Wall Street More Expensive, No More Efficient Today Than A Century Ago

Wall Street is making more money than ever, but it's that's not because it's getting the job done much better.

The financial system of today is just as good at transferring money from savers to borrowers as it was in 1910, according to research from New York University economist Thomas Philippon. In fact, the Wall Street of 1900 was producing loans, bonds and stocks just as well as the finance industry of 2010 -- and doing it more cheaply when considering cost per dollar of assets.

Philippon notes that all of this inefficiency is true of today's Wall Street "despite its fast computers and credit derivatives," which might seem strange given how most other industries typically react to advancements in technology. Hint: they usually get more efficient, and their services cheaper.

As Timothy Noah of the New Republic notes, citing Philippon's data: "Wal-Mart uses technology to increase sales volume, but the more it does so the more it drives down profit margins -- its own and everybody else's."

So why has Wall Street gotten so inefficient, flying in the face of market theory? Philippon offers one possible reason: Technological advancements have actually increased trading activity, which makes more money for Wall Street, but doesn't do anything for its efficiency.

Philippon's latest findings echo his earlier research. Wall Street wastes an estimated $280 billion per year, according to a paper from Philippon published last year. But despite the inefficiency, the industry doubled in size between 1980 and 2010.

What's more, the financial services sector is now bigger than it was before the financial crisis. Wall Street accounts for 8.4 percent of America's gross domestic product, a greater share than in 2006 and one of the biggest percentages in history.

 

Comments

[authorized-user]

01:56 PM on 04/16/2012

"Philippon's latest findings echo his earlier research. Wall Street wastes an estimated $280 billion per year, according to a paper from Philippon published last year."

----Not to worry, that 280 billion is stuck to someone's hands.

Who or what goes out the window when this pyramid fails, traders or computers?

[kamact]

11:23 AM on 04/16/2012

Captive government and crony capitalism...WS banksters continue to be the greatest threat to America...

[Ghoaster]

04:59 PM on 04/15/2012

Can we declare NYC a seperate country? And tax them on their exports?

[knewsreply]

01:08 PM on 04/15/2012

Premeditate "White-Collar Crime" by Corporate Executives, which robs money from others, should be the same as premeditate robberies, which robs money from others. Most the non-"white-collar robbers" go to jail, so it's only fair for "white-collar" criminals to receive equal punishment, even though the robbery of "white-collar" criminals is usually for more money than any bank robbery. It's "equal pay for equal work."

[Andrew Nutra]

01:30 PM on 04/15/2012

Great. Why don't you name names or do you just like to generalize that all corporate executives are criminals?

[wonderYrednow]

01:48 PM on 04/15/2012

Paulson, Summers, Dimon, Blankfein, just for starters.

[whitcombc]

11:15 AM on 04/15/2012

Come on! It is Much More Efficient at taking and keeping money since 1929. 1900 was the period leading up TO the Crash and Depression. It was pre-war, full of corruption, and raging with monopolies. Kinda like now where the various big industries have eliminated competition, absorbed the smaller companies, put people out of good work and back into lower wage jobs, substitution Irish workers in service jobs. Once we had the "lovely War" which goosed a few companies into mega wealth status, the Market went wild again and POP! Gone again. It is where WE are now. Waiting for the Next Lucrative War! Then deregulation of industries and Wall St. and we will be back to 1929 again.

[Neuron Flash]

07:41 PM on 04/14/2012

Wall Street wastes $280 B a year? Correction: Wall Street steals $280 B a year.

[Andrew Nutra]

02:04 AM on 04/15/2012

Wow, you're so clever.

[Neuron Flash]

02:23 AM on 04/15/2012

I am so flattered that a genius such as yourself would respond to my humble comment.

Please elighten us with your brilliant intellect.

[wonderYrednow]

01:49 PM on 04/15/2012

NO, Wall St. STEALS trillions, they WASTE $280 billion.

[minto]

04:03 PM on 04/14/2012

I don't understand how this can keep going eventually it has to collapse again doesn't it?

[twninja]

03:52 PM on 04/14/2012

too many middle man gets paid too much. too much too much . . .

[wsterr]

12:46 AM on 04/15/2012

It's the American way! Shut up and suffer.

[John Shuck]

01:18 PM on 04/14/2012

The trend is, as always, toward a slow steady decline until it all collapses. Their bucks end with a bang, ours with a whimper...

[Estonia-Firster]

12:09 PM on 04/14/2012

In 1900 there was no central bank to artificially keep interest rates low thus giving big banks cheap money and to be the lender of last resort. So big banks had to do a better job of managing risk, had to be more customer oriented, and had to work harder to make a profit without the artificially cheap money.

[watchingduck]

01:54 AM on 04/15/2012

so we all agree, the people on wall street today are vastly overpaid for what they actually produce. and not only are they over compensated for their crooked or incompetent behavior, but they pay a lower tax rate, and are rarely held accountable.

[Estonia-Firster]

11:13 AM on 04/15/2012

true