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March 2, 2015

The New York Times: Smothered by a Boom in Banking

“Attendees at last week’s JPMorgan Chase annual investor day once again asked the question that no big bank executive wants to hear. Wouldn’t shareholders be better off if the company were smaller or broken up?

“No, no and no, JPMorgan replied. “Scale has always defined the winner in banking,” said Marianne Lake, the company’s chief financial officer.

“It is to be expected that all big bank executives believe in big finance. They benefit from being giant, after all.

“For the rest of us, though, it’s worth noting that the effects of a dominant financial industry are far less beneficial.

“Certainly, as we learned in 2008, when megabanks get into trouble, they line up for bailouts. This imperils taxpayers.

“But even during good times the impact of big finance can be negative for the world at large. According to a compelling new paper published two weeks ago by the Bank for International Settlements, high-growth financial sectors actually hurt the broader economy by dragging down overall growth and curbing productivity.

“The paper’s co-authors are Stephen G. Cecchetti, economics professor at Brandeis International Business School, and Enisse Kharroubi, senior economist at the B.I.S. Their findings are a great addition to the debate about how much is too much when it comes to the role finance should play in our economy.

“The paper is titled “Why Does Financial Sector Growth Crowd Out Real Economic Growth?” and it builds on past research that found that overall productivity gains were dragged down in economies with rapidly growing financial industries.

“This idea seems almost counterintuitive. Wouldn’t a booming finance industry mean that money is humming through all parts of the economy, financing growth in all kinds of industries? In the new paper, the authors looked for an answer. They studied 33 manufacturing industries in 15 advanced economies around the world.

“They found that financial booms were especially harmful to certain industries. Bankers, they say, act in predictable ways. They tend to lend money to projects with assets that can be pledged as collateral, such as those in real estate or construction. This is understandable — bankers want to be able to seize assets if a borrower gets into trouble on a loan, and they prefer those assets to be tangible”

***

Read the full New York Times article by Gretchen Morgenson here.

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