In fact, high pre-crisis returns to banking had a much more mundane explanation. They reflected simply increased risk-taking across the sector. This was not an outward shift in the portfolio possibility set of finance. Instead, it was a traverse up the high-wire of risk and return. This hire-wire act involved, on the asset side, rapid credit expansion, often through the development of poorly understood financial instruments. On the liability side, this ballooning balance sheet was financed using risky leverage, often at short maturities.
In what sense is increased risk-taking by banks a value-added service for the economy at large? In short, it is not.
PK's post was titled: "A Gigantic Scam." He concludes:
And he suggests that much if not all of the rise in the share of finance in GDP reflected this deception; in effect, Wall Street and the City were con artists extracting huge rents from an unwary public (and eventually dumping much of the cost, when things went bad, on taxpayers).
A lot more to say about this — but I’m needed in the kitchen to chop vegetables.
I saw Haldane's article reposted at Naked Capitalism yesterday morning, and left this comment. It generated some very favorable responses from other readers, some of whom told me that I did, indeed, miss things. Those blanks are well worth filling in. Check it out at the link.
So, to summarize:
1) Over the last 30 years banking has devolved from a necessary financial function involved in the allocation of resources and management of risk to essentially non-value-added rent-seeking activities implemented through high risk practices.
2) When the whole house of cards came tumbling down, the losses were socialized, while the criminals who perpetrated the underlying fraud walked off not only scot-free, but with huge bonuses.
Did I miss anything?
This is how we’ve been screwed for decades.
Have I ever mentioned that I love it when Krugman agrees with me? But it gets even better. I chopped veggies this afternoon, too!
Happy Thanksgiving, everyone.