According to Robin Greenwood and David Scharfstein in their article, The Growth of Modern Finance:
"The U.S. financial services industry grew from 4.9% of GDP in 1980 to 7.9% of GDP in 2007. A sizeable portion of the growth can be explained by rising asset management fees…. Another important factor was growth in fees associated with an expansion in household credit, particularly fees associated with residential mortgages. This expansion was itself fueled by the development of non-bank credit intermediation (or “shadow banking”). We offer a preliminary assessment of whether the growth of active asset management, household credit, and shadow banking--the main areas of growth in the financial sector--has been socially beneficial…."
Several times here in Daily Kos and in some of my other blog posts I argued that the modern financial system that first developed in the US and the North-Atlantic countries and has now spread throughout the world since 1980 has in fact limited the growth of world wealth rather than grown it as some of its supporters, such as that dangerous man Milton Friedman, predicted.
Brad DeLong has recently commented on the fact 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 our 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…"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."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."Daniel Kahneman, winner of a Nobel economics prize, discovered that the apparent belief of financial high fliers that their success is earned by talent and hard work is a cognitive illusion. For example, he studied the results achieved by 25 wealth advisers, across eight years. He found that the consistency of their performance was zero. “The results resembled what you would expect from a dice-rolling contest, not a game of skill.” Those who received the biggest bonuses had simply got lucky.
Such results have been widely replicated. They show that traders and fund managers all across Wall Street receive their massive remuneration for doing no better than would a chimpanzee flipping a coin. When Kahneman tried to point this out to the Street, they ignored him. “The illusion of skill … is deeply ingrained in their culture,” he observed.
In other words, as I never tire of repeating, in one form or another the depredations of the parasite community impoverishes us all.