Ex-IMF director and blogger (on Nouriel Roubini’s Global Economic Monitor) Simon Johnson argues that while China has been making investments which boost the productive capacity of the real economy, the USA (and this thesis would apply to most Anglophone Western states) has allowed the financial sector to commandeer an ever greater proportion of economic activity. This growth comes not as a result of new, innovative investment (he cites ATMs, Credit Cards and the ability to hedge as positive financial productivity enhancers) but as a result of ever greater rent seeking activity. I.e. The financial sector is levying an ever greater tax on the rest of the economy, and is devoting significant resources to protect and expand it’s ability to do so. In this he strikes a chord with the FIRE economy thesis propounded by Eric Jenzen on iTulip.com for a number of years. He argues that in the USA that Finance, Insurance, and Real Estate (FIRE) have hollowed out the real, productive economy.
We can see this in Ireland in ludricrous house prices, homes which cost maybe 3 times the average salary just over a decade ago, had soared to a ratio well over 10 times average salary by 2006. The quality of the houses hadn’t increased significantly, the banks had just figured out a way to extract more cash from unfortunate consumers.
Simon says –
Finance is rent-seeking. The sector has devoted great resources to tilting all playing fields in its direction. Consumers are taken advantage of; consumer protection is vehemently opposed. And great risks are taken, with the downside handed off to the government (and the consumers again, as taxpayers). This downside protection allows an overexpansion of debt-financed finance reaching the preposterous levels seen in mid-2008 and now re-emerging.
So government protection of financial institutions leads to excessive risk taking behaviour (moral hazard). Does it look to you that we have learnt nothing from this crises and are set to replay our mistakes, starting with NAMA?