Cross-posted from LF Economics:
The title of the article comes from a very interesting and hard-hitting paper authored by a leading mainstream economist, Luigi Zingales. He is a professor of entrepreneurship and finance at Chicago University’s School of Business, with impeccable mainstream credentials. The paper in question appeared in The Journal of Finance and can be found here.
The main argument made by Zingales is that while economies need banking and finance facilities, this sector has clearly become too large for the good of societies, with particular focus on the US. The out-of-control financial sector siphons off an ever-increasing proportion of economies’ surplus, levies odious fees and interest charges, engages in unceasing control fraud (though that term is not explicitly used), generates asset bubbles, rent-seeks, and buys off both politicians and the economics profession.
The financial sector has become bloated relative to the size of the economy:
A competitive, efficient and honest financial sector can only exist with public support. In contrast, Australia’s financial sector is the opposite, with the media revealing control frauds on a regular basis and a majority of the public in favour of a Royal Commission to investigate its many crimes. It has become a loathsome, criminal leviathan whose greed knows no bounds.
That the financial sector has made rent-seeking and the purchase of politicians into a fine art should come as no surprise. This dynamic also helps to explains why regulators often do not bother to investigate and prosecute control frauds, especially the mother of all control frauds in the mortgage market (Australia and the US). When it comes to this form of control fraud, however, the media, regulators and politicians won’t touch it if evidence demonstrates lenders are the ones orchestrating the crime, rather than borrowers and brokers (who the establishment falsely blames instead).
As of 2017Q2, the non-financial business and household sector debt to GDP ratios were 77% and 122% respectively, for a total of 199%. Globally, Australia has the 2nd-highest household debt to GDP ratio, the equal 2nd-highest household sector debt service ratio (with Denmark) and the 5th-highest household debt to income ratio.
Importantly, it is noted that not only are politicians and regulators captured, but so is the mainstream economics profession. Many high-ranking economists (i.e. thought leaders) often have many direct and indirect conflicts of interest with the financial sector they have acted as cheerleaders for. This is the case in Australia, particularly since the so-called reforms undertaken by the Hawke-Keating government in the 1980s. Not many economists are willing to investigate the dark side of the banks, which is actually mostly done by journalists instead.
It is crucial that economists do not become “simple mouthpieces of the financial industry”. Unfortunately, it is far too late for many in government, industry and academia.
In conclusion, this paper is well worth reading given it sums up nicely the problems caused by the financial sector in the neoliberal economic age and are only likely to get worse. Indeed, financial sectors in developed nations are even larger and more politically powerful than before the GFC. That a leading mainstream economist can and has openly criticised the financial sector shows it has far out-stepped its original purpose – to finance production – and has instead morphed into the equivalent of a legally-sanctioned economic mafia.