We Must Calculate the Full Cost of Our Financial System

FT: Overmighty Finance Levies a Tithe on Growth

What is sorely missing is any real discussion of what function our
financial system is supposed to perform and how well it is doing that
job – and, just as important, at what cost.

The discussion of the costs associated with our financial system has
mostly focused on the paper value of its recent mistakes and what
taxpayers have had to put up to supply first aid. The estimated
$4,000bn of losses in US mortgage-related securities are just the
surface of the story. Beneath those losses are real economic costs due
to wasted resources: mortgage mis-pricing led the US to build far too
many houses. Similar pricing errors in the telecoms bubble a decade ago
led to millions of miles of unused fibre-optic cable being laid.

Perversely, the largest individual returns seem to flow to those whose
job is to ensure that microscopically small deviations from observable
regularities in asset price relationships persist for only one
millisecond instead of three. These talented and energetic young
citizens could surely be doing something more useful.

In the US, both the share of all wages and salaries paid by the
financial firms and those firms’ share of all profits earned have risen
sharply in recent decades. In the early 1950s, the “finance” sector
(not counting insurance and real estate) accounted for 3 per cent of
all US wages and salaries; in the current decade that share is 7 per
cent. From the 1950s to the 1980s, the finance sector accounted for 10
per cent of all profits earned by US corporations; in the first half of
this decade it reached 34 per cent.

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