… finance was taking a heavier toll on the economy even before Lehman Brothers went under.
That is the conclusion of anew paper by Guillaume Bazot of the Paris School of Economics. …
The paper is a useful contribution to the debate about the role of the financial industry in the global economy. What justifies the high incomes earned by bankers and fund managers? One could argue that they have created a lower cost of capital for business in the form of low bond yields and high equity valuations. But that is a tricky case to make: low yields are more the consequence of central-bank policy and the low level of inflation.
An alternative view is that these higher incomes are what economists call rents: excess incomes earned by those with a privileged economic position. The financial industry is protected because governments and central banks will act to rescue it when it falters, in a way they would not do for chemicals, say. And the sector may also benefit from asymmetric information: some of the products it sells are highly complex and clients may not be aware of the full cost until well after a sale is made.
The central question that the finance industry needs to answer is this: why has its increased importance been associated with slower economic growth in the developed world and a greater number of asset bubbles?