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Lean and efficient finance? Think again!

Doug
rabble-rouser-supreme
Member: 1044
Joined: Apr 17 2001
December 5, 2011 - 10:38pm

Far from being a model of efficiency, it turns out that modern finance is actually a bit of a pig.

 

Has the financial industry become less efficient? This lead commentary in the Vox debate on the financial sector argues that, despite all of its fast computers and credit derivatives, the current financial system is no better at transferring funds from savers to borrowers than the financial system of 1910.

 


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Comments

Fidel
\,,/ rabble-rouser-l33t \,,/
Member: 6594
Joined: Apr 29 2004
December 5, 2011 - 11:25pm
#1 (permalink)

Quote:
I conclude that the most important questions in finance today are:

A positive question: Why do people (fund mangers, households, etc.) trade so much?
A normative question: Has increased trading led to either better prices or better risk sharing?

I would like to believe that the answer to (ii) is yes, but I am still waiting for the evidence. If the answer turns out to be no, then we would have to conclude that the finance industry's share of GDP is about 2 percentage points higher than it needs to be and this would represent an annual misallocation of resources of about $280 billion for the US alone.

Interesting. That's possibly a lot of misallocation happening. They could have a real health care system, or affordable post-secondary education for Americans.


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