Thursday, January 28, 2010
Volker: Financial innovation adds nothing to the real economy
"...I have found very little evidence that vast amounts of innovation in financial markets in recent years have had a visible effect on the productivity of the economy. Maybe you can show me that I am wrong. All I know is that the economy was rising very nicely in the 1950s and 1960s without all of these innovations. Indeed, it was quite good in the 1980s without credit-default swaps and without securitization and without CDOs." -Paul Volker
He's right! In the 1970s we built 2.6 million homes in the United States. Mortgages were issued from plain vanilla commercial banks that held those loans on their books and serviced them. Bankers made little more than a civil servant's salary.
In 2006 at the height of the real estate boom we built 2.6 million homes, same thing, but there was so much intermediation, exotic mortgage products, etc. It didn't add anything to the nation's housing capital stock. It only added risk.
The financial sector garners 40% of the nation's corporate profits, whereas in the 1970s it comprised about 2% of all corporate profits. All that money, for what? Shuffling paper around. Obscene!!
Read all of Volker's comments here.