Yves Smith — Thirty Years of Financial Inefficiency

Arjun Jayadev at Triple Crisis provides a quote from Thomas Phillipon that somehow never sees the light of day in the financial press:

…the unit cost of intermediation is higher today than it was a century ago, and it has increased over the past 30 years. One interpretation is that improvements in information technology may have been cancelled out by increases in other financial activities whose social value is difficult to assess.

This of course is a very understated way of suggesting that the bankers have found new ways to sell or bundle other products or services along with the ones made cheaper by information technology, or create new ones of dubious additional value, so as to allow them to fatten their total pricing.

This is a big and important topic, so let me take just an initial slice at it, and I’ll hopefully come back to it in future posts. We can certainly see the net effect, which is the financialization of the economy, which suggest that IT (and other developments) have allowed the banks to move into an oligopoly position and are extracting economic rents. Simon Johnson, in his important 2009 article, The Quiet Coup, described how the financial sector had accomplished the surprising feat of increasing average worker pay packages and increasing their share of GDP. Wages rose from roughly comparable to average private sector worker wages from just after World War II through 1982. They increased to 181% of private sector worker wages right before the crisis. From 1973 to 1982, the financial sector never garnered more than 16% of corporate profits. By the 2000s, it hit 41%.

Naked Capitalism
Thirty Years of Financial Inefficiency
Yves Smith