Thursday, August 23, 2012

The financial sector distortions in three graphics

In the aftermath of the sub-prime mortgage meltdown, there has been a fierce debate on the spectacular growth of the financial sector in recent decades and its attendant resource mis-allocation problems. Here are three excellent graphics that captures the essence of what has gone wrong.

Buoyed by a wave of financial market deregulation policies, the sector's share of the GDP of western economies have exploded since the mid-nineties.

This excessive returns are reflected in the steep increase in financial sector compensation since then. In particular, the ratio of executives compensation to the average worker's salary has rocketed.

Financial sector wages have grown exponentially. As compensation returns rose, risk appetites too ballooned, thereby leaving a trail of incentive distortions everywhere.

The long post-war era of the Great Moderation suddenly gave way to the Great Excess!

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