While on Dreamliner watch over the long weekend, I ran across a couple of fascinating essays on the “financial services industry.” Noah Smith does a deep dive analyzing some recent research on how much value, or lack thereof, the sector creates. Economist David Glasner uses this as a pivot to discuss the social value and costs of finance.
Understand, we’re not talking about what granddad called “banking,” where an institution takes in deposits and makes loans to individuals and companies. This is the growing and highly complex world of making money by moving money around, e.g. derivatives. Glasner writes, “Much of what financial firms do is aimed at obtaining an information advantage from which profit can be extracted, just as athletes devote resources to gaining a competitive advantage.” But we don’t know enough about the costs to the economy and society that result.
Anecdotal evidence is abundant. For example, the rise of anti-competitive mergers and short-term financial focus that has consolidated industries and gutted local economies is highly profitable for financial firms. It’s difficult to believe this hasn’t played a big role in slowing growth in the real economy, as well as hurting the middle class and opportunity. What about the costs from this industry gaining control of policy and regulation to game the market to its advantage?
Another example detonated right here, where a venerable, plain-vanilla savings and loan, Washington Mutual, turned itself into a massive hustle, growing at all costs and feeding the securitization of mortgages. It minted huge compensation for WaMu leaders and was a great ride for shareholders until the roulette wheel stopped and the latter had bet everything on the wrong number.
Meanwhile, the Bush and Obama administrations, along with the Federal Reserve, showed the Masters of the Universe that their grifting would be made good by the taxpayers and the full faith and credit of the federal government. And no one besides politically unconnected Bernie Madoff would face prosecution. Kerry Killinger, Jon Corzine, Angelo Mozilo — still at large. Not even a clawback in their compensation. Steal a $1.29 Honey Bun and you’re going to jail. But the rule of law doesn’t apply to finance, and I’d say that’s a pretty big social cost alone.
And Don’t Miss: Why is Ben Bernanke the only man in Washington who cares about jobs? || The New Republic
Today’s Econ Haiku:
A long, costly wait begins
So who will be charged?