Welcome to Finance and Fury the Furious Friday Edition

On the last episode we talked about the City of London Corporation, a mini plutocracy

Today we are exploring at what point does a financial sector state to crowd out real economic growth? Referred to as the ‘financial curse’

I have found some contradictions to my previous beliefs – research shows a tipping point

Why is finance important?

  • We all use it
  • Each economy has stages with a financial system
  • Reaches an optimal size
  • Beyond this point a financial system starts to inflict damage
  • Profitable techniques start to impact the creation of wealth
  • There is a limit to useful roles of a financial system

The Tipping Point:

  • Financial crisis
  • Supporting the creation of wealth vs extracting it from other parts of the economy
  • Shaping laws, rules, thinktanks and culture
  • The damage it does

Measurable impact: link to database

  • Finance becomes a net drag on GDP growth and productivity – misallocation of resources
  • Negative relationships between rate of financial sector growth and rate of productivity growth
  • Bank incentives shift after GDP to debt reaches a certain size
  • What do credit booms do?
  • The ratio of household debt reflects what?
  • What does the IMF study show?

Real life examples:

  • Britain and the City of London corporation
    • What kind of hit has it put on the UK economy?
    • Lost economic output and misallocation costs
    • No longer lending into new business, mostly each other, housing and commercial real estate
  • USA
    • The cost of the 2008 financial crisis
  • Australia
    • Credit to the private sector surpassing 100% of GDP makes financial sector contribution to economic growth negative
    • When interest rates are lower there is less incentive to save and more incentive to borrow

The Unmeasurable

  • Finance curse inflict damage in many areas
  • Economic, cultural, democratic and social effects

Summary:

  • With too little and too much financial sector, we would be doomed
  • Resources are being misallocated
  • How some investments come at the expense of other investments I own?
  • Next week we will dive deeper into the share market and Milton Freedman

 

Thank you for listening, if you want to get in contact you can do so here.

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