The Financial Curse – When a Financial System does more harm than good

Welcome to Finance and Fury the Furious Friday Edition

On the last episode we talked about the City of London Corporation, a mini plutocracy

Today we are exploring at what point does a financial sector state to crowd out real economic growth? Referred to as the 'financial curse'

I have found some contradictions to my previous beliefs – research shows a tipping point

Why is finance important?

• We all use it
• Each economy has stages with a financial system
• Reaches an optimal size
• Beyond this point a financial system starts to inflict damage
• Profitable techniques start to impact the creation of wealth
• There is a limit to useful roles of a financial system

The Tipping Point:

• Financial crisis
• Supporting the creation of wealth vs extracting it from other parts of the economy
• Shaping laws, rules, thinktanks and culture
• The damage it does

Measurable impact: link to database

• Finance becomes a net drag on GDP growth and productivity – misallocation of resources
• Negative relationships between rate of financial sector growth and rate of productivity growth
• Bank incentives shift after GDP to debt reaches a certain size
• What do credit booms do?
• The ratio of household debt reflects what?
• What does the IMF study show?

Real life examples:

• Britain and the City of London corporation
  • What kind of hit has it put on the UK economy?
  • Lost economic output and misallocation costs
  • No longer lending into new business, mostly each other, housing and commercial real estate
• USA
  • The cost of the 2008 financial crisis
• Australia
  • Credit to the private sector surpassing 100% of GDP makes financial sector contribution to economic growth negative
  • When interest rates are lower there is less incentive to save and more incentive to borrow

The Unmeasurable

• Finance curse inflict damage in many areas
• Economic, cultural, democratic and social effects

Summary:

• With too little and too much financial sector, we would be doomed
• Resources are being misallocated
• How some investments come at the expense of other investments I own?
• Next week we will dive deeper into the share market and Milton Freedman

Thank you for listening, if you want to get in contact you can do so here.