In Case You Missed This... 'Are The Big Banks Winning?' - Charles R. Morris/Reuters

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Are the big banks winning?
By Charles R. Morris - Reuters
OCTOBER 24, 2012

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The Dodd-Frank Act to re-regulate the big banks was intentionally tough. It was passed in the wake of the 2008-2009 financial crash to end cowboy banking; require far more capital and much less leverage, and rein in the trading-desk geniuses who pumped up serial bubbles. Since Congress is a poor forum for crafting such a complex statute, the details were left to the expert regulatory agencies.

The big banks pay lip-service to the goals of Dodd-Frank — but they’re mounting bitter, rearguard actions in federal courts to block meaningful constraints and regulations on procedural and other grounds. This is an ominous turn of events, since these banks have the legal firepower to overwhelm budget-constrained U.S. regulatory agencies.

While Dodd-Frank is aimed at preventing another cycle of bubble-and-bust, shrinking the financial sector is crucial for other reasons. One is a mass of evidence demonstrating that hyper-financialized economies have lower growth. Another is the appalling ethical record of large financial companies. The chance of making huge paydays by risking other people’s money, it seems, can sometimes derange moral compasses.

First, the pro-growth argument for clamping down on the banks: Once the financial sector achieves a certain size, its continued expansion reduces economic growth, according to a new study by two senior economists at the Bank for International Settlements, Stephen Cecchetti and Enisse Kharroubi, using a large international data base stretching back more than 30 years: http://www.bis.org/publ/work381.pdf

Their conclusions are unambiguous. No country can achieve a high rate of growth without a well-functioning financial system. China, for example, lacks a deep system of consumer finance, forcing it into a lop-sided development strategy. The result is the creation of dangerous imbalances that could threaten continued rapid growth.

An outsized financial sector expansion can actually reduce economic growth, according to their data. This relationship holds for country after country, and the tipping points are fairly consistent. When private credit grows to between 90 percent and 100 percent of gross domestic product, it is tilting toward too big. In the runup to the 1997-98 Asian financial crises, Thai private credit outstanding grew to 150 percent of GDP and growth turned sharply down. As soon as credit was ratcheted back to 95 percent of GDP, however, Thai productivity picked up sharply.

New Zealand’s economy offers much the same picture. As its financial sector expanded beyond the 100 percent mark, productivity dropped sharply, then rose again as credit was brought under control. Ireland and Spain show a similar pattern.

The sector that typically bears the brunt of hyper-financialization is manufacturing...

More: http://blogs.reuters.com/great-debate/2012/10/24/are-the-big-banks-winning/