reinventing the financial wheel

After JPMorgan’s $2 billion loss that’s likely related to the London whale (love that nickname), Jamie Dimon’s rants against the evils of  Wall Street regulation and the Volcker rule look shakier than ever. Now i’m not usually one for heavy regulation- I do think governments hardly have the expertise to tell businesses/banks how to run themselves, but at the same time, the size of the finance industry in today’s day and age is getting somewhat out of hand.

To put things into perspective, research done by a NYU finance economist showed that even though the internet age has brought leaps and bounds in financial technology and innovation, the costs of have actually increased more than the benefits, implying that the finance sector today is actually more inefficient than a century ago.

Phillippon, the economist, takes into account the output of finance e.g. matching savers with borrowers, pooling risks, and producing information through price changes, and the costs, total compensation for providing such services. He then estimated the unit cost of the financial middleman, which was 1.3 percent of all financial assets percent in the early 1900s and amounts to some 2.3 percent currently, with much of the rise having occurred since the 1970s.

Now i know it’s just one research paper by an academic, but if the way he’s calculated the costs and benefits is reliable, then this really an interesting bit of information to consider when weighing the pros and cons of regulating Wall Street.

The Business Week story has more details.

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