Monday, December 6, 2010

Capital Market Dysfunctionality

More from a recent article in The New Yorker. Some thoughts from the man who set up the Paul Woolley Centre for the Study of Capital Market Dysfunctionality at the London School of Economics:

On Allocating Capital
Was the financial industry doing what it was supposed to be doing? Was it allocating capital to its most productive uses?

At first, like most economists, he believed that trading drove market prices to levels justified by economic fundamentals...The dotcom bubble of the late nineteen-nineties changed his opinion.

Markets are "Grossly Inefficient"
Financial markets, far from being efficient, as most economists and policymakers at the time believed, were grossly inefficient. "And once you recognize that markets are inefficient a lot of things change."

Rent Capture
"Rent capture causes the misallocation of labor and capital, transfers substantial wealth to bankers and financiers, and, at worst, induces systemic failure. Both impose social costs on their own, but in combination they create a perfect storm of wealth destruction."

Size of the Financial Sector
I asked Woolley how big he thought the financial sector should be. "About a half or a third of its current size," he replied.

Check out the entire article in The New Yorker.

Adam

Related post:
The Banking Power Utility

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