... 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. Bruce Bartlett points to Greenwood and Scharfstein, to Cechetti and
Kharoubi's suggestion that financial deepening is only useful in early
stages of economic development, to Orhangazi's evidence on a negative
correlation between financial deepening and real investment, and to Lord
Adair Turner's doubts that the flowering of sophisticated finance over the
past generation has aided either growth or stability.
Four years ago I was largely frozen with respect to financial
sophistication. It seemed to me then that 2008-9 had demonstrated that our
modern sophisticated financial systems had created enormous macroeconomic
risks, but it also seemed to me then that in a world short of risk-bearing
capacity with an outsized equity premium virtually anything that induced
people to commit their money to long-term risky investments by creating
either the reality or the illusion that finance could, in John Maynard
Keynes's words, "defeat the dark forces of time and ignorance which envelop
our future". ...
But the events and economic research of the past years have demonstrated ...
I should ... have read a little further in Keynes, to "when the capital
development of a country becomes a by-product of the activities of a casino,
the job is likely to be ill-done". And it is time for creative and original
thinking--to construct other channels and canals by which funding can reach
business and bypass modern finance with its large negative alpha.
Posted by Mark Thoma on Friday, June 28, 2013 at 10:32 AM in Economics, Financial System, Regulation |