Two Quick Views On The Financial Sector

Paul Krugman writes about the secret of bank success and concludes: “Beyond that, however, I find this ominous. We got into this mess because we had an over-financialized economy, with finance making a share of profits out of all proportion to its actual economic contribution. And now it’s baaaack.”

We are going to get lost in the minuate of financial reform – who is an end-user, what kind of haircut can be used on secured creditors – and that’s all very important. But it’s also important to step back and see where the financial industry is going. And what I find interesting (and disturbing) is how quickly the idea that the banking sector of 2007 should be the “normal mode” of the financial industry has become the public stance of the financial industry. That’s the first view.

You see it when JP Morgan analysts just assume that 2007 profit levels are what they are going to be getting in the market going forward. It’s a very disturbing view. You see it in the industry going after Basel III already, because it might hurt their earnings, which we will talk about in a second.

Then there’s another view, and to summarize it I’ll just quote the title of a Dean Baker column: A Financial Sector Small Enough to Drown in a Bathtub. I sort of get where the conservatives are coming from when I hear that. What is wrong with wanting a financial sector small enough to drown in a bathtub? It’s an intermediate good whose real value to the economy is minimal, and it draws an extensive amount of our resources, intellectual and otherwise. Shouldn’t the financial sector actually shrink after a financial crisis? Is it going to? It’s a view that isn’t heard enough.

Which view do you side up with?

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