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Several times in my past posts I argued that the modern financial system, first developed in the US and the North Atlantic countries and now since 1980 spread throughout the world, has in fact slowed the potential growth of world wealth rather than grown it as some of its supporters, such as Milton Friedman, predicted.

    Brad DeLong recently pointed out that in 1950 finance and insurance in the US accounted for less than 3% of GDP, but by 2011 accounts for almost 6% of GDP without measurable evidence that it has boosted growth by expected amounts.

    Delong also pointed our a fundamental truth about the current financial system:


"There are two sustainable ways to make money in finance: find people with risks that need to be carried and match them with people with unused risk-bearing capacity, or find people with such risks and match them with people who are clueless but who have money…"

    He adds:


"Over the past year and a half, in the wake of Thomas Philippon and Ariel Resheff's estimate that 2% of U.S. GDP was wasted in the pointless hypertrophy of the financial sector, evidence that our modern financial system is less a device for efficiently sharing risk and more a device for separating rich people from their money--a Las Vegas without the glitz--has mounted."
            Brad Delong
    Recently in revisiting this problem Delong wrote:


"…the events and economic research of the past years have demonstrated three things. First, modern finance is simply too powerful in its lobbying before legislatures and regulators for it to be possible to restrain its ability to create systemic macroeconomic risk while preserving its ability to entice customers with promises of safe, sophisticated money management. Second, the growth-financial deepening correlations on which I relied do indeed vanish when countries move beyond simple possession of a banking system, EFT, and a bond market into more sophisticated financial instruments. And, third, the social returns to the U.S.'s and the North Atlantic's investment in finance as the industry of the future over the past generation has, largely, crapped out. A back-of-the-envelope calculation I did in 2007 suggested that in mergers and acquisitions the world paid finance roughly $800 billion/year for about $170 billion/year of real economic value--a rather low benefit-cost ratio--and that appears to be not the exception but the rule."
    In other words, as I never tire of repeating, in one form or another the depredations of the parasite community impoverishes us all.


Today's Quotes:

"First let's kill all the bankers, the lawyers will then die of starvation."
        Trenz Pruca
"…it fit like a metaphor."
            Bruen -The Dramatist

 Pookie's puerile epigrams:


If someone describes something he sees as it manifests itself, he is called a "scientist."

        If one can never know how it manifests itself it is called a "religion."

        If one does not care whether or not it manifest itself he is called a "politician."

        If one persuades someone else to buy what is manifested it is called "business."

        If one persuades someone else to buy what cannot be manifested, it is called "finance."

        If one does not care if someone else buys what may or may not be manifest as long as that someone buys whatever it is he is saying, he is called an "economist."

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Comment Preferences

  •  Yes, the only good thing is that it's all virtual. (1+ / 0-)
    Recommended by:

    And quantifiable. Because money can be counted, we can know the extent of the depredation and degradation of our assets and resources.

    Consider, for example, the proposed valuation of Detroit's art treasures, which is causing much anxiety because of the prospect that the collection might be sold off and dispersed to the four corners of the earth. However, a valuation or quantification in terms of dollars turns the art collection into an asset, a valuable asset, whose care and preservation the citizen owners of Detroit might well determine has not been properly supported.
    Comparing asset value and costs might well lead the citizens to decide that it makes little sense to pay the lenders of dollars a premium on bonds and instead let the "investor" class contribute dollars as taxes to support the art. Otherwise, public ownership of art just turns into a holding category into which accumulators make donations to avoid paying their taxes and then, later, after the value has increased, they buy them back.
    It's the same pattern that's caught on in the environmentally sensitive land preservation scheme. Indeed, I've had the offer to contribute land into a local "land trust" rejected because there was no associated tax credit to be garnered. Many a development proposal is designed to generate an artificial value that can then be used to reduce regular tax obligations.

    Why are tax cuts so highly prized?  I'm beginning to suspect they're like hair cuts, a good thing because a sign of some social status that's valued. Getting one's hair cut is evidence of compliance, of being an eager participant in the culture of obedience.
    For how many people is getting a hair cut a quasi religious experience?
    Is it a co-incidence that the financiers are all well-coifed?

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