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

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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.

212 episodes available. A new episode about every 2 days averaging 23 mins duration .