Is Finance a Drag on Economic Growth?

IntheBlack, September 2016

See the article as it ran here

Money, as the musical Cabaret had it, makes the world go round. And clearly it does, to a degree: our banking systems allow us to grow wealth, to afford houses, to get paid. They support trade and they enable business. But there’s another idiom just as relevant as that line from Cabaret: you can have too much of a good thing.

There is a growing body of opinion that financial services industries, while vital to the growth of emerging nations, can eventually get so big as to be obstructive, a drag on growth rather than a catalyst of it. Beyond a certain point, they drain talent that might be usefully applied elsewhere, they bring risk and volatility where they ought to bring stability, and they enrich themselves at the expense of their societies.

It is a view that, while niche, has gathered increasing academic momentum. Last year Luigi Zingales, Professor of Entrepreneurship and Finance at the University of Chicago Booth School of Business, raised the subject in his presidential address for the American Finance Association conference. “Finance,” he said, “can easily degenerate into a rent-seeking activity.

“While there is no doubt that a developed economy needs a sophisticated financial sector… there is no theoretical reason or empirical evidence to support the notion that all the growth of the financial sector in the last forty years has been beneficial to society,” he said.

“An industry does not pay $139 billion in fines in two years if there is nothing wrong.”