little bit before my time BUT didn’t excessive RE values due to the Oil boom of the late 70’s create the financial distortions that led to the S&L collapse, sure there were plenty of people with their fingers in the cookie jar helping to re-direct wealth into their own pockets but without the Texas RE boom there would have been no way to justify the silliness.

      • CB, the real price of oil shot up in 1979 and peaked sharply in 1980 and then declined very rapidly in the early 80s before stabilising and the S & L crisis happened took off in 86 and snowballed into the early 90s. Perhaps there’s something in what you’re saying but from the little I know it was the financial deregulations of Ronald Reagan’s first administration that were fingered as the main culprit of that financial debacle.

      • China-Bob,

        Familiarize your self with the head investigating prosecutor Bill Blacks works, and no it was not attributed to anything but Control Fraud. It was not the market pushing from one sector to another or boom and bust.

        Skippy… the Keating Five FFS, your either obfuscating or playing dumb. Anyone with a modicum of education or experience knows this, its common knowlage. Hell it almost ended John McCains political career and over a thousand went to jail.

  13. When you can print wealth and have idiots accepting those slave certificates, why would you ever want to do some actual work?

    • You can’t print wealth, no one can, money is neither a commodity nor wealth, its unrealized price.