The End of Banking as We Know It:
The bright side is that all those displaced financial services professionals can now set their sights on doing something, well, truly useful.
Still, this adjustment will be painful for all those who have to carve out new careers, as well as for New York and other places these companies call home.
Finally, what will a humbled financial services industry mean for consumers? Higher borrowing costs, Mr. Miller said.
"The leverage that these companies were using allowed them to lower their rates," he said. "Rates have to go higher for the banks to operate in a safe and sound manner and make money."
Credit is also likely to remain tight, in Mr. Miller's opinion. A result is that consumer spending won't recover to bubble levels.
The bloated banking sector did have a use: propping up conspicuous consumption in a culture where for a small moment everyone fancied themselves a potential real estate millionaire in the making. It seems the current opinion is that all those extra iBankers were like all the extra bureaucrats at any large corporation; no value added except for their own bottom line. To be fair, I think this argument could be made about most scientists and science. But there is a structural difference between science & finance. Just because 99.99% of scientific possibilities are false leads, it doesn't mean that it is then acceptable that 99.99% of financial decisions are also missteps. In finance the remaining 0.01% of decisions won't result in something like electricity or the railroad.
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Well, we need to separate two issues: (1) has there been bloat in finance? and (2) does finance add value? Even if the answer to (1) is "yes," it doesn't necessarily follow that the answer to (2) is also "yes." That needs to be separately established. Didn't "financial engineering" reduce borrowing costs? And don't currency swaps promote international trade? And doesn't trading help keep price signals accurate and buy-sell spreads (i.e., transactions costs) low? Yes to all of those, so I think (2) needs to be answered in the affirmative.
I think going back to credit requirements we had in the 80's is a good thing. Likewise limiting all the excessive consumer credit for nearly everything is good. I'm not sure it'll change the overall economic situation beyond keeping people from going bankrupt quite as often.
Just like real estate and the stock market, financial institutions (FIs) were a bubble that burst. Many economists saw it coming. One FI would bundle paper and sell it to another FI, then the paper would be rebundled and sold again and again and again, sometimes back to the original seller at several times the initial price. It was a case of taking in each other's washing. FIs could show they were making profitable sales. Coupled with massive deregulation and occasionally outright fraud, the paper profits kept climbing higher and higher. After a while, the house of cards toppled.
Now we'll have a period of regrouping and reregulating, similar to the world wide actions of governments and central banks in the 1930s. Deflation is a serious threat to the world economy. We're being inflicted with the old Chinese curse: "May you live in interesting times."
(1) has there been bloat in finance? and (2) does finance add value? Even if the answer to (1) is "yes," it doesn't necessarily follow that the answer to (2) is also "yes."
uh, well, no shit to number #2 ;-) a modern efficient capitalist system also needs lawyers and a legal framework to enforce contracts. but obviously there are diminishing marginal returns on every other employed individual becoming a lawyer ;-) similarly, i think there's a pretty obvious possibility that many sci & tech people who went into finance subtracted from the spillover effects of sci & tech to modern society. granted, people in professions like finance, medicine and law "capture" a much greater proportion of the social value-add to themselves as individuals in the form of income, so it's in someone's rational economic interest to pick these fields rather than relatively unremunerated scientific fields....