{"id":730,"date":"2012-10-19T09:52:47","date_gmt":"2012-10-19T16:52:47","guid":{"rendered":"https:\/\/somewhatlogically.com\/?p=730"},"modified":"2012-10-19T11:22:47","modified_gmt":"2012-10-19T18:22:47","slug":"is-the-financial-sector-worth-what-we-pay-it","status":"publish","type":"post","link":"https:\/\/somewhatlogically.com\/?p=730","title":{"rendered":"Is the Financial Sector Worth What We Pay It?"},"content":{"rendered":"
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Plenty more where that came from!<\/strong><\/p>\n

(This article is cross posted from my article for OECD Insights<\/a>\u00a0where they provide discussion of a wide range of subjects that influence world development)<\/em><\/p>\n

A basic capitalist tenet<\/strong> is that the market represents the most efficient\u00a0way to\u00a0allocate capital. How well is it working?<\/p>\n

We are rapidly evolving a fast-moving, increasingly cybernetically interlinked capital\u00a0marketplace that, as Lord May observes in the\u00a0Santa Fe Institute Journal<\/a><\/em>, has become intertwined in ever-more complex interdependent patterns. He goes on to ask how much are we, societally, paying the financial sector to allocate capital?\u00a0More importantly, is\u00a0the sector\u00a0allocating capital to further societal goals, or merely enriching itself and a narrow segment of the world\u2019s population?\u00a0Human nature is powerful. John Stuart Mills said, in\u00a0Social Freedom<\/em>: \u201cMen do not merely desire to be\u00a0rich<\/em>, but\u00a0richer<\/em>\u00a0than other men\u201d.<\/p>\n

Benjamin Friedman holds, in\u00a0The Moral Consequences of Economic Growth<\/em>, that \u201cgreater opportunity, tolerance of diversity, social mobility, commitment to fairness and dedication to democracy\u201d derive directly from economic growth. He shows that even during stagnation\u2013let alone recession and depression\u2013those values\u00a0can vanish easily.\u00a0Brad Delong<\/a>\u00a0observes, in reviewing Friedman, that\u00a0if the majority of the people do not see an improving future, these values are at risk even in countries where absolute material prosperity remains high.\u00a0Given rising political intransigence and loss of common social purpose in the U.S., and the rise of nationalistic political sentiments in Europe, the effects of increasing stagnation and inequality are becoming more evident, despite the financial sector\u2019s phenomenal growth.<\/p>\n

In a 2006\u00a0speech<\/a>\u00a0on the growing integration of the financial sector and the broader economy, Rodrigo deRato, Managing Director of the IMF, noted its supposed general stability and growth, and that from 1990-2005 the estimated sum of equity-market capitalization, outstanding total bond issues (sovereign and corporate) and\u00a0global bank assets rose from 81% to 137% of GDP, while over-the-counter derivatives markets tripled in the latter\u00a0five years to $285 trillion,\u00a0six times global GDP, 50 times the U.S. public debt.\u00a0So if the financial sector has worked, we should see proportional acceleration of growth plus improved consequences for all society.<\/p>\n

This is not happening, as Cornia and Court\u00a0report<\/a>\u00a0in\u00a0Inequality, Growth and Poverty in the Era of Liberalization and Globalization.<\/em>Global poverty reduction\u00a0has stalled for 30-40 years, despite an approach to growth based on \u201c\u2026a neo-liberal\u00a0policy package, [including] stringent focus on macroeconomic stability, liberalization of domestic markets, privatization, market solutions to the provision of public goods, and rapid external trade and financial liberalization.\u201d\u00a0They\u00a0reveal that inequality has grown faster during the same period in the majority of countries for which data is available. The paper also shows that increased inequality greatly encumbers the climb\u00a0from poverty and that excessively low or high levels of inequality impede growth, provoking various ills, including crime, social conflict and uncertain property rights. In the US, bank employees were found to be signing thousands of foreclosure documents without checking the information in them in so-called\u00a0robo-signings<\/a>\u00a0that rendered the documents illegal.<\/p>\n

All the data seem to affirm Friedman\u2019s assertion that all societal strata\u00a0should participate to maximize the moral benefits of economic growth. Further support can be found in Court\u2019s conjecture about an optimum range of equality. This is confirmed by modeling work at Dominican University, discussed in a\u00a0previous OECD Insights post<\/a>, which shows\u00a0that there is indeed an optimum level of equality for a given economic structure useable for policy planning, to insure capital allocation to economic growth for public purposes. Returning us to Lord May\u2019s point that we\u00a0must know how much economies are \u2018paying\u2019 the financial sector to allocate capital, including payments to banks, sovereign funds, hedge funds, private equity, and the managers, often in major international banks, of the\u00a0estimated $21-32 trillion<\/a>\u00a0of largely secret \u201coffshore\u201d financial assets.<\/p>\n

The financial crisis and subsequent Euro problems show that we are paying vast sums for a system that, as\u00a0Joseph Stiglitz<\/a>, former chief economist of the IMF, points out, doesn\u2019t allocate capital where needed, causing capital flows that are pro-cyclic, exacerbating peaks and lows of business cycles. \u00a0\u00a0What efficient capital distributive function is served by the approximately $1.5 trillion of daily flows sloshing about in the casino of OTC foreign exchange activities, and the nearly 70% of all U.S. market trades conducted algorithmically, without human intervention?<\/p>\n

Keynes may have lost the 1944\u00a0Bretton Woods battle<\/a>\u00a0for a solution that transcended national financial self-interest but his plans for an international clearing agency are prophetic, especially considering how the combined financial sector dominates national and international policy for its own ends \u201c As Keynes said, \u201c\u2026 no country can . . . safely allow the flight of funds for political reasons or to evade domestic taxation or in anticipation of the owner turning refugee.\u00a0Equally, there is no country that can safely receive fugitive funds, which constitute an unwanted import of capital, yet cannot safely be used for fixed investment.\u201d\u00a0Right again, Lord Maynard.<\/p>\n

Useful links<\/strong><\/p>\n

OECD work on financial markets<\/a><\/p>\n<\/div>\n","protected":false},"excerpt":{"rendered":"

Plenty more where that came from! (This article is cross posted from my article for OECD Insights\u00a0where they provide discussion of a wide range of subjects that influence world development) A basic capitalist tenet is that the market represents the … Continue reading →<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[],"class_list":["post-730","post","type-post","status-publish","format-standard","hentry","category-uncategorized"],"_links":{"self":[{"href":"https:\/\/somewhatlogically.com\/index.php?rest_route=\/wp\/v2\/posts\/730","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/somewhatlogically.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/somewhatlogically.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/somewhatlogically.com\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/somewhatlogically.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=730"}],"version-history":[{"count":8,"href":"https:\/\/somewhatlogically.com\/index.php?rest_route=\/wp\/v2\/posts\/730\/revisions"}],"predecessor-version":[{"id":737,"href":"https:\/\/somewhatlogically.com\/index.php?rest_route=\/wp\/v2\/posts\/730\/revisions\/737"}],"wp:attachment":[{"href":"https:\/\/somewhatlogically.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=730"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/somewhatlogically.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=730"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/somewhatlogically.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=730"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}