Paul Lachine

Finance Agonistes

For at least a quarter-century, the financial sector has grown much more rapidly than the economy as a whole, both in developed and in most developing countries. But there is strong evidence that this was a relatively short-term phenomenon, and that the industry's salad days are well and truly over.

LONDON – For at least a quarter-century, the financial sector has grown far more rapidly than the economy as a whole, both in developed and in most developing countries. The ratio of total financial assets (stocks, bonds, and bank deposits) to GDP in the United Kingdom was about 100% in 1980, while by 2006 it had risen to around 440%. In China, financial assets went from being virtually non-existent to well over 300% of GDP during this period.

As the size of the financial industry grew, so, too, did its profitability. The share of total profits of companies in the United States represented by financial firms rocketed from 10% in 1980 to 40% in 2006. Against that background, it is not surprising that pay in the financial sector soared. The City of London, lower Manhattan, and a few other centers became money machines that made investment bankers, hedge-fund managers, and private equity folk immoderately wealthy. University leaders like me spent much of our time persuading them to recycle a portion of their gains to their old schools.

For the last two years, things have been different. Many financial firms have shrunk their balance sheets dramatically, and of course some have gone out of business altogether. Leverage is down sharply. Investment banks with leverage of more than 30 times their capital in early 2007 are now down to little more than ten times. Trading volumes are down, as is bank lending, and there have been major layoffs in financial centers around the globe.

To continue reading, please log in or enter your email address.

To access our archive, please log in or register now and read two articles from our archive every month for free. For unlimited access to our archive, as well as to the unrivaled analysis of PS On Point, subscribe now.

required

By proceeding, you agree to our Terms of Service and Privacy Policy, which describes the personal data we collect and how we use it.

Log in

http://prosyn.org/ICXpRW8;

Cookies and Privacy

We use cookies to improve your experience on our website. To find out more, read our updated cookie policy and privacy policy.