Sunday, 12 October 2008

Redeploying intellectual capital

From Market Pipeline:
If paying the bankers (a lot) less or taxing them (a lot) would certainly be more desirable from a moral point of view ... would it be harmful in terms of economic efficiency, as many economists suggest? Is there a risk of discouraging the most talented to work hard and innovate in finance? Probably. But it would almost certainly be a good thing. A study on Harvard graduates showed that those who work in finance earn almost 3 times more than others. The temptation for young talent to work in this sector is enormous – 15% of 1990 Harvard graduates are working in finance, compared with only 5% of the class of 1975. More generally, the massive deregulation of the financial sector, which began in the 1980s, and the opportunity to make extraordinary profits have been accompanied by an increase in the number and qualifications of employees in this sector. Again, according to Philippon and Resheff, one has to go back to 1929 to see such a gap between the average education of an employee in the financial sector and one in the rest of the economy. The complex financial products, but also the evolution of standards in the social sectors over the past 30 years, have made the financial sector particularly attractive to any graduate, intelligent as he or she may be.

What the crisis has made bluntly apparent is that all this intelligence is not employed in a particularly productive way.
It is hard to disagree with this. If some of those 10% extra Harvard graduates in finance had gone into alternative energy, or transport planning, or medicine, would they have done more good (however you want to define it)? One's visceral reaction is that they would, especially once you factor in all the unproductive professions that go along side finance: tax lawyers, particularly.

Good banks lending on rational terms are important. New financial products can help investors and borrowers meet on terms that are better for both. But just as we don't need many of the 'innovations' that are foisted upon us by politicians -- ID cards spring to mind -- so investors should have been sensible enough to say no thank you to the worst excesses of financial creativity. No one needed a Libor squared swap in 1994: similarly no one needed a CPDO or CDO squared in the 2000s. Just say no to pointless, counterproductive innovation. It will help the innovators do something more useful with their lives.



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