Before the Great Recession, the financial sector had consistently been eating up a greater and greater share of the economy. In 2007, it accounted for a whopping 40 percent of corporate profits. Before 1950, the financial sector made up less than 3 percent of GDP; now it makes up more than 8 percent.
According to a new report from Demos, the financial sector siphons off $635 billion annually in funds that otherwise might go to productive uses, rather than flipping financial assets back and forth:
In recent years, the financial sector share of aggregate GDP has been in the range of 8.3%, an increase from the historic level of 4.1%. By inferring that the historical increase in financial sector share of GDP is attributable to the value diverted from capital intermediation, the excessive wealth transfer to the financial sector is in the range of $635 billion per year. In terms of capital investment loss, one would apply a multiplier to the annual wealth transfer figure since recovery of the annual cost to the capital intermediation system would enable greater upfront investment by businesses and governments.
Research has found that a large financial sector can actually impede economic growth. An International Monetary Fund study showed that “at high levels of financial depth, a larger financial sector is associated with less growth. Our findings show that there can be ‘too much’ finance.” Currently, the six biggest banks hold assets equal to 60 percent of America’s GDP.