Economist J. Bradford DeLong: Financial Industry May Suck the Nation Dry

Friday, 28 Jun 2013 11:49 AM

By John Morgan

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Evidence is growing that America's financial services industry — which metastasized from 2.8% of GDP in 1950 to 8.4% of GDP by 2011 — produces little of value to the real economy and functions as "Las Vegas without the glitz," according to J. Bradford DeLong, an economics professor at the University of California at Berkeley.

In a column for Project Syndicate, DeLong suggests the time has come for the United States to find a way to circumvent the way that big banks and other institutions – the operators of finance and insurance – conduct their business.

He said the “massive diversion” of resources away from goods and services to the financial sector would be a good bargain only if produced measureable economic dividends of some kind.

Declassified: ‘Financial War’ Could Wipe Out 50% of Your Wealth

DeLong, a former U.S. Treasury official in the Clinton administration, said it seemed during the depths of the 2008-2009 economic meltdown that the nation needed incentive to make investments, but that the financial industry has provided no real reason for it to do so.

“First, modern finance is simply too politically powerful for legislatures or regulators to restrain its ability to create systemic macroeconomic risk.”

Also, economic growth and stability actually appears to vanish when nations’ financials systems move beyond traditional banking, money transfers and bond markets to more “sophisticated instruments,” Delong said, an apparent reference to derivatives and other synthetic transactions often favored by big banks.

“Finally, the social returns from investment in finance as the industry of the future have largely disappeared over the past generation,” he declared.

For instance, DeLong estimated that the world pays financial institutions about $800 billion annually for mergers and acquisitions that yield only $170 billion in real economic value.

When a nation’s capital development resembles the activities of a casino, according to DeLong, “it is time either for creative thinking about how funding can be channeled to the real economy in a way that bypasses modern finance, with its large negative alpha, or to risk being sucked dry."

In a Friday piece for MarketWatch entitled “Who Killed the American Dream,” columnist Rex Nutting said much of the increase in individual income in the U.S. in recent decades has gone to two types of workers – corporate executives and those in the financial industry.

According to Nutting, the “horrendous widening of equality in America isn’t the result of benign and impersonal market forces, but of conscious policy decisions — for instance, lower tax rates and reduced bargaining power for workers — that increased the ability of a few to capture almost all the benefits of the economy’s growth over the past 30 years.”

Declassified: ‘Financial War’ Could Wipe Out 50% of Your Wealth






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