Saturday, February 13, 2010

Financial market share

I had blogegd earlier about the disproportionately large influence of the financial sector in the economy and the hugely overpaid employees in that sector.

Catherine Rampell has a nice post which draws attention to the recently released annual Economic Report of the US President which amplifies these aforementioned concerns.

This graph compares the trend growth of the size of the American banking sector in relation to the US GDP. From 1952 to 2009, nominal output increased by 4,000% while financial sector assets exploded 16,000%.

Another graph illustrates the source of this explosive growth within the financial sector - the shadow banking sector. The makeup of financial sector assets has changed drastically, shifting from a concentration of assets in banks (which include commercial banks, bank-holding companies, thrifts and credit unions) toward other institutions, including mutual funds, government-sponsored enterprises (like Fannie Mae and Freddie Mac) and issuers of asset-backed securities. Today, banks still represent the largest component of the financial sector, 26.7% as of June 2009, but back in 1952, banks accounted for 53.2% of financial sector assets.

In an indication of the lack of transparency in the markets, this graph does not contain the shares of hedge funds since accurate information about their size is not even available.

All this growth got initiated in the mid-eighties (under Republican administration) and took-off in the mid-nineties (under democratic administration). This bipartisan nature of its growth atleast partially explains why the financial services sector managed to consistently outrun its government overseers in the last couple of decades.

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