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The depredations of the parasite community impoverishes us all.

September 7, 2015

Several times in my blog posts I argued that the modern financial system that first developed in the US and the North Atlantic countries and now spread throughout the world, has since 1980  limited the growth of world wealth rather than grown it.

The well-known economist Brad DeLong recently pointed out that in 1950 finance and insurance in the US accounted for less than 3% of GDP, but by 2011 accounts for almost 6% of GDP without measurable evidence that it has boosted growth by expected amounts.

Delong also pointed out a fundamental truth about the current financial system:

“There are two sustainable ways to make money in finance: find people with risks that need to be carried and match them with people with unused risk-bearing capacity, or find people with such risks and match them with people who are clueless but who have money…”
Delong

He adds:

“Over the past year and a half, in the wake of Thomas Philippon and Ariel Resheff’s estimate that 2% of U.S. GDP was wasted in the pointless hypertrophy of the financial sector, evidence that our modern financial system is less a device for efficiently sharing risk and more a device for separating rich people from their money–a Las Vegas without the glitz–has mounted.”
Brad Delong

Recently in revisiting this problem Delong wrote:

“…the events and economic research of the past years have demonstrated three things. First, modern finance is simply too powerful in its lobbying before legislatures and regulators for it to be possible to restrain its ability to create systemic macroeconomic risk while preserving its ability to entice customers with promises of safe, sophisticated money management. Second, the growth-financial deepening correlations on which I relied do indeed vanish when countries move beyond simple possession of a banking system, EFT, and a bond market into more sophisticated financial instruments. And, third, the social returns to the U.S.’s and the North Atlantic’s investment in finance as the industry of the future over the past generation has, largely, crapped out. A back-of-the-envelope calculation I did in 2007 suggested that in mergers and acquisitions the world paid finance roughly $800 billion/year for about $170 billion/year of real economic value–a rather low benefit-cost ratio–and that appears to be not the exception but the rule.”

In other words, as I never tire of repeating, in one form or another the depredations of the parasite community impoverishes us all.

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