Saturday, October 20, 2012
Is The Financial Sector Worth What We Pay It?
In theory, the financial sector is responsible for allocating capital to its most productive uses. There should be a positive relationship between the growth in financial assets and growth in the economy. Social welfare should also be improved if resources are allocated to promote income equality and social mobility. Financial assets grew from 81% to 137% of GDP between 1990 and 2005. Growth in derivatives exploded between 2000 and 2005 by a factor of 3 to $285 trillion. The growth in financial assets has not produced equivalent growth in the economy, and it has not improved social welfare. Inequality has increased and social mobility has been reduced. Meanwhile the financial industry's share of profits, and compensation, grew substantially. It is not apparent that social welfare has been improved by the manner in which the financial sector has allocated resources. This conclusion holds even before we consider the damages from the global recession that was caused by the behavior of the financial industry. The neo-liberal agenda, that included the free movement of capital across the globe, has not served those outside of the financial sector very well.