Thursday, May 17, 2012

Bankers are not socially very useful

And a professor from NYU has the charts to show this.

IF we could reduce the banking business back to its useful function by making finance a publicly regulated utility with civil service pay scales, it would be MUCH smaller and cheaper.

NYU PROFESSOR: Bankers Today Are Less Competent Than Past Generations

Ashley Lutz | May 15, 2012

The U.S. finance industry is less efficient than ever.

Investment banks take the biggest share of income in history, while the cost of the services they do has actually stayed the same when measured for time and inflation, according to a recent study by Thomas Philippon at New York University.

Phillipon says that today's Wall Street is not as competent as generations before:
I find that the unit cost of intermediation has increased since the mid 1970s and is now significantly higher than it was at the turn of the twentieth century. In other words, the finance industry that sustained the expansion of railroads, steel and chemical industries, and later the electricity and automobile revolutions seems to have been more efficient than the current finance industry.
He also asserts that the cost of what banks do, investing assets, hasn't changed that much:
I find that this (annual) unit cost is around 2% and relatively stable over time. In other words, I estimate that it costs two cents per year to create and maintain one dollar of intermediated financial asset.
While their compensation has skyrocketed, even as technological advancements make their jobs easier:
The income share grows from 2% to 6% from 1870 to 1930. It shrinks to less than 4% in 1950, grows slowly to 5% in 1980, and then increases rapidly to more than 8% in 2010. Surprisingly, the tremendous improvements in information technologies of the past 30 years have not led to a decrease in the average cost of intermediation, or at least not yet. more

1 comment:

  1. It scaled up when they went to 'asset gathering' strategies. doesn't it scare everyone [it should] when they collect fees on a lot of money for a management cost that is fairly fixed [high fixed cost, low variable cost vs. high variable fees]. I wish I'd thought of it first.................