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Posted by on Sep 29, 2011 in Economy, TG Roundup

Finance: Functionally Inefficient or Socially Predatory?

The golden period of economic growth in the US economy. During that time, the financial sector played its rightful role. What is the role of the financial sector in the economy? It is to support the real economy (manufacture of goods, sales and service):

  • by mobilizing savings
  • by allocating those saving to help the economy grow
  • by serving an insurance function – spreading and pooling risk
  • in helping you save when you are young and spend it down when they are old

The modern day finance sector is anything but all these. It is dominated by speculation and gambling, predatory lending, outright stealing, money laundering, political hacking – in short, socially predatory.

Here is a good Interview at INET. The synopsis.

We all know it: The financial sector is bloated and banks are too big to fail. But just how bloated is it, and how much should it be shrunk? Gerald Epstein and his collaborator James Crotty use both micro and macro data to deliver the numbers. They build on James Tobin’s concept of functional efficiency to separate the financial sector’s beneficial activities (mobilizing savings, financing investment, and reducing risk) from its socially inefficient activities (gambling, and distorting the political process). An empirical study that is full of institutional detail and addresses the elephant in the room: big banks and regulatory capture — this is new economic thinking.

Quotes from the interview:

  • “When finance is getting too big, too powerful, too destructive, it can actually lead to financial instability”
  • “50% of Goldman Sach’s revenues come from trading (gambling)”

Sure – this guy is an academician. For that very reason, some financiers will try to discredit his as being an academic who is out of touch with reality. That would be the same financiers who would brag about their own academic credentials and pedigree – i.e. where they got their MBAs from.

1 Comment

  1. Good one. I liked the phrase ‘Socially Predatory’. But be careful, if you will be called a socialist! 🙂

    Even if you say the wall street trading nowadays is more of gambling than based on any fundamentals of economic growth, that is too much respectful! The Las Vegas gambling companies will be ashamed to be compared at like these wall street firms. The more appropriate word is looting I believe, and that too systematic one. If occasional looting that will be more evident!

    Thanks for the post.