Modern financial innovations have been like a black hole—sucking in money and talent and letting nothing escape.
Sunday, March 29, 2009 at 11:54AM Paul Krugman is concerned that the Obama Administration apparently wants to restore the financial system to 2007 or perhaps to 1997, when a 1977 model would be much better for America.
And the [post-Depression] financial system wasn't just boring. It was also, by today's standards, small. Even during the "go-go years," the bull market of the 1960s, finance and insurance together accounted for less than 4 percent of G.D.P. The relative unimportance of finance was reflected in the list of stocks making up the Dow Jones Industrial Average, which until 1982 contained not a single financial company.
It all sounds primitive by today's standards. Yet that boring, primitive financial system serviced an economy that doubled living standards over the course of a generation.
After 1980, of course, a very different financial system emerged. In the deregulation-minded Reagan era, old-fashioned banking was increasingly replaced by wheeling and dealing on a grand scale. The new system was much bigger than the old regime: On the eve of the current crisis, finance and insurance accounted for 8 percent of G.D.P., more than twice their share in the 1960s. By early last year, the Dow contained five financial companies — giants like A.I.G., Citigroup and Bank of America.
And finance became anything but boring. It attracted many of our sharpest minds and made a select few immensely rich.
. . . .
Much discussion of the toxic-asset plan has focused on the details and the arithmetic, and rightly so. Beyond that, however, what's striking is the vision expressed both in the content of the financial plan and in statements by administration officials. In essence, the administration seems to believe that once investors calm down, securitization — and the business of finance — can resume where it left off a year or two ago.
. . . .
As you can guess, I don't share that vision. I don't think this is just a financial panic; I believe that it represents the failure of a whole model of banking, of an overgrown financial sector that did more harm than good. I don't think the Obama administration can bring securitization back to life, and I don't believe it should try.
Skeptic
Robert Reich was already complaining about this in 1980. He said there was too much "paper entrepreneurship" and not enough "product entrepreneureship" and that there should be policy changes to rebalance.
Reader Comments (1)
yes, you are right. good article.