Following on from the below posts on the financial sector I see VoxEU has decided to publish an article supporting the broad thrust of my argument; finance is too big, too powerful and needs to be shrunk.
Our results show that the marginal effect of financial development on output growth becomes negative when credit to the private sector surpasses 110% of GDP. This result is surprisingly consistent across different types of estimators (simple regressions and semi-parametric estimations) and data (country-level and industry-level). The threshold at which we find that financial development starts having a negative effect on growth is similar to the threshold at which Easterly et al. 2000 find that financial development starts increasing volatility.
A very large financial sector like we have in the UK is not necessarily a good thing even if it appears to be out “comparative advantage” as Timmy is wont to argue.
A large financial sector can increase volatility. One effect of this is that volatility depresses investment. If you have the option to invest but the future is uncertain it makes more sense to wait and see. The preponderance of finance and the UK’s low rate of investment may be linked.
A good financial sector helps to improve the quality of investment, but that does not seem to be operating at the moment, finance appears to be system for the enrichment of a minority and the majority’s expense. Perhaps it is time for the banking commission to pull the plug on large bank’s right to exist.
Matters are complicated because such a large share of the City’s activities are exported and this makes a comparison between the UK’s financial industry and the UK’s GDP more difficult. But, it seems that finance is at the same time too concentrated in a few firms, too indebted to positively contribute to growth, too risk tolerant due to subsidy and too arrogant to see this.
Anybody else sick of these guys?