Tuesday, August 11, 2009

A Few Minutes of Hate for Finance Sector

A quick read of my blog will quickly establish exactly what I happen to think banking classes are a wasteful bunch who've been spending our pensions on yachts, mansions and BMW M3s. I don't like them very much at all.

It's reassuring to know that I'm not not just it's not just mad lefties who feel that way though. Here's Simon Johnson (former IMF Chief Economist):

What has “financial innovation” brought us since the 1980s? One answer, of course, is “hedging strategies” that lower the cost of doing business for companies large and small. This is plausible, although not likely to be large relative to the economy - send me your favorite study on the cost of capital since 1990 (you choose the definition), and we can talk about whether this effect is significant, sustainable, or even sensible.

Because financial innovation has mostly facilitated a big increase in finance. If a sector grows, pays more wages, and rises as a share of GDP, surely this is a good thing? Not necessarily – if this is a rent-seeking sector.

Rent-seeking means effectively a tax extracted by one sector from the rest of the economy. We’re used to thinking of this as something that occurs through trade restrictions and the big breakthroughs in this area came from analysis of tariffs and quotas (Anne Krueger, Jagdish Bhagwati). If a tariff, for example, will make your life cushy, you will devote great resources to getting one established or increased – irrespective of the effects on the rest of the economy (call this strategy “let’s hammer the unprotected consumer”).

Finance is rent-seeking. The sector has devoted great resources to tilting all playing fields in its direction. Consumers are taken advantage of; consumer protection is vehemently opposed. And great risks are taken, with the downside handed off to the government (and the consumers again, as taxpayers). This downside protection allows an overexpansion of debt-financed finance – reaching the preposterous levels seen in mid-2008 and now re-emerging.

Finance in its modern American form is not productive. It is not conducive to further sustained economic growth. The GDP accruing from these activities is illusory – most of finance is simply a tax on what is done by more productive members of society and a diversion of talent away from genuinely productivity-enhancing activities.

Read the whole thing, it's rather good (and yes, I know he's talking about the US, but I reckon it applies equally over here).

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