Starving the Squid (financialization vs growth)

[gavinfielder]

Back in 2011, I noted that finance and insurance in the United States accounted for 2.8% of GDP in 1950 compared to 8.4% of GDP three years after the worst financial crisis in almost 80 years. “f the US were getting good value from the extra…$750 billion diverted annually from paying people who make directly useful goods and provide directly useful services, it would be obvious in the statistics.”

Starving the Squid by J. Bradford DeLong - Project Syndicate

In the article, he links to two studies that show a negative correlation between financialization and real economic returns:

"This paper investigates how financial development affects aggregate productivity growth. Based on a sample of developed and emerging economies, we first show that the level of financial development is good only up to a point, after which it becomes a drag on growth. Second, focusing on advanced economies, we show that a fast-growing financial sector is detrimental to aggregate productivity growth.

http://www.bis.org/publ/work381.pdf

I discuss the impact of financialisation on real capital accumulation in the US. Using data from a sample of non-financial corporations from 1973 to 2003, I find a negative relationship between real investment and financialisation. Two channels can help explain this negative relationship: first, increased financial investment and increased financial profit opportunities may have crowded out real investment by changing the incentives of firm managers and directing funds away from real investment. Second, increased payments to the financial markets may have impeded real investment by decreasing available internal funds, shortening the planning horizons of the firm management and increasing uncertainty

http://courses.umass.edu/econ711-rpollin/Orhangazi financialization in CJE.pdf

This certainly makes me stop and think.

 

[Lord Tammerlain]

I believe it has been and will be a negative on the US.

 

[JP Hochbaum]

Financialization seeks growth via higher risk. This is typically why we see bubbles, they aren't content with average or normal growth so they get creative.

reading a piece today by Galbraith that shows how to help predict financial crashes:

http://www.nea.org/assets/docs/HE/TA09EconomistGalbraith.pdf

"Periods of calm, of progress, of sustained growth render financial market
participants malcontent with the normal rate of return. In search of higher returns,
they seek out greater risk, making bets with greater leverage. Financial positions
previously sustainable from historical cash flows—hedge positions—are replaced
by those which, it is known in advance, will require refinancing at some future
point. These are the speculative bets. Then there is an imperceptible transition, as
speculative positions morph into positions that can only be refinanced by new
borrowing on an ever-increasing scale. This is the Ponzi scheme, the end-stage..."

"Minsky’s analysis showed that capitalist financial instability is not only
unavoidable, but intrinsic: instability arises from within, without requiring exter-
nal disturbances or “shocks.” There is no such thing as an equilibrium growth path,
indefinitely sustained. Short of changing the system, the public responsibility is to
regulate financial behavior, limiting speculation and stretching out for as long as
possible the expansionary phase of the cycle."

 

[Mach]

It's a tool like everything else. Great in good hands, deadly in the wrong hands. Having safe operating, emergency, training, and oversight of using such a tool is required if we're to use it for good and avoid the bad. How good has our government been at regulating this? Were not both parties basically just taking Alan Greenspan's recommendations on this for years, culminating in Greenspan saying "I was wrong"? Who set up such a system that it's just one person calling the shots? It would be insulting to compare it to monkey's running things..