financial intermediation

A Failure of Capitalism: The Crisis of '08 and the Descent Into Depression
by Richard A. Posner
Published 30 Apr 2009

A choice under profound uncertainty is not adding a column of numbers but firing a shot in the dark, and so we should consider the character traits (not character flaws) that make some people willing to act on such a basis. They will be people who have a below-average aversion to uncertainty and, since we are speaking of business, an above-average love of making money. They were bound to swarm into financial intermediation in the era created by Alan Greenspan's monetary policy that offered prospects of great wealth to smart people willing to take large risks. Such people are not irrational, but their clustering in financial intermediation when the wraps are taken off risky lending enhances the inherent instability of that business. Similarly, it is not irrational, though often thought to be, to allow oneself to be influenced by what other people are doing.

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The case against reorganization is the clearer: experience, as with the Department of Homeland Security, teaches that a major federal reorganization (not to mention a reorganization that would encompass both state and foreign regulation of financial intermediation as well) takes years to gel, and during those years of growing pains the efficiency with which the mission entrusted to the reorganized entity will be performed will be lower than it was in the pre-reorganization regime. And this is apart from the fact that in the present instance the same small knot of senior economic officials that would design and supervise the reorganization have their hands full dealing with an economic emergency. The case against trying to reregulate financial intermediation at this time is a bit subtler and requires me to distinguish between two senses of "regulation."

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And for the further reason that while reregulation is likely to be administratively less complex than reorganization (just count the federal and state agencies that would have to be included in one way or another in the reorganization for it to be maximally effective), it is more challenging intellectually. There is first the extraordinary diversity and complexity of modern financial intermediation. Commercial banks conduct little more than half the financial intermediation in the American economy. If they are forced to be safe, their competitors will eat them alive. But can hedge funds, private equity funds, investment banks, and all the other nonbank banks be placed under the identical regulatory regime as commercial banks?

Profiting Without Producing: How Finance Exploits Us All
by Costas Lapavitsas
Published 14 Aug 2013

In recent years, however, data has been made available which focuses more closely on the financial sector and, above all, on financial intermediation (though the starting point of the change is different for each country). Thus, figure 6 shows employment in financial intermediation as a percentage of total employment. The countries of market-based finance, US and UK, have higher levels of financial employment than the countries of bank-based finance, Japan and Germany. However, the most striking aspect of figure 6 is that employment levels have been low and stable across the four countries: the proportion of the labour force employed in financial intermediation has been flat (or even gently declining) as the financial sector has surged ahead.

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Townsend, ‘Optimal Contracts and Competitive Markets with Costly State Verification’, Journal of Economic Theory 22, 1979. 9 See, for instance, Joseph Stiglitz and Andrew Weiss, ‘Credit Rationing in Markets with Imperfect Information’, American Economic Review 71:3, 1981, pp. 393–410; Nobuhiro Kiyotaki and John Moore, ‘Credit Cycles’, Journal of Political Economy 105:2, 1997. 10 Once again, the literature is very broad; see, very selectively, Hayne Leland and David H. Pyle, ‘Informational Asymmetries, Financial Structure and Financial Intermediation’, The Journal of Finance 32, 1977; John Bryant, ‘A Model of Reserves, Bank Runs, and Deposit Insurance’, Journal of Banking and Finance 4, 1980; Douglas Diamond and Philip Dybvig, ‘Bank Runs, Deposit Insurance and Liquidity’, Journal of Political Economy 91, 1983; Douglas Diamond, ‘Financial Intermediation and Delegated Monitoring’, Review of Economic Studies 51, 1984; John H. Boyd and Edward C. Prescott, ‘Financial Intermediary-Coalitions’, Journal of Economic Theory 38, 1986; Douglas Diamond and Raghuram Rajan, ‘Liquidity Risk, Liquidity Creation, and Financial Fragility: A Theory of Banking’, Journal of Political Economy 109:2, 2001; Franklin Allen and Anthony M.

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However, the most striking aspect of figure 6 is that employment levels have been low and stable across the four countries: the proportion of the labour force employed in financial intermediation has been flat (or even gently declining) as the financial sector has surged ahead. If employment in financial intermediation (mostly banking) was taken as a proxy for aggregate financial employment, it would appear that financialization has not brought a sustained increase in the proportion of the labour employed in the realm of finance.8 The reasons for stagnant employment in financial intermediation are not immediately clear, and are probably related to the transformation of banking discussed in subsequent sections of this chapter. Suffice it to note that banks have been deeply restructured during the last three decades, altering the mix of labour skills and technologies deployed.

The Future of Money: How the Digital Revolution Is Transforming Currencies and Finance
by Eswar S. Prasad
Published 27 Sep 2021

While mobile money takes existing technologies and puts them to transformative uses, the latest wave of Fintech is more often characterized by new technologies, some of which are in themselves transformative. Fintech firms are making forays into areas ranging from basic financial intermediation to insurance and payment systems. In each of these areas, new technologies are improving extant business models and sometimes also creating new financial products or ways of doing business. Fintech Intermediation Fintech has helped create alternatives to banks as sources of loans. While many success stories point to how banks could be shunted aside in the process of financial intermediation, it is hardly time to regard banks as defunct. Models of peer-to-peer lending that link businesses directly to households and investors, thereby circumventing traditional financial intermediaries, show promise, but banks still dominate the landscape.

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It carries the prospect of democratizing finance by providing the economically underprivileged with access to the financial system. The revolution promises, and has begun to deliver, lower costs and more efficient financial intermediation. The rise of new types of nonbank and informal financial institutions has helped create new products for savers and borrowers. Whether these institutions will displace commercial banks or expand the channels of financial intermediation in an economy is not conclusive at this stage. New technologies will certainly improve financial inclusion, giving low-income households access to financial products and services that yield higher returns on and better diversification of their savings, and also provide easier access to credit to smooth out temporary income shocks.

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Rather, they argued, market discipline was thwarted by government intervention or, worse, direct government involvement in the market. Taking this contention at face value (not that you necessarily should), decentralized financial intermediation might help limit the government’s involvement and give greater sway to market forces. Decentralized payment-processing and settlement systems could, in addition to increasing efficiency, level the playing field across banks of varying sizes. The advantage of scale that large banks (and other large institutions) have will matter less as the costs of financial intermediation fall. Regulators will, however, need to be vigilant to avoid the risks of the system being captured by large institutions.

Other People's Money: Masters of the Universe or Servants of the People?
by John Kay
Published 2 Sep 2015

Systemic instability in the financial system is the result of the interdependencies inherent in an industry that deals mainly with itself. The growth in the scale of resources devoted to financial intermediation is not to any large degree (or, in most cases, at all) the result of any change in the needs of users of intermediary services. The growth of financial activity has come from a massive expansion in the packaging, repackaging and trading of existing assets. The finance sector today does many things that do not need to be done, and fails to do many things that do need to be done. Financial intermediation that meets the needs of the real economy should not be a game in which professional intermediaries compete to outwit each other.

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The common sense that suggests that the activity of exchanging bits of paper cannot make profits for everyone may be a clue that much of this profit is illusory: much of the growth of the finance sector represents not the creation of new wealth but the sector’s appropriation of wealth created elsewhere in the economy, mostly for the benefit of some of the people who work in the financial sector. And yet, although the finance industry today displays many examples of egregious excess, the majority of those engaged in it are not guilty or representative of that excess. They are engaged in operating the payments system, facilitating financial intermediation, enabling individuals to control their personal finances and helping them to manage risks. Most people who work in finance are not aspiring Masters of the Universe. They are employed in relatively mundane processing activities in banking and insurance, for which they are rewarded with relatively modest salaries.

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But connectedness, which the internet delivers so effectively, is only one of the functions of the intermediary. The greater ease of making connections increases the need to monitor these connections. Facebook illustrates how a broader range of relationships diminishes their average quality. Recent financial innovations, such as crowd-funding and peer-to-peer lending, cannot eliminate financial intermediation. If savers are to obtain returns that match the risks they take, they need to be able to judge how their money is used and how the assets purchased with that money are managed. Few have the time, knowledge or experience to do this. Cynicism born of experience is required to find the few viable opportunities among many optimistic business plans.

Value of Everything: An Antidote to Chaos The
by Mariana Mazzucato
Published 25 Apr 2018

The same banks that had benefited from the bailout now profited from governments' plight, earning some 20 per cent of their entire derivative revenues from such naked CDSs. Financial intermediation - the cost of financial services - is a form of value extraction, the scale of which lies in the relationship between what finance charges and what risks it actually runs. Charges are called the cost of financial intermediation. But as we have seen, while finance has grown and risks have not appreciably changed, the cost of financial intermediation has barely fallen, apart from some web-based services that remain peripheral to global financial flows. In other words, the financial sector has not become more productive.

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These activities, especially the transformation of short-term deposits into long-term loans and the guarantee of liquidity to customers with overdrafts, also mean a transfer of risk to banks from other private-sector firms. This bundle of services collectively constitutes ‘financial intermediation'. It is assumed that, instead of directly charging for these services, banks impose an indirect charge by lending at higher interest rates than they borrow at. The cost of ‘financial intermediation services, indirectly measured' (FISIM) is calculated by the extent to which banks can mark up their customers' borrowing rates over the lowest available interest rate. National statisticians assume a ‘reference rate' of interest that borrowers and lenders would be happy to pay and receive (the ‘pure' cost of borrowing).

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Maximum efficiency, friction-free capitalism, would in theory be reached when the interest differential disappears. Yet the ‘indirect' measure of financial intermediation services adopted by national accounts (FISIM, explained in Chapter 4) assumes that a rise in added value will be reflected in a wider wedge (or, if the wedge narrows, by increased fees and charges through which intermediaries can obtain payment directly). The point, of course, is not to eliminate interest but - if interest is the price of financial intermediation - to make sure that it reflects increased efficiencies in the system, driven by appropriate investments in technological change, as some fintech (financial technology) developments have done.

The Great Reversal: How America Gave Up on Free Markets
by Thomas Philippon
Published 29 Oct 2019

FIGURE 11.1  (a, b)  Two equivalent financial systems Finance Still Costs 200 Basis Points As we have just explained, the sum of all profits and wages paid to financial intermediaries represents the cost of financial intermediation. In Philippon (2015), I measure this cost from 1870 to 2010, as a share of GDP. As you can see in Figure 11.2, the total cost of intermediation varies a lot over time. The cost of intermediation grows from 2 percent to 6 percent of GDP from 1880 to 1930. It shrinks to less than 4 percent in 1950, grows slowly to 5 percent in 1980, and then increases rapidly to almost 8 percent in 2010. Why are we spending more on financial intermediation today than 100 years ago? To answer that question, let us construct the amount of intermediation.

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The data range for intermediated assets is 1886–2012. The solid line with circles in Figure 11.2 is the share of GDP that we spend on financial intermediation in the US. It is literally the equivalent of the $2 paid to intermediaries in Figure 11.1. The shaded-line series is built by adding the series of debt, equity, and liquidity services with the proper theory-based weights. It is the equivalent of the $100 in Figure 11.1. FIGURE 11.3  Raw unit costs of financial intermediation. The raw measure is the ratio of finance income to intermediated assets, as shown in Figure 11.2. The 2012 data are from Philippon (2015), while the new data were accessed May 2016.

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Moreover, one would think that, with the advent of computers, financial services would have become a lot more efficient and a lot cheaper. I am going to show you that this did not happen and that, in fact, little has changed over the past 100 years, at least until very recently. What Does Finance Actually Do? Financial intermediation arises from the need for expertise in channeling capital from savers to borrowers. In the absence of financial intermediaries, households with savings would have to interact directly with borrowers. That would not be easy. Borrowers typically need long-term, committed capital. Prime examples are mortgages and corporate loans.

Portfolios of the poor: how the world's poor live on $2 a day
by Daryl Collins , Jonathan Morduch and Stuart Rutherford
Published 15 Jan 2009

In addition, Hamid always made sure he had $2 in his pocket to deal with anything that might befall him on the road. 8 THE PORTFOLIOS OF THE PO OR Table 1.2 Hamid and Khadeja’s Closing Balance Sheet, November 2000 Financial assets Microfinance savings account Savings with a moneyguard Home savings Life insurance Remittances to the home villagea Loans out Cash in hand $174.80 Financial liabilities Microfinance loan account Private interest-free loan Wage advance Savings held for others Shopkeeper credit Rent arrears 16.80 8.00 2.00 76.00 $223.34 153.34 14.00 10.00 20.00 16.00 10.00  30.00 40.00 2.00 Financial net worth $48.54 Note: US$ converted from Bangladeshi takas at $1  50 takas, market rate. a In the Bangladesh and Indian diaries remittances to the home village are treated as assets, given that for the most part the remittances entail debt obligations on the part of the recipients or are used to create assets for use by the giving households. In South Africa, remittances are treated as expenses given that they were mostly used to support the daily needs of family members living at a distance. Their active engagement in financial intermediation also shows up clearly on the liabilities side of their balance sheet. They are borrowers, with a debt of $153 to a microfinance institution and interest-free private debts from family, neighbors, and employer totaling $24. They also owed money to the local grocery store and to their landlord.

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Within our sample, these government grants made up 48 percent of the 35 CHAPTER T WO average household income in the rural areas and 10 percent in the townships. These monthly payments certainly make income more regular, and we later show that this regularity does make it easier to engage in higher levels of financial intermediation. But these incomes are small: in the rural areas, a grant meant to support one person supports, on average, a family of four. As a result, grants are rarely enough to cover costs, and most households supplement them with small business, casual work, and remittances from working relatives.

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In South Africa, however, labor laws are much more rigorously enforced, and when households do manage to find a waged job, they tend to have a fairly reliable source of income. Even grant recipient households could depend on regular monthly grant income. In our study, these households were able to “leverage” their more regular sources of income to engage in larger-scale financial intermediation: with a regular income, they were more comfortable taking on higher levels of debt and lenders were more willing to provide loans. As table 2.4 shows, regular wage earners in South Africa are usually better off in terms of both absolute income and income per capita than those earning irregularly (those whose income 44 T H E DA I LY G R I N D Table 2.4 Regular versus Irregular Income Households, South Africa Wage-earning households Share of sample in profile Financial statistics Average monthly income Average monthly income per capita Debt/service ratio Debt/equity ratio Grant-receiving households Irregular income households 49% 27% 21% $635 $188 $235 $219 13% 22% $61 17% 23% $87 7% 19% Note: US$ converted from South African rand at $ = 6.5 rand, market rate.

The Little Book of Common Sense Investing: The Only Way to Guarantee Your Fair Share of Stock Market Returns
by John C. Bogle
Published 1 Jan 2007

The moral of the Gotrocks story: Successful investing is about owning businesses and reaping the huge rewards provided by the dividends and earnings growth of our nation’s—and, for that matter, the world’s—corporations. The higher the level of their investment activity, the greater the cost of financial intermediation and taxes, the less the net return that shareholders—as a group, the owners of our businesses—receive. The lower the costs that investors as a group incur, the higher the rewards that they reap. So to enjoy the winning returns generated by businesses over the long term, the intelligent investor will reduce to the bare-bones minimum the costs of financial intermediation. That’s what common sense tells us. That’s what indexing is all about. And that’s the central message of this book.

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Paraphrasing Upton Sinclair: It’s amazing how difficult it is for a man to understand something if he’s paid a small fortune not to understand it. Our system of financial intermediation has created enormous fortunes for those who manage other people’s money. Their self-interest will not soon change. But as an investor, you must look after your self-interest. Only by facing the obvious realities of investing can an intelligent investor succeed. How much do the costs of financial intermediation matter? Hugely! In fact, the high costs of equity funds have played a determinative role in explaining why fund managers have lagged the returns of the stock market so consistently, for so long.

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Chapter Four How Most Investors Turn a Winner’s Game into a Loser’s Game “The Relentless Rules of Humble Arithmetic” BEFORE WE TURN TO the success of indexing as an investment strategy, let’s explore in a bit more depth just why it is that investors as a group fail to earn the returns that our corporations generate through their dividends and earnings growth, which are ultimately reflected in the prices of their stocks. Why? Because investors as a group must necessarily earn precisely the market return, before the costs of investing are deducted. When we subtract those costs of financial intermediation—all those management fees, all of that portfolio turnover, all of those brokerage commissions, all of those sales loads, all of those advertising costs, all of those operating costs, all of those legal fees—the returns of investors as a group must, and will, and do fall short of the market return by an amount precisely equal to the aggregate amount of those costs.

GDP: A Brief but Affectionate History
by Diane Coyle
Published 23 Feb 2014

9 Unable to imagine when this was written that banking could be subtracting value from the economy, statisticians sought to find a way of measuring these earnings from financial intermediation. So for many years the convention was to count financial services as the negative output of an imaginary segment of the economy. It is, to use a phrase from Alice in Wonderland, curiouser and curiouser. As the financial services industry grew throughout the 1980s, the approach changed again, and the 1993 update of the UN System of National Accounts introduced the concept of “financial intermediation services indirectly measured,” or FISIM. This current measure compares banks’ borrowing and lending rates on their loan and deposit portfolios to a risk-free “reference rate” such as the central bank’s policy rate, and multiplies the difference by the stock of outstanding balances in each case.

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See also purchasing power parity expenditures: categories of, 27–28; as GDP measure, 25, 26t, 27 factor cost, 30 famines, 73 Federal Reserve Bank of Dallas, 121, 123–25 Federal Reserve Board, 83, 88, 94 financial crisis (2008–), 93–97 financial intermediation services indirectly measured (FISIM), 100–104, 136 financial sector, 40, 97–105 fiscal policy, 15, 19, 23, 77 fiscal stimulus, 23 FISIM. See financial intermediation services indirectly measured Fitoussi, Jean-Paul, 118, 139 Fleming, Alexander, 63 Ford, Henry, 45 France, 8–9, 103 Frank, Robert, 112 free market ideology, 93 Friedman, Thomas, 95–96 Gagarin, Yuri, 47 Geary-Khamis dollars, 52 Genuine Progress Indicator (GPI), 116, 137 Georgiou, Andreas, 1–2, 4 Germany, 17, 41–42, 71 Ghana, 32, 53, 94, 107 Gilbert, Milton, 15, 50 globalization, 93–94 global supply chains, 125 Golden Age, 43, 56 Gosplan, 29 government expenditures (G), 27–29 government role in economy, 14–17, 19–21, 23, 63–66, 77–78.

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Finance was a more or less “unproductive” activity because the interest flows (now measured by the FISIM construct) were broadly treated as an intermediate input of the finance sector and therefore netted out of the sector’s final value-added contribution to GDP. In the United States from 1947 to 1993, the net interest revenue from financial intermediation (labeled the imputed bank service charge, IBSC) was counted as an input to other sectors of the economy. This approach was formalized worldwide in the revised 1968 SNA, when the IBSC was “considered wholly intermediate consumption and, more pointedly, as the input/expense exclusively of a notional industry sector with no output of its own.

13 Bankers: The Wall Street Takeover and the Next Financial Meltdown
by Simon Johnson and James Kwak
Published 29 Mar 2010

And derivatives, as discussed earlier, can be useful tools to help companies hedge their operational risks. But there is no law of physics or economics that dictates that all financial innovations are beneficial, simply because someone can be convinced to buy them. The core function of finance is financial intermediation—moving money from a place where it is not currently needed to a place where it is needed. The key questions for any financial innovation are whether it increases financial intermediation and whether that is a good thing. Much recent “innovation” in credit cards, for example, has simply made the pricing of credit more complex. Card issuers have lowered the “headline” price that they advertise to consumers while increasing the hidden prices that consumers are less aware of, such as late fees and penalty rates.

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This was a key element in Donald Regan’s strategy to provide a full spectrum of financial services; as he said, “I wanted to get into banking, and CMA was the way to do it.”82 Cash management accounts competed directly with traditional savings and checking accounts for deposits, and enabled securities firms to sweep up a larger share of their clients’ assets. Investment banks also benefited from the general shift in financial intermediation (the movement of money from people who have it to people who need it) from banks into the capital markets. Traditionally, households and businesses would put their excess cash in deposit accounts at commercial banks or S&Ls, which would lend the cash out as mortgages and commercial loans.

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These changes have contributed to a substantial improvement in the financial strength of the core financial intermediaries and in the overall flexibility and resilience of the financial system in the United States. And these improvements in the stability of the system and efficiency of the process of financial intermediation have probably contributed to the acceleration in productivity growth in the United States and in the increased stability in growth outcomes experienced over the past two decades.47 Even in April 2009, after the financial crisis, Greenspan’s successor, Ben Bernanke, said, “Financial innovation has improved access to credit, reduced costs, and increased choice.

The Captured Economy: How the Powerful Enrich Themselves, Slow Down Growth, and Increase Inequality
by Brink Lindsey
Published 12 Oct 2017

The positive association between financial development and growth turns entirely on growth of credit to the business sector; there is no known connection between expanded household credit and faster growth.36 Indeed, there is evidence that more credit to the household sector reduces savings rates with negative implications for growth.37 Accordingly, to the extent that a larger financial sector focuses more on household credit, it may be diverting resources away from productive activities. Even if we just focus on finance for the enterprise sector, more financial intermediation disproportionately benefits sectors of the economy where collateral is relatively favorable but productivity growth is low, such as in construction.38 By contrast, enterprises with the most growth potential these days are generally built on human and intellectual capital, assets that cannot be pledged as collateral. Here again, more financial intermediation may end up with more resources diverted to relatively unproductive activities. In addition, the financial sector is skilled labor–intensive, meaning its workforce is disproportionately highly educated and highly skilled.

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Governments in those countries have often pursued a policy of “financial repression” in which the combination of interest rate controls and high inflation results in negative real interest rates. This is a convenient state of affairs for governments that run chronic budget deficits, but it stunts the development of financial intermediation since savers are stuck with returns below the rate of inflation. Thus, in the world’s lowest-income countries, private bank lending averages a mere 11 percent of GDP, as opposed to 87 percent of GDP in the highest-income countries.30 Meanwhile, corruption and spotty enforcement of contract rights hinder the growth of capital markets.

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The prevalence of stunted, underdeveloped financial sectors around the world explains why, at the global level, there is a strong positive association between the size of a country’s financial sector and both the size and growth rate of its overall economy.31 Healthy financial development promotes healthy economic development in two basic ways. First, the growth of financial intermediation means more household savings get mobilized for productive use instead of sitting idle under the proverbial mattress. Second, banks and capital markets are generally better able to identify which individuals and businesses should receive financing than are the alternative mechanisms for allocating capital, namely, government, on the one hand, and informal networks of families and friends, on the other.

Empirical Market Microstructure: The Institutions, Economics and Econometrics of Securities Trading
by Joel Hasbrouck
Published 4 Jan 2007

Wrobleski, 1977, On the structure of moving average prices, Journal of Econometrics 6, 121–34. Arnold, Tom, Philip Hersch, J. Harold Mulherin, and Jeffry Netter, 1999, Merging markets, Journal of Finance 54, 1083–107. Bacidore, Jeffrey M., 1997, The impact of decimalization on market quality: An empirical investigation of the Toronto Stock Exchange, Journal of Financial Intermediation 6, 92–120. Bacidore, Jeffrey M., 2002, Depth improvement and adjusted price improvement on the New York stock exchange, Journal of Financial Markets 5, 169–95. Bacidore, Jeffrey, Katharine Ross, and George Sofianos, 2003, Quantifying market order execution quality at the New York Stock Exchange, Journal of Financial Markets 6, 281.

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Battalio, Robert H., 1997b, Third market broker-dealers: Cost competitors or cream skimmers?, Journal of Finance 52, 341–52. Battalio, Robert H., 1998, Order flow distribution, bid-ask spreads, and liquidity costs: Merrill Lynch’s decision to cease routinely routing orders to regional stock exchanges, Journal of Financial Intermediation 7, 338–58. Battalio, Robert H., 2003, All else equal?: A multidimensional analysis of retail, market order execution quality, Journal of Financial Markets 6, 143–62. Bertsimas, Dimitris, and Andrew W. Lo, 1998, Optimal control of execution costs, Journal of Financial Markets 1, 1–50. Bessembinder, H., 2004, Does an electronic stock exchange need an upstairs market?

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CFA Institute, 2002, Trade Management Guidelines, CFA Institute (formerly the American Institute for Management Research), available online at http://www.cfainstitute.org/standards/pdf/trademgmt_ guidelines.pdf. Chakravarty, Sugato, and Craig W. Holden, 1995, An integrated model of market and limit orders, Journal of Financial Intermediation 4, 213–41. Challet, Damien, and Robin Stinchcombe, 2003, Non-constant rates and over-diffusive prices in a simple model of limit order markets, Quantitative Finance 3, 155–62. Chan, Louis K. C., and Josef Lakonishok, 1993, Institutional trades and intraday stock-price behavior, Journal of Financial Economics 33, 173–99.

Trading at the Speed of Light: How Ultrafast Algorithms Are Transforming Financial Markets
by Donald MacKenzie
Published 24 May 2021

There is a second, quite different, argument for more research on finance’s mundane money-making, implicitly revealed in a remarkable article by the economist Thomas Philippon (2015).29 I’ve written about his article elsewhere—initially in the London Review of Books (MacKenzie 2016)—but the point is worth repeating: it sounds esoteric, but its implications are large. What Philippon has done is to measure the “efficiency”—the unit cost of financial intermediation—of the US financial system through time.30 Strikingly, and quite surprisingly, his data, shown in figure 1.6, do not reveal any clear tendency for finance’s efficiency to increase between the 1880s (the era of clerks writing in ledgers by pen, perhaps by gaslight) and 2012, in the epoch of HFT and the iPhone. If Philippon’s data are correct in suggesting that the unit cost of financial intermediation has changed little over this long period, why should that be so, given that the information and communication technologies that underpin finance have improved so radically?

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Lehman Brothers “Clackatron” (ca. 2002), used to strike the keys of an EBS (Electronic Broking Services) foreign-exchange trading keypad   1.3.  The “equities triangle” in New Jersey   1.4.  Geodesics from Chicago to the New Jersey share-trading datacenters   1.5.  An order book   1.6.  The unit cost of financial intermediation in the United States, 1884–2012   2.1.  Electricity infrastructure in the Chicago suburbs   2.2.  A tower of the kind employed in ultrafast communication in finance   2.3.  The Chicago Board of Trade building   2.4.  Pits in the trading room of the Chicago Board of Trade in 1908   2.5.  

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Although there is no definitive proof, what may be involved in this dramatic change in the fortunes of the finance sector is an increase in what an economist would call “rent,” defined by the commentator Martin Wolf (2019) as “rewards over and above those required to induce the desired supply of goods, services, land or labour.”32 In effect, the financial system may be exacting rents from the rest of the economy, and, of course, among the expected consequences of this would be slower growth of the wider economy. FIGURE 1.6. The unit cost of financial intermediation in the United States, 1884–2012. Data courtesy of Thomas Philippon. For details, see endnote 30 of chapter 1 and Philippon (2015). Let me not raise false expectations about the chapters that follow: on no plausible calculation are the aggregate profits, salaries, and bonuses earned via HFT large enough to contribute in anything other than a minor way to overall inequality of income and wealth.

What They Do With Your Money: How the Financial System Fails Us, and How to Fix It
by Stephen Davis , Jon Lukomnik and David Pitt-Watson
Published 30 Apr 2016

For a fuller discussion of the literature on this topic, see David Pitt-Watson, Christopher Sier, Shyam Moorjani, and Hari Mann, Investment Costs—An Unknown Quantity, Financial Services Consumer Panel (November 2014), https://www.fscp.org.uk/sites/default/files/investment_david_pitt_watson_et_al_final_paper.pdf. 6. Private study obtained by the authors prepared for Her Majesty’s Treasury, November 2011. 7. Thomas Philippon, “Has the US Finance Industry Become Less Efficient? On the Theory and Measurement of Financial Intermediation,” National Bureau of Economic Research Working Paper no. 18077 (May 2012), http://www.nber.org/papers/w18077. 8. Ronald Gilson and Jeffrey Gordon, “Capital Markets, Efficient Risk Bearing and Corporate Governance: The Agency Costs of Agency Capitalism,” Columbia Law School Coursewebs (2012), https://coursewebs.law.columbia.edu/coursewebs/cw_12S_L9519_001.nsf/0f66a77852c3921f852571c100169cb9/C52A6786C57B3B52852579830053479F/$FILE/GilGor+Oxford+Prelim+Draft.Conf+Final.011012.pdf?

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For example, Canadian economist Richard Lipsey wrote of perfect competition that “it is a pity it corresponds in so few aspects to reality as we know it.” Richard Lipsey, Positive Economics (Weidenfeld and Nicholson, 1973), 299. 1 What’s the Financial System For? 1. See discussion in Thomas Philippon, “Has the US Finance Industry Become Less Efficient? On the Theory and Measurement of Financial Intermediation,” National Bureau of Economic Research, Working Paper 18077 (May 2012), 6–9, http://www.nber.org/papers/w18077. 2. See World Bank data at data.worldbank.org/indicator/NV.ARG.TOTL.ZS. 3. For current figures see New York Stock Exchange data at www.nyse.com/about/listed/nya_characterstics.shtml (August 21, 2013). 4.

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The abusive sale of indulgences was such a problem in the thirteenth century, the era of our time traveler, that reform of the system was a subject of the fourth Lateran council of 1215. See text of fourth Lateran council (1215), 63–66, https://www.ewtn.com/library/COUNCILS/LATERAN4.HTM. 2 Incentives Gone Wild 1. Thomas Philippon, “Has the US Finance Industry Become Less Efficient? On the Theory and Measurement of Financial Intermediation,” National Bureau of Economic Research Working Paper no. 18077 (May 2012), http://www.nber.org/papers/w18077 http://www.nber.org/papers/w18077. 2. During the same period, GDP per capita, which is an approximate measure of productivity, increased about tenfold. See http://www.worldeconomics.com/Data/MadisonHistoricalGDP/Madison%20Historical%20GDP%20Data.efp.

The Long Twentieth Century: Money, Power, and the Origins of Our Times
by Giovanni Arrighi
Published 15 Mar 2010

Flows of commodities and means of payment that were “external” to the declining and rising states were, in fact, “internal” to the non-territorial network of long-distance trade and high finance controlled and managed by the Genoese merchant elite through the system of the Bisenzone fairs (see chapter 2). As in the kin-based systems of rule studied by anthropologists, to paraphrase Ruggie (1993: 149), the network of commercial and financial intermediation controlled by the Genoese merchant elite occupied places, but was not defined by the places it occupied. Marketplaces like Antwerp, Seville, and the mobile Bisenzone fairs were all as critical as Genoa itself to the organization of the space-of-flows through which the Genoese diaspora community of merchant bankers controlled the European system of interstatal payments.

…

But by 1485 the branch in Bruges had been closed and the Medici soon disappeared from the world of European high finance (Ehrenberg 1985: 196-8). As long as the Hundred Years War lasted, however, the equilibrium between the two contending territorialist organizations, and the constant need for financial assistance imposed on both of them by the commercialization of warfare, created unprecedented opportunities for commercial and financial intermediation which the Medici and other Florentine merchant bankers were well placed to turn to their own advantage, both economically and politically. These opportunities presented the Medici with opportunities for business success that Bardi and Peruzzi never had. By seizing these opportunities, the Medici became one of the wealthiest and most powerful families in Europe.

…

In one instance, the bidding up of purchase prices prevailed; in the other, the bidding down of sale prices prevailed. But whatever the impact on the general price level, intensifying competition resulted in a “precautionary” or “speculative” withdrawal of cash flows from trade. This in turn was both the cause and the consequence of the emergence of profitable opportunities in world financial intermediation — opportunities which select cliques of merchant bankers and financiers (the Genoese nobili vecc/71' in the late sixteenth century, the Rothschilds in the late nineteenth and early twentieth centuries) were particularly well placed to seize and turn to their own advantage. In doing so, the leaders and governors of financial expansions tended to give temporary relief to the competitive pressures that depressed returns to capital, and thereby contributed to the transformation of the end of the material expansion into a “wonderful moment” for a wider circle of capitalist accumulators.

Capital in the Twenty-First Century
by Thomas Piketty
Published 10 Mar 2014

The Notion of the Pure Return on Capital The other important source of uncertainties, which leads me to think that the average rates of return indicated in Figures 6.3 and 6.4 are somewhat overestimated, so that I also indicate what might be called the “pure” rate of return on capital, is the fact that national accounts do not allow for the labor, or at any rate attention, that is required of anyone who wishes to invest. To be sure, the cost of managing capital and of “formal” financial intermediation (that is, the investment advice and portfolio management services provided by a bank or official financial institution or real estate agency or managing partner) is obviously taken into account and deducted from the income on capital in calculating the average rate of return (as presented here). But this is not the case with “informal” financial intermediation: every investor spends time—in some cases a lot of time—managing his own portfolio and affairs and determining which investments are likely to be the most profitable.

…

Although today’s public debt is nowhere near the astronomical levels attained at the beginning of the nineteenth century, at least in Britain, it is at or near a historical record in France and many other countries and is probably the source of as much confusion today as in the Napoleonic era. The process of financial intermediation (whereby individuals deposit money in a bank, which then invests it elsewhere) has become so complex that people are often unaware of who owns what. To be sure, we are in debt. How can we possibly forget it, when the media remind us every day? But to whom exactly do we owe money? In the nineteenth century, the rentiers who lived off the public debt were clearly identified.

…

In a more complex economy, where there are many more diverse uses of capital—one can invest 100 euros not only in farming but also in housing or in an industrial or service firm—the marginal productivity of capital may be difficult to determine. In theory, this is the function of the system of financial intermediation (banks and financial markets): to find the best possible uses for capital, such that each available unit of capital is invested where it is most productive (at the opposite ends of the earth, if need be) and pays the highest possible return to the investor. A capital market is said to be “perfect” if it enables each unit of capital to be invested in the most productive way possible and to earn the maximal marginal product the economy allows, if possible as part of a perfectly diversified investment portfolio in order to earn the average return risk-free while at the same time minimizing intermediation costs.

The Currency Cold War: Cash and Cryptography, Hash Rates and Hegemony
by David G. W. Birch
Published 14 Apr 2020

Such a realistic platform for the digital currency of the future is distinct from the intermediary-free world of the Bitcoin maximalists. As Tim Swanson puts it, the facts on the ground clearly suggest that the vision of ‘everyone being their own bank’ has no basis in reality (Swanson 2015b). A world of tokens is not a world without middlemen, but it could be a world where the overall total cost of robust and reliable financial intermediation is reduced. Dumb money versus smart money As I set out in Before Babylon, Beyond Bitcoin, the money created by the communities of the future will be very different from the money of today because it will be smart: money with an application programming interface (API); money that has apps (or ‘smart contracts’, as some people insist on calling them, even though they are neither); money that has the capacity to facilitate more complex kinds of transactions because it enables so much more information exchange, including a history of the transactions themselves (Rogoff 2016).

…

It could thus curtail the development of private forms of anonymous payment but might increase risks to financial integrity. Design features such as size limits on payments in and holdings of CBDC would reduce but not eliminate these concerns. An account-based CBDC – with payments through the transfer of claims recorded on an account – could increase risks to financial intermediation. It would raise funding costs for deposit-taking institutions and facilitate bank runs during periods of distress. Again, careful design and accompanying policies should limit these risks, but they will not completely erase them. The ECB reckon that introducing this type of CBDC to the eurosystem would mean going from the 10,000 accounts it has now to perhaps half a billion.36 This speech caught my attention because, as you will have deduced from part 1 of this book, I think Lagarde is right to mention state-backed tokens as an option.

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Pavoni, S. 2020. Sarah Bloom Raskin: the US’s focus is misplaced. The Banker, 2 January. Peck, M. 2016. A blockchain currency that beats Bitcoin on privacy. IEEE Spectrum, 18 November. URL: http://bit.ly/2UtbjEC. Petralia, K., T. Philippon, T. Rice and N. Véron. 2019. Banking disrupted? Financial intermediation in an era of transformational technology. Report, International Center for Monetary and Banking Studies, September. Pilling, D. 2020. A revolution in Africa’s relations with France is afoot. Financial Times, 1 January. URL: https://on.ft.com/39vF50L. Popper, N. 2020. Bitcoin has lost steam.

Money Changes Everything: How Finance Made Civilization Possible
by William N. Goetzmann
Published 11 Apr 2016

Laws separating governance from direct economic interests at first created a sophisticated system of credit markets. Senators could lend, but they could not directly engage in business. However, financial intermediation provides an infinite variety of ways to conceal investment or to put it at arm’s length. The legal form of the peculium was one solution to the problem—there were many others. Modern scholarship has recently documented the amazing sophistication of the Roman economy, particularly with respect to financial intermediation. In fact, sometimes the Roman financial system seems shockingly familiar to the modern eye. The degree to which we can actually compare modern institutions like banks to Roman institutions has been regularly debated.

…

The usurper was usurped. Ochus took the royal title of Darius II. The overthrow of Sogdianus may be the first war we know of to have been fought on borrowed money, but it certainly was not the last. The Persian rulers following Darius II frequently resorted to tax levies in later years to finance wars. Financial intermediation was a crucial link—some firm or agent that could turn a contractual promise into money in a hurry. In the fifth century BCE, the Murašu firm provided this essential line of credit, and it probably turned the tide of victory. But fate is not always kind. The landholders who supported Ochus remained mired in debt, and many faced foreclosure.

…

Our modern perspective suggests there are a range of financial services Athenians needed: from a basic institution that took deposits and relieved patrons of keeping their money under the mattress in coin, to an entity that could transfer large sums to and from counterparties in transactions, to a source of temporary cash buffer against economic shocks. Bankers also may have served as facilitators of economic investments—either because they profited economically or because this enhanced their reputations and connections. As business opportunities and personal investment needs scaled up with the Athenian economy, the need for financial intermediation inevitably scaled up as well. FINANCIAL LITERACY As a young man, Demosthenes sued his relatives. His uncles were appointed as his guardians after his father’s death, and they stole his inheritance. The financial details in the trial were extremely complex. They involved two businesses, inventories, loans, and other assets.

Confessions of a Microfinance Heretic
by Hugh Sinclair
Published 4 Oct 2012

I needed to find out if FCC was allowed to take savings, and what it was doing with these deposits. Some MFIs are essentially full-fledged banks. They take savings from some customers and make loans to other customers, just like Deutsche Bank, Bank of America, or Barclays Bank in developed countries. This is so-called “financial intermediation.” Such MFIs make money by charging interest to borrowers at greater rates than the interest they pay to savers. However, in exchange for this margin, the bank has to manage its reserves in such a way that it can return funds to the savers when required. Even if the bank’s borrowers do not repay the funds to the bank, the bank is still legally obliged to return savings to the general public, and thus the bank must assume and manage this risk.

…

And naturally, the banks have to cover their operating costs from this margin. This is a risky business and is regulated. All commercial retail banks across the planet operate on variants of this model: take money from A, lend to B, manage the risk and operating costs efficiently, and hope to make a profit in the meantime. Most MFIs do not engage in such financial intermediation, since most are not allowed to take deposits. Their business model is fairly simple: get money from investors, usually incurring some interest charge, lend money to clients at a higher interest rate, cover all administration costs and costs of defaults of borrowers who do not repay. What is left over is profit for the MFI and its owners.

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First, they can quietly use the client savings for other activities. This may involve lending the savings to other clients, who in turn are obliged to make forced deposits in an ever-growing pyramid. Or the MFI may simply use the savings to cover its own operating costs. Both strategies are usually prohibited for MFIs not licensed to engage in full financial intermediation, but local regulators are often not sophisticated enough to detect this or fail to enforce the rules. The second way MFIs can manipulate this system to their advantage is by blurring the difference between forced savings and voluntary savings. The MFI is able to justify capturing forced savings as a guarantee, but then may also discreetly capture voluntary savings, which are deposited into the same account.

The Hidden Wealth of Nations: The Scourge of Tax Havens
by Gabriel Zucman , Teresa Lavender Fagan and Thomas Piketty
Published 21 Sep 2015

Although financial sanctions are appealing and simple to implement, they face a potential obstacle: they can be easily circumvented. A bank that does not want to comply with FATCA could use FATCA-compliant intermediaries to continue investing in the United States without facing the 30% US withholding tax. The US law contains provisions to prevent this scenario, but the opacity of financial intermediation chains (largely because of the absence of financial registers) is such that these provisions may well not be enough. An alternative approach to withholding taxes consists of acting on the level of the trade of goods and services, which are currently more traceable than financial transactions.

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Fortunately, progress has begun in this area since the 2008–9 financial crisis, under the auspices of a committee of authorities from around the world working to create a global system of legal entity identification.28 Furthermore, by virtue of the international anti-laundering regulations, authorities have the right to demand that the depositories correctly identify the true holders of securities, by going back up the chain of financial intermediation if necessary. This is the fundamental principle in the fight against money laundering and the financing of terrorism: all establishments should know the names and addresses of their actual clients. One concern that some readers will probably have is that a world financial register would threaten individual privacy.

High-Frequency Trading: A Practical Guide to Algorithmic Strategies and Trading Systems
by Irene Aldridge
Published 1 Dec 2009

“Uncovered Interest Parity: It Works, but Not for Long.” Journal of International Economics 66, 349–362. Chakravarty, Sugato, 2001. “Stealth Trading: Which Traders’ Trades Move Stock Prices?” Journal of Financial Economics 61, 289–307. Chakravarty, Sugato and C. Holden, 1995. “An Integrated Model of Market and Limit Orders.” Journal of Financial Intermediation 4, 213–241. Challe, Edouard, 2003. “Sunspots and Predictable Asset Returns.” Journal of Economic Theory 115, 182–190. Chambers, R.G., 1985. “Credit Constraints, Interest Rates and Agricultural Prices.” American Journal of Agricultural Economics 67, 390–395. Chan, K.S. and H. Tong, 1986. “On estimating Thresholds in Autoregressive Models.”

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“Continuous Auctions and Insider Trading,” Econometrica 53, 1315–1335. Le Saout, E., 2002. “Intégration du Risque de Liquidité dans les Modèles de Valeur en Risqué.” Banque et Marchés, No. 61, November–December. Leach, J. Chris and Ananth N. Madhavan, 1992. “Intertemporal Price Discovery by Market Makers: Active versus Passive Learning.” Journal of Financial Intermediation 2, 207–235. References 317 Leach, J. Chris and Ananth N. Madhavan, 1993. “Price Experimentation and Security Market Structure.” Review of Financial Studies 6, 375–404. Lechner, S. and I. Nolte, 2007. “Customer Trading in the Foreign Exchange Market: Empirical Evidence from an Internet Trading Platform.”

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Journal of Financial and Quantitative Analysis 43, 467–488. Lyons, Richard K., 1995. “Tests of Microstructural Hypotheses in the Foreign Exchange Market.” Journal of Financial Economics 39, 321–351. 318 REFERENCES Lyons, Richard K., 1996. “Optimal Transparency in a Dealer Market with an Application to Foreign Exchange.” Journal of Financial Intermediation 5, 225–254. Lyons, Richard K., 2001. The Microstructure Approach to Exchange Rates. MIT Press. MacKinlay, A.C., 1997. “Event Studies in Economics and Finance.” Journal of Economic Literature XXXV, 13–39. Mahdavi, M., 2004. “Risk-Adjusted Return When Returns Are Not Normally Distributed: Adjusted Sharpe Ratio.”

Cogs and Monsters: What Economics Is, and What It Should Be
by Diane Coyle
Published 11 Oct 2021

He described how just one bank, Bank of America, had a balance sheet exposure to $74 trillion of derivatives in the first nine months of 2011, although accountancy rules allow this to be presented as just $79 billion.6 Needless to say, none of this derivatives activity translates into investment in the real economy. The financial sector as a whole looks as though it contributes to growth in gross domestic product (GDP) only because of the way its activity has been defined and measured, known as FISIM—financial intermediation services indirectly measured. The definition in effect counts the risk-taking as a plus for the economy, speculative trading as well as potentially productive investment (Christophers 2013; Coyle 2014). The possibility that the intellectual approach to finance prevailing since the 1970s has contributed little to the economy, and may indeed have subtracted value, raises some challenging questions.

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Conventional international macro models can explain a lot about the origins of the 2012 Eurozone crisis, and indeed many macroeconomists predicted the non-viability of the euro before its launch, including those at the UK Treasury (HM Treasury 2003). The fact that macroeconomic policy since 2008 has avoided the policy errors of the 1930s is further evidence that macroeconomics has progressed, and many macroeconomists would argue that the pre-crisis models have been made considerably richer by adding, for example, financial intermediation and imperfect competition. Certainly there has been a large amount of impressive work in macroeconomics in the years since 2008–9. But to my mind this does not fundamentally change the picture of a profound lack of consensus about how the economy as a whole functions and therefore what policies will make it function better.

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J., 122, 124 BBC Reith Lectures, 77–78 BBC Trust, 83 Becker, Gary, 2, 92, 119 behavioural economics: aggregation and, 3, 40, 42, 71–72, 100–102, 106, 113, 122–23, 141, 176–77, 201–2; beliefs of tomorrow and, 22; bias and, 109, 136; Coase on, 58; cognitive science and, 35–36, 48, 51, 91–92, 118–19, 186; competition and, 45–51 (see also competition); consumers and, 22, 59–60, 92, 109; context and, 88; failures and, 55; Goodhart’s Law and, 72, 103; happiness and, 70–71, 153; incentives and, 29, 33, 35, 55, 63–64, 80, 106, 110, 160, 200; interventions and, 48, 63, 104, 106, 160, 208, 211; markets as process and, 37–45; models and, 22, 35, 47, 63, 88, 92–93, 119, 136, 154; outsider context and, 88, 92–93, 100, 103–9; performativity and, 11, 23, 30, 211; progress and, 136–37, 145, 154, 157–60; psychology and, 38, 63, 70, 92, 94; public choice theory and, 64, 106, 119, 124; public services and, 33; rationality and, 22, 35, 46–47, 59, 109, 117–19; self-referential policy advice and, 63–64; separation protocol and, 119–20, 124; special interest groups and, 64–66; technocratic dilemma and, 67–79; twenty-first-century policy and, 186, 202, 207–8; Wu study and, 8 Bell, Daniel, 67 Bernanke, Ben, 17 Berners-Lee, Tim, 195 bias: academics and, 6; artificial intelligence (AI) and, 13, 161, 165, 187; behavioural, 109, 136; causality and, 13, 105; control groups and, 105; data, 13, 101, 105, 161, 187, 209; decision making and, 13, 109, 187, 209; framing effects and, 47; gender, 6, 8; institutional, 180; market, 180, 187, 209; non-rational, 47, 109; skill-biased technical change and, 132; special interest groups and, 64–66; survey, 101; twenty-first-century policy and, 187, 209 Biden, Joe, 205 Big Bang, 16 big data, 3, 13, 40, 51, 86, 100, 203, 209 biodiversity, 39, 63, 165 Black, Fisher, 23–25, 28 blackboard economies, 99 black box solutions, 161 BlackLivesMatter, 9, 214 black markets, 43 Black-Scholes-Merton model, 24–25 Blair, Tony, 208 Blake, William, 150 Blue Books, 150 BMW, 196 Booking, 173 Borges, J., 90 Boskin Commission, 146–47 Boston Dynamics, 137 Bowles, Sam, 85, 117, 119 Bretton Woods, 192 Brexit, 1, 37, 53, 56, 70, 110, 131, 155, 213 Brown, Dan, 108 Brynjolfsson, Eric, 176 bubbles, 20, 22, 29 Buchanan, James, 33 budget constraints, 177 Bundeskartellamt, 205 Bureau of Economic Policy Analysis, 66 business cycles, 71, 81, 102, 124 calculus, 16, 33, 90, 145 Calculus of Consent, The: Logical Foundations of Constitutional Democracy (Buchanan and Tullock), 33 Camus, Albert, 87, 108, 111 capitalism: criticism of, 19–20; free market and, 19, 41, 186; globalisation and, 110, 132, 139, 154, 164, 193–94, 196, 213; inequality from, 19; progress and, 143, 149; Schumpeter on, 143; twenty-first-century policy and, 186, 190, 195 Capital (Piketty), 131 carbon emissions, 38–40, 180, 187 Carlin, Wendy, 85 Cartlidge, John, 27 Case, Anne, 131 cash for clunkers, 55, 63 causality: bias and, 13, 105; correlation and, 94; deductive approach and, 103; economically establishing, 100; empirical work and, 2, 61, 94–96, 99; feedback and, 11, 94, 96; Leamer on, 102; methodological debate over, 2; models and, 2, 94–95, 102; moral issues and, 96; outsider context and, 94–96, 99–105; progress and, 137; public responsibilities and, 61, 74; randomised control trials (RCTs) and, 93–95, 105, 109–10; reflexivity and, 11, 81; societal statistics and, 61; statistics and, 61, 95, 99, 102; two-way, 94, 96 central banks: independence of, 16; progress and, 149; public responsibilities and, 16, 32, 62, 64, 66–67, 76, 81 central planning: artificial intelligence (AI) and, 184, 186–87; competition and, 38, 41, 124, 182; failure of communist, 40, 182–88, 190; socialist calculation debate and, 182–88, 190, 209 Central Planning Bureau, 66 Chetty, Raj, 86 Chicago School, 24–25, 73, 75, 190, 193–94 Chile, 184 China, 173, 195, 206 Citadel, 27 City of London, 16, 19 climate change, 85, 148, 154 Close the Door campaign, 155–56 cloud computing, 150, 170–72, 184, 197 Coase, Ronald, 57–58, 62, 98–99 codes of conduct, 9, 206 cognitive science, 35–36, 48, 51, 91–92, 118–19, 186 Colander, David, 100 Cold War, 190 Coming of Post-Industrial Society, The (Bell), 67 common sense, 78, 127 communication, 53, 127, 168; bandwidth and, 171; compression and, 171; cost of, 196; 4G platforms and, 195; instant messaging, 171; latency and, 171; price of, 150, 171, 177; servers and, 25–26, 141, 170; smartphones and, 46, 138–39, 164, 171, 173, 177, 195, 198; SMS, 171; social media and, 52, 73, 82, 140–41, 149, 157, 163, 173, 176–77, 195; telephony and, 4, 31, 46, 98, 123, 138–39, 144, 156, 164, 171, 173–74, 177, 184, 195, 198; 3G platforms, 60, 139, 173, 195; transmission speeds and, 171 comparative advantage, 78, 97 competition: behavioural fix and, 45–51; central planning and, 38, 41, 124, 182; Chinese, 173, 195, 206; creative destruction and, 41; digital economy and, 42, 85, 165, 181, 201–6; directory numbers and, 60; empirical work and, 181, 209; envelopment and, 203–4; incumbents and, 41–42; innovation and, 28, 41, 46, 68, 85, 209; monopolies and, 20, 42; network effects and, 202, 205; opportunity cost and, 56, 58, 80, 156; outsider context and, 98, 105; Pareto criterion and, 122–23, 126–27, 129; production and, 12, 41; profit and, 33, 41–42, 105, 204; progress and, 135, 158, 165; public responsibilities and, 28, 33, 38, 41–42, 45–48, 57–69, 74, 77, 79, 85; rationality and, 117; resource, 41, 45, 117, 123, 125; separation protocol and, 120, 123–25; socialist calculation debate and, 182–83; special interest groups and, 64–66; specific studies in, 12; spectrum auctions and, 60–61; SSNIP test and, 204; twenty-first-century policy and, 182, 201–9 Competition and Markets Authority (CMA), 205 computers: AI and, 116 (see also artificial intelligence [AI]); Black-Scholes-Merton model and, 24–25; changing technology and, 169; cloud computing and, 150, 170–72, 184, 197; data sets and, 2, 13, 51–52, 60, 101, 161, 177, 201, 209; David on, 169; declining price of, 170; empirical work and, 2, 17, 52; exchange locations and, 25; feedback and, 179; Millennium Bug and, 155; Moore’s Law and, 170, 184; power of, 2, 17, 40, 58, 170, 183–84, 188; progress and, 138, 144, 155; rationality and, 116–17; servers and, 25–26, 141, 170; software and, 25, 140, 155, 171, 177–78, 186, 197, 200–201, 203; Solow on, 169; speed and, 25, 184; statistics and, 17, 52, 58, 144, 169; supercomputers, 170; twenty-first-century policy and, 183–84, 186, 188, 214; ultra-high frequency trading (HFT) and, 25–27 conservatism, 30 Consumer Price Index (CPI), 146–47, 172 consumers: bad choices and, 3; behavioural economics and, 22, 59–60, 92, 109; conspicuous consumption and, 42; digital economy and, 42, 137, 172–76, 181, 198, 200–206, 213; empirical work and, 3, 181; income and, 93 (see also income); innovation and, 28, 102, 200; Keynes and, 22; online shopping and, 173, 198; outsider context and, 92, 96, 98, 100–102, 105, 108–9; progress and, 137, 141, 144, 146–47, 151; public responsibilities and, 22, 28, 42, 59–60, 65; rationality and, 116; technology and, 28, 102, 171–76, 181, 200, 213; time spent online, 176–78; twenty-first-century policy and, 184, 198–206; welfare and, 105, 206 Cook, Eli, 150 copyright, 140 CORE’s The Economy, 85–86, 212–13 cost-benefit analysis (CBA), 56–57, 58n12, 125–26, 207 cost of living, 143–47, 172 counterfactuals, 97–98, 158, 161, 198, 208 Covid19 pandemic: body politics and, 163; financial recovery from, 88, 114; GDP growth and, 88, 165; impact of, 3, 10–11, 14, 20, 38, 43, 45, 68, 75, 88, 110, 114, 132–33, 149, 153, 155, 163–66, 181, 194, 213–15; lockdowns and, 3, 43, 45, 88, 114, 163, 198; public opinion and, 165–66 “Creating Humble Economists” (Colander), 100 creative destruction, 41 curriculum issues, 2, 4–5, 83, 85, 88 Daily Telegraph, 159 Darwin, Charles, 48 data centres, 26 data sets, 2, 13, 51–52, 60, 101, 161, 177, 201, 209 David, Paul, 169 Deaths of Despair (Case and Deaton), 131 Deaton, Angus, 128–29, 131 debt, 76, 101, 153 decision making: artificial intelligence (AI) and, 116, 186–87; bias and, 13, 109, 187, 209; Green Book and, 56, 126; normative economics and, 110, 114, 120; opportunity cost and, 56; outsider context and, 93; production and, 12, 123, 140, 196; progress and, 160, 162; rationality and, 116 (see also rationality); rules of thumb and, 47–48, 90, 117, 212; self knowledge and, 81; separation protocol and, 120 DeepMind, 115–16 Deliveroo, 173 demand management, 31, 191–92 democracy, 33, 67, 69, 79, 193 deregulation, 16, 31, 60, 68, 71, 193–94 derivative markets, 16, 18, 23–25, 28 Desrosières, Alain, 146 Dickens, Charles, 150 digital economy: AI and, 115 (see also artificial intelligence (AI)); changing nature of, 168–81; cloud computing and, 150, 170–72, 184, 197; cogs and, 6, 129, 154, 165, 179; competition and, 42, 85, 165, 181, 201–6; consumers and, 42, 137, 172–76, 181, 198, 200–206, 213; difference of, 168–76; dominance of by giant companies, 133; envelopment and, 203–4; 4G platforms, 195; GAFAM and, 173; globalisation and, 110, 132, 139, 154, 164, 193–96, 213; GPTs and, 169; Great Financial Crisis (GFC) and, 113–14; growth and, 129, 132, 140, 143, 194, 202; implications of, 176–78, 211–14; individual and, 6, 13–14, 128–29, 141, 175, 179, 181, 201; innovation and, 169–70; market changes and, 173–76; measuring online value and, 176; monsters and, 6, 154; network effects and, 127, 141, 174, 177, 185, 199–202, 205, 209; new agenda for, 179–81; online shopping and, 173, 198; Phillips machine and, 135–37, 151, 192; populism and, 211; production and, 132, 140, 142, 176, 195–97, 202, 213; progress and, 14, 137–43, 150, 153–54, 164–67; Project CyberSyn and, 184; services and, 176; software and, 25, 140, 155, 171, 177–78, 186, 197, 200–201, 203; statistics and, 113, 150, 164, 170, 172, 212; superstar features and, 173–74; 3G platforms, 60, 139, 173, 195; twenty-first-century policy and, 13, 185–88, 194–210; wealth creation and, 132–33; welfare and, 128, 134, 143, 206, 208, 212 Director, Aaron, 190 directory numbers, 60 discount rates, 147–48 diversity, 6–9, 213–14 Dow Jones, 26 Duflo, Esther, 20–21, 52, 109, 137 eBay, 175 ECO, 11 Economics Job Market Rumors, 8 Economics Observatory (ECO), 214 economies of scale: changing technology and, 174; network effects and, 127, 174, 177, 185, 199–201, 209; progress and, 142 education: derivatives and, 16; growth and, 16–17, 132; interventions and, 12; online, 177; policy on, 60; provision of basic, 30; real-world context and, 88; skills and, 88, 128, 132, 169–70; spread of higher, 151, 153 Efficient Markets Hypothesis, 17, 29 Eichengreen, Barry, 16 electricity: changing economies and, 127, 169, 191–92; progress and, 139, 142, 156, 165, 169, 191–92; regulation and, 65; supply of, 32; twenty-first-century policy and, 191–92, 200–201; warranties on goods and, 105 empirical work: behavioural economics and, 117, 159; causality and, 2, 61, 94–96, 99; competition and, 181, 209; computers and, 2, 17, 52; consumers and, 3, 181; context and, 17, 35, 61, 78, 92; correlation and, 70, 94; counterfactuals and, 97–98, 158, 161, 198, 208; data sets and, 2, 13, 51–52, 60, 101, 161, 177, 201, 209; feedback and, 11, 94–95, 155, 179, 188–89, 203, 205; growth and, 17, 61, 78, 209; macroeconomics and, 74, 100; market structures and, 35; physics envy and, 50; politics and, 3, 76, 78–79, 124, 213; populism and, 77; public responsibilities and, 17, 35, 40, 52, 61, 70, 74–81, 90, 92, 94–102, 110–11; randomised control trials (RCTs) and, 93–95, 105, 109–10; rationality and, 17; separation protocol and, 119, 124, 128; social constructs and, 13; statistics and, 17, 52, 61, 90, 95, 99; taxes and, 3; theory and, 2, 17, 52, 74, 90, 96, 99, 124, 181 endogenous growth theory, 17, 202 Enlightenment, 20 envelopment, 203–4 environmentalists, 126 equilibrium, 31, 38–39, 90–91, 123, 182 ethics, 4, 34, 39, 100, 105, 115, 119–24 Ethics and Society group, 115 ethnicity, 6–7, 9 European Commission, 67, 130, 205 European Steel and Coal Community, 190 European Union (EU), 37, 67, 195, 204 Eurozone, 67, 74 exchange rates, 118, 192 Facebook, 133, 173, 204–5 facial recognition, 165 fairness, 43, 45–46, 166 fake items, 98 Fear Index, The (Harris), 27 feedback: causality and, 11, 94–96; changing technology and, 179; political economy and, 188–89; progress and, 155; twenty-first-century policy and, 203, 205 financial intermediation services indirectly measured (FISIM), 28 Financial Times, 68–69, 97–98 Fisher Ideal index, 144n3 fixed costs, 174, 177, 179, 185–86, 200 forecasting: agent-based modeling and, 102; conditional projections and, 76; financial crises and, 17, 30, 100–101, 112–13; growth and, 37, 61; inflation and, 36; macroeconomics and, 3, 12, 36–37, 76, 101–2, 112; models and, 17, 74, 101–2, 113; self-fulfilling prophecies and, 5, 22–23, 154–55, 157; twenty-first-century policy and, 205; weather, 76 Fourastié, J., 191 4G platforms, 195 framing, 47, 130, 208 Frankenfinance, 18, 21, 25, 51–52, 165 Freakonomics, 108 free market: Brexit and, 213; capitalism and, 19, 41, 186; criticism of, 19; globalisation and, 110, 132, 139, 154, 164, 193–94, 196, 213; politics and, 30, 36, 130, 206; public responsibilities and, 19, 30–32, 35–36, 45, 54; separation protocol and, 123–24; twenty-first-century policy and, 182, 186, 191, 193, 195, 207 frictions, 22, 113, 136, 154, 182 Friedman, Ben, 16 Friedman, Milton, 16, 31, 93, 104, 121, 190 Furman, Jason, 86 GAFAM, 173 GameStop, 27 game theory, 48, 90–91, 129, 159–60, 179–80 Gelman, Andrew, 108 gender, 6–9, 93 GenZ, 166 Giavazzi, Francesco, 68 Gigerenzer, Gerd, 48 Gilded Age, 133 Giudici, Claudio, 69 Glaeser, Ed, 92 globalisation, 110, 132, 139, 154, 164, 193–96, 213 Goldman Sachs, 19 Good Economics for Hard Times (Banerjee and Duflo), 109 Goodhart’s Law, 72, 103 Google, 133, 141, 173, 201, 204–5 Gordon, Robert, 142 Gould, Stephen Jay, 49–50 Gove, Michael, 110, 149 Government Economic Service (GES), 53, 83–85 GPT, 169 Great Depression, 3, 10, 17, 20, 74, 191, 213 Great Financial Crisis (GFC): behavioural economics and, 51; consequences of, 1, 3, 11, 213; digital economy and, 113–14; dynamic stochastic general equilibrium models and, 31; forecasting, 30, 101, 112–13; Greece and, 56–58, 67; Italy and, 56–58, 67–69; models and, 31, 101, 113; outsider context and, 87–88, 101, 110, 112–14; progress and, 149, 153, 159; public responsibilities and, 16–19, 21, 29–31, 37–38, 50–51, 56, 67–68, 73–74, 79, 84; technology and, 56, 181; twenty-first-century policy and, 194 Great Moderation, 17, 73 Greece, 56, 67–68 greed, 11, 16, 29, 164 Green, Duncan, 95–96 Green Book, 56, 126 Greenspan, Alan, 101 Griliches, Zvi, 198 Gross Domestic Product (GDP), 60; Covid19 pandemic and, 88, 165; Fisher Ideal index and, 144n3; FISIM and, 28; flatlining of, 142; free market and, 130; Gross Domestic Product (GDP) and, 172–73; Gross National Product (GNP) and, 151; growth and, 28, 46, 88, 97, 138, 143–44, 159, 165, 169, 171–72; inflation and, 13, 113, 148; internet and, 97; Laspeyres index and, 144n3; macroeconomics and, 13, 101, 113, 151; progress and, 138, 142–44, 148, 151, 158–59, 165, 172–73; real, 101, 142–44, 169, 173; Sen-Stiglitz-Fitoussi Commission on the Measurement of Economic Performance and, 151; social welfare and, 134; twenty-first-century policy and, 187; Winter of Discontent and, 158, 192 Gross National Product (GNP), 151 Grove, Andy, 41 growth: changing economies and, 171–72, 212; Covid19 pandemic and, 88, 165; derivatives market and, 16, 23, 28; digital technology and, 129, 132, 140, 143, 194–210; education and, 16–17, 132; empirical work and, 17, 61, 78, 209; endogenous growth theory and, 17, 202; faster, 66, 71, 144, 159; forecasting, 37, 61; Goodhart’s Law and, 72; Gross Domestic Product (GDP) and, 28, 46, 88, 97, 138, 143–44, 159, 165, 169, 171–72; income, 70, 131, 138, 143, 164–65, 194, 207; inflation and, 12, 66, 73, 178; innovation and, 37, 41, 46, 68, 71, 194, 209; internet and, 97; living standards and, 143–47, 172, 194; outsider context and, 12, 97, 101n1, 111; political economy and, 167, 181, 188–95; progress and, 138, 140, 143–45, 152, 159, 165; public responsibilities and, 16–17, 23, 28, 37, 41, 46, 61, 66, 68–73, 76, 78; recession and, 17, 51, 73, 111, 154, 158–59; slow, 11, 72; spillovers and, 129–30; sustainability and, 11, 20, 111, 148, 152, 166; technology and, 71, 132, 140, 202; twenty-first-century policy and, 187, 191–92, 194, 202, 207, 209; velocity of money and, 71 Guardian, 159 happiness, 70–71, 153 Harberger, A.

The Bankers' New Clothes: What's Wrong With Banking and What to Do About It
by Anat Admati and Martin Hellwig
Published 15 Feb 2013

The trillions of dollars that they raise are invested in short-term debt of nonfinancial companies and banks.30 When money market funds invest in the debt of nonfinancial companies, they are competing with banks that might also lend to these companies. When money market funds make short-term loans to banks, they create an additional layer of financial intermediation between investors who want services like those associated with deposits and banks seeking short-term funding. Borrowing from money market funds increases the risk of liquidity problems and runs. Without deposit insurance, the situation is similar to that of George Bailey in the movie It’s a Wonderful Life, which we discussed in Chapter 4.

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Acharya, Viral V., and Tanju Yorulmazer. 2008. “Information Contagion and Bank Herding.” Journal of Money, Credit, and Banking 40: 215–231. Acharya, Viral V., Demos Gromb, and Tanju Yorulmazer. 2007. “Too Many to Fail—An Analysis of Time-Inconsistency in Bank Closure Policies.” Journal of Financial Intermediation 16 (1): 1–31. Acharya, Viral V., Thomas F. Cooley, Matthew P. Richardson, and Ingo Walter, eds. 2010. Regulating Wall Street: The Dodd-Frank Act and the New Architecture of Global Finance. New York: John Wiley and Sons. Acharya, Viral V., Matthew Richardson, Stijn van Nieuwerburgh, and Lawrence J.

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Dell’Ariccia, Giovanni, Luc Laeven, and Deniz Igan. 2008. “Credit Booms and Lending Standards: Evidence from the Subprime Mortgage Market.” IMF Working Paper 08/106. International Monetary Fund, Washington, DC. Demirgüç-Kunt, Asli, Edward J. Kane, and Luc Laeven. 2008. “Determinants of Deposit-Insurance Adoption and Design.” Journal of Financial Intermediation 17 (3): 407–438. Demirgüç-Kunt, Asli, Enrica Detragiache, and Ouarda Merrouche. 2010. “Bank Capital: Lessons from the Financial Crisis.” Policy Research Working Paper 5473. World Bank, Washington, DC. De Mooij, Ruud A. 2011. “Tax Biases to Debt Finance: Assessing the Problem, Finding Solutions.”

Crisis Economics: A Crash Course in the Future of Finance
by Nouriel Roubini and Stephen Mihm
Published 10 May 2010

That’s the philosophy embodied in some of the proposals now on the table. For example, the Obama administration’s proposals for regulatory reform specifically target “systemically significant financial firms.” A selective application of regulations would be a profound mistake: it would simply open the door to more regulatory arbitrage. Next time around, financial intermediation would move from the bigger, newly regulated institutions to their less significant brethren. However small, these less regulated institutions would become increasingly important to the larger system in the aggregate, and their collective failure could be equally problematic. For example, during the savings and loan crisis about fourteen hundred such thrifts went bust; no single one of them was systemically important, but their collective poor loan underwriting and losses had systemic effects.

…

But like the investment banks, hedge funds would not be permitted to engage in large-scale short-term borrowing from banks and other financial institutions. They would have to turn to long-term funding instead. Insurance companies and private equity firms would fall into additional categories. Neither type of institution would be permitted to branch out into kinds of financial intermediation beyond their core activities. Insurers could not engage in proprietary trading; nor would any commercial bank, investment bank, or hedge fund be permitted to venture into insurance. Private equity would remain the province of private equity firms. A firm belonging to one category could not venture onto the turf occupied by firms in any other category.

…

The financial system we’re describing is compartmentalized, sanitized— and boring. And that’s precisely the point. It could be made more boring by forcing banks to become “narrow banks,” which can only take deposits and invest them in safe, short-term debt. Unfortunately, this kind of draconian restriction would simply chase financial intermediation into the shadows—precisely the problem that originally created the crisis. For that reason, it’s better to preserve different kinds of financial institutions in their present forms but pursue the regulatory equivalent of divide and conquer. By unbundling the financial services now combined under one roof, we can steer the financial system away from an excessive reliance on too-big-to-fail—and too-interconnected-to-fail—firms.

Rethinking Capitalism: Economics and Policy for Sustainable and Inclusive Growth
by Michael Jacobs and Mariana Mazzucato
Published 31 Jul 2016

As recent events have shown, the most visible and violent of those costs are experienced at times of financial crisis. These costs, for example in foregone output, have been extensively studied.5 But there is a second potential cost of modern capital markets—the cost of short-termism. Although it has no off-the-shelf definition, short-termism is generally taken to refer to the tendency of agents in the financial intermediation chain to weight too heavily near-term outcomes at the expense of longer-term opportunities.6 This has opportunity costs, for example in foregone investment projects and hence future output. Unlike crises, these opportunity costs are neither violent nor visible. Rather, they are silent and invisible.

…

This empirical exercise revealed that the investment multiplier from being a private firm is slightly higher than 4. Ceteris paribus, the accumulated capital stock of a private firm tends to be four times larger than that of a quoted one. If we restrict our analysis to the five largest sectors (agriculture, manufacturing, wholesale/retail trade, financial intermediation and real estate), which comprise over 92,000 firms and cover more than 90 per cent of total corporate assets in the sample, the result is even more dramatic. Private firms in these five sectors appear to have built even larger stocks of fixed assets relative to their profits than quoted firms—the investment multiplier from being a private firm is 5.2.

…

When we have taken into account additional factors in our analysis, such as the age of companies and the sector in which they operate, the estimated investment multiplier of private firms remained very relevant and statistically significant. Relative to the median sector,33 private firms in the sectors of manufacturing; transport, storage and communication; financial intermediation; real estate; health and social work; and community services exhibit positive multipliers on their investment relative to quoted firms, with multipliers ranging from 4 to 15. These results suggest, overall, that UK private firms tend to plough back between four and eight times more of their profits into their business over time than publicly held firms.

The Clash of the Cultures
by John C. Bogle
Published 30 Jun 2012

Surely Jack Bogle and others inside the industry have done enough to raise the alarm. Never is this clearer than in his insistence that fees and costs are draining all the promised value out of the pockets of investors. Investors must know that they inevitably earn the gross return of the stock market, but only before the deduction of the costs of financial intermediation are taken into account. If beating the market is a zero sum game before costs, it is a loser’s game after costs are deducted. Which is why costs must be made clear to investors, and, one hopes, minimized. Pointing this out routinely surely cannot earn Jack Bogle many friends among Wall Street, which depends on the mystery surrounding financial innovations—as they are called euphemistically.

…

It called attention to the even higher levels of speculation that had come to distort our markets and ill-serve our investors. To understand why speculation is a drain on the resources of investors as a group, one need only understand the tautological nature of the markets: Investors, as a group, inevitably earn the gross return of, say, the stock market, but only before the deduction of the costs of financial intermediation are taken into account. If beating the market is a zero-sum game before costs, it is a loser’s game after costs are deducted. How often we forget the power of these “relentless rules of humble arithmetic” (a phrase used in another context by former Supreme Court Justice Louis Brandeis a century ago), when we bet against one another, day after day—inevitably, to no avail—in the stock market.

…

When you understand how hard it is to find that needle, simply buy the haystack. Rule 6: Minimize the Croupier’s Take The resemblance of the stock market to the casino is hardly far-fetched. Both beating the stock market and gambling in the casino are zero-sum games—but only before the costs of playing the game are deducted. After the heavy costs of financial intermediation (commissions, spreads, management fees, taxes, etc.) are deducted, beating the stock market is inevitably a loser’s game for investors as a group. In the same way, after the croupiers’ wide rakes descend, beating the casino is inevitably a loser’s game for gamblers as a group. (What else is new?)

Trading and Exchanges: Market Microstructure for Practitioners
by Larry Harris
Published 2 Jan 2003

In Wayne Wagner, ed., The Complete Guide to Securities Transactions (John Wiley & Sons, New York). Wunsch, Steven. 1989. The single-price auction. In Wayne Wagner, ed., The Complete Guide to Securities Transactions (John Wiley & Sons, New York). Chapter 6: Order-driven Markets Domowitz, Ian. 1990. The mechanics of automated trade execution systems. Journal of Financial Intermediation 1(2), 167–194. Mendelson, Haim. 1982. Market behavior in a clearing house. Econometrica 50(6), 1505–1524. Chapter 7: Brokers Brennan, Michael J., and Tarun Chordia. 1993. Brokerage commission schedules, Journal of Finance 48(4), 1379–1402. Chan, Yuk-Shee, and Mark Weinstein. 1993.

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Reputation, bid-ask spread and market structure. Financial Analysts Journal 49(4), 57–62. Fishman, Michael J., and Francis A. Longstaff. 1992. Dual trading in futures markets. Journal of Finance 47(2), 643–672. Röell, Ailsa. 1990. Dual capacity trading and the quality of the market. Journal of Financial Intermediation 1(2), 105–124. Sofianos, George, and Ingrid Werner. 2000. The trades of NYSE floor brokers. Journal of Financial Markets 3(2), 139–176. Weiss, David M. 1993. After the Trade Is Made: Processing Security Transactions (NYFI, New York). Chapter 8: Why People Trade Barber, Bard M., and Terrance Odean. 2000.

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Stiglitz. 1980. On the impossibility of informationally efficient markets. American Economic Review 70(3), 393–408. Hasbrouck, Joel. 1991. Measuring the information content of stock trades. Journal of Finance 46(1), 179–208. Madhavan, Ananth. 1996. Security prices and market transparency. Journal of Financial Intermediation 5(3), 255–283. Malkiel, Burton G. 1973. A Random Walk Down Wall Street (Norton, New York). Pinches, George E. 1970. The random walk and technical analysis. Financial Analysts Journal 26(2), 104–109. Silber, William L. 1994. Technical trading: When it works and when it doesn’t. Journal of Derivatives 1(3), 39–44.

The Growth Delusion: Wealth, Poverty, and the Well-Being of Nations
by David Pilling
Published 30 Jan 2018

Banking became a bigger and bigger part of the US and UK economies. The “contribution” of the financial sector to national income grew enormously. In the 1950s, when banks were banks rather than “great vampire squids,” they contributed about 2 percent to the US economy.10 By 2008, that had quadrupled.11 Similar things happened in Britain. Until 1978 financial intermediation accounted for around 1.5 percent of whole economy profits. By 2008, that ratio had risen to about 15 percent. The perceived success of financial deregulation in generating economic dynamism encouraged other countries to do the same. New Zealand, Australia, Ireland, Spain, Russia, and even little Iceland were seduced by the Anglo-Saxon model.

…

But the bulk of its revenue comes from what is called the spread—the difference between the interest rate it charges you and the interest rate at which the bank itself can obtain money. To measure the supposed economic value generated by this interest-rate spread, a new accounting concept was introduced in the 1993 update to the UN System of National Accounts, the holy book of GDP. The concept is called financial intermediation services indirectly measured, or FISIM for short. Without going into technical details, the upshot is that the wider the spread the more value is judged to have been created. That is back to front. In banking, spreads increase when risk rises. If a banker judges you quite unlikely to repay a loan, she will raise the interest rate charged to reflect the higher risk of default.

Makers and Takers: The Rise of Finance and the Fall of American Business
by Rana Foroohar
Published 16 May 2016

All the money in the world, and all the information about who’s making and taking it, passes through that tiny middle. Financiers sit in what is the most privileged position, extracting whatever rent they like for passage. It’s telling that technology, which usually decreases industries’ operating costs, has failed to deflate the costs of financial intermediation. Indeed, finance has become more costly and less efficient as an industry as it deployed new and more advanced tools over time.16 It’s also telling that during the last few decades financiers have earned three times as much as their peers in other industries with similar education and skills.17 As Thomas Piketty put it in Capital in the Twenty-First Century, financiers are, in some ways, like the landowners of old.

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“It takes two weeks to put aluminum in, and six months to get it out.”12 Guess who Coke, Coors, and their thirsty consumers were paying that premium to? Goldman Sachs. It’s an amazing tale that provides a window into the complex and costly shenanigans that can result when banks move too far out of their traditional purview of simple lending and financial intermediation and into other types of business. While the Goldman aluminum-hoarding scandal has less human significance than the food and fuel bubbles of 2008 and 2010, it has received significant legal attention and documentation. It thus provides a sharp lens through which to understand the confluence of events that created the dysfunctional system in which financial institutions are allowed to both make the market and be the market.

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Greenwood and Scharfstein, “The Growth of Finance,” 21. 23. Financial efficiency is defined here as the amount of money and engagement that finance provides to Main Street, rather than to the capital markets themselves. 24. Thomas Philippon, “Has the U.S. Finance Industry Become Less Efficient? On the Theory and Measurement of Financial Intermediation,” American Economic Review 105, no. 4 (2015): 1408–38. 25. Robert D. Atkinson and Stephen J. Ezell, Innovation Economics: The Race for Global Advantage (New Haven, CT: Yale University Press, 2012), 21. 26. Victoria Williams, US Small Business Administration, Office of Advocacy, “Small Business Lending in the United States 2013,” December 2014. 27.

Sacred Economics: Money, Gift, and Society in the Age of Transition
by Charles Eisenstein
Published 11 Jul 2011

Overall I am more sympathetic to a system that includes private credit, first because it allows organic, endogenous money creation independent of a central authority; second because it more easily incorporates exciting new modes of economic cooperation such as commercial barter rings and mutual-credit systems; third because it allows for much more flexibility in financial intermediation and capital formation; and fourth because it simplifies interbank credit clearing. Moreover, as some of Irving Fisher’s associates began realizing in the mid-1930s, it is nearly impossible to prevent fractional-reserve deposits from appearing in covert forms.6 I draw this point out in the appendix, but consider: even if you issue an IOU to a friend, and your friend gives it to another friend in lieu of cash, you are increasing the money supply.

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Banks could still lend money, but only if that money has been given to them in the form of time deposits. For example, if a depositor buys a six-month certificate of deposit (CD), those funds could be lent out for a term of six months. One of the main criticisms of full-reserve banking is that it makes financial intermediation—the connection of lenders and borrowers—much more difficult. Instead of issuing loans based purely on creditworthiness, the bank would have to find a depositor willing to commit his money for the term of the loan. However, closer examination reveals this criticism to be for the most part invalid.

…

In general, liquidity would be no more a restraint on lending than it is today. Random fluctuations in the level of deposits happen every day and are no big deal because banks can cover any shortfall in reserves by borrowing from the Fed Funds market or the Fed’s own overdraft facility. Equivalent mechanisms could easily operate in a full-reserve system. Besides financial intermediation, another apparent difference between the two systems is that in a full-reserve system, banks would supposedly have no capacity to alter the money supply, which would be dependent on the monetary authority. However, this difference too is an illusion. In the present system, the money supply increases when banks lend more, such as during an economic expansion when there are lots of safe lending opportunities.

The Tyranny of Nostalgia: Half a Century of British Economic Decline
by Russell Jones
Published 15 Jan 2023

By the time of Thatcher’s exit from 10 Downing Street in November 1990, however, I had been posted to Tokyo to cover Japan’s economy as the collapse of its 1980s ‘bubble’ ushered in a remarkable reversal of fortune for a nation that had been held up as an example for all to follow. It was there that I spent much of the next decade. My responsibilities were subsequently extended to Asia as a whole, and in due course I learned a huge amount about the importance of asset prices, credit markets and the functioning of financial intermediation to macro performance, while also getting early insights into the mechanics and complexities of operating monetary and fiscal policy close to the zero-interest-rate bound. Along with the knowledge I had accumulated of the interwar international economy during my academic career, this experience stood me in excellent stead later in my professional life.

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International trade and capital flows slumped. Rapid deflation became entrenched. Governments chased their tails in futile efforts to slash their spending to match their slumping revenues. The Gold Standard collapsed in the face of a series of financial crises. Banking systems imploded. Credit premia surged. Financial intermediation froze. Investment spending dried up. Unemployment and poverty skyrocketed. Political and social instability mounted. One government after another fell. Democracy withered as totalitarian regimes multiplied.6 The supposedly perfect system of capitalism seemed to be on the verge of collapse.

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Hence, as we saw earlier, British consumers, investors and economists regularly had to struggle with the minutiae of UK hire-purchase controls (effectively loan-to-value ratios) and with ‘the corset’: a system of ‘supplementary special deposits’ designed to limit bank advances. On a basic level, these less-than-subtle intrusions into the process of financial intermediation were a success. The years from the late 1940s to the mid 1970s were devoid of the sort of chronic financial crisis that peppered the pre-war period and that resurfaced in 2007. On the other hand, though, the ability of the authorities to prevent exaggerated business cycles waned and higher inflation became embedded.

Flash Boys: A Wall Street Revolt
by Michael Lewis
Published 30 Mar 2014

What Scalpers Inc. did was to hide an entirely new sort of activity behind the mask of an old mental model—in which the guy who “makes markets” is necessarily taking market risk and providing “liquidity.” But Scalpers Inc. took no market risk.§ In spirit Scalpers Inc. was less a market enabler than a weird sort of market burden. Financial intermediation is a tax on capital; it’s the toll paid by both the people who have it and the people who put it to productive use. Reduce the tax and the rest of the economy benefits. Technology should have led to a reduction in this tax; the ability of investors to find each other without the help of some human broker might have eliminated the tax altogether.

…

In the first two months of its existence, IEX had seen no activity from high-frequency traders except this. It was astonishing, when you stopped to think about it, how aggressively capitalism protected its financial middleman, even when he was totally unnecessary. Almost magically, the banks had generated the need for financial intermediation—to compensate for their own unwillingness to do the job honestly. Brad opened the floor for questions. For the first few minutes, the investors vied with each other to see who could best control his anger and exhibit the sort of measured behavior investors are famous for. “Do you think of HFT differently than you did before you opened?”

Stolen: How to Save the World From Financialisation
by Grace Blakeley
Published 9 Sep 2019

The most obvious indicator of financialisation is the dramatic increase in the size of the finance sector itself. Between 1970 and 2007, the UK’s finance sector grew 1.5% faster than the economy as a whole each year.9 The profits of financial corporations show an even starker trend: between 1948 and 1989, financial intermediation accounted for around 1.5% of total economy profits. This figure had risen to 15% by 2007.10 The share of finance in economic output was, however, dwarfed by the growth in the assets held by the UK banking system: banks’ assets grew fivefold between 1990 and 2007, reaching almost 500% of GDP by 2007.11 The UK also boasted one of the biggest shadow banking systems relative to its GDP before the crisis — a trend that has continued to this day.12 Meanwhile, cottage industries of financial lawyers, consultants, and assorted advisors grew up in the glistening towers in the City of London and Canary Wharf.

…

The debt that had been created by the banks in the boom between the 1980s and 2007 had been transformed into the plumbing of the entire global financial system. Every day, millions of dollars’ worth of mortgages were packaged up into securities, traded on financial markets, insured, bet against, and repackaged into a seemingly endless train of financial intermediation. As the crisis escalated, it was presented as an archetypal financial meltdown, driven by the greed and financial wizardry of the big banks, whose recklessness had brought the global economy to its knees. But whilst the big banks’ relentless desire for returns had escalated the crisis, it’s causes could be traced back to what was taking place in the real economy: mortgage lending.2 And this was driven by financialisation.

Finding Alphas: A Quantitative Approach to Building Trading Strategies
by Igor Tulchinsky
Published 30 Sep 2019

Journal of Banking and Finance. www.journals.elsevier.com/ journal-­­of-­­banking-­­and-­­finance Elsevier. Journal of Corporate Finance. www.journals.elsevier.com/ journal-­­of-­­corporate-­­finance Elsevier. Journal of Empirical Finance. www.journals.elsevier.com/ journal-­­of-­­empirical-­­finance Elsevier. Journal of Financial Intermediation. www.journals.elsevier. com/journal-­­of-­­financial-­­intermediation Elsevier. Journal of Financial Markets. www.journals.elsevier.com/ journal-­­of-­­financial-­­markets Elsevier. Journal of International Money and Finance. www.journals. elsevier.com/journal-­­of-­­international-­­money-­­and-­­finance Elsevier. Pacific-Basin Finance Journal. www.journals.elsevier.com/ pacific-­­basin-­­finance-­­journal Google Finance. www.google.com/finance Google Scholar. https://scholar.google.com Incredible Charts.

Big Business: A Love Letter to an American Anti-Hero
by Tyler Cowen
Published 8 Apr 2019

There may be specific reasons parts of the financial sector are too large, such as the repackaging of subprime mortgages, but a larger financial sector relative to GDP is frequently a sign of previous economic success and stability. It is a possible and indeed plausible response to be disappointed that, in percentage terms, the costs of financial intermediation are not falling but rather sticking at around 2 percent of those forms of intermediable wealth. Why hasn’t the financial sector been more innovative and disruptive? After all, the costs of a phone call to Africa have fallen a great deal, so should we not expect comparable progress from banking and finance?

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“Has the Finance Industry Become Less Efficient? Or Where Is Wal-Mart When We Need It?” VoxEU, Center for Economic Policy Research, December 2, 2011. https://voxeu.org/article/where-wal-mart-when-we-need-it. Philippon, Thomas. 2015. “Has the U.S. Finance Industry Become Less Efficient? On the Theory and Measurement of Financial Intermediation.” American Economic Review 105 (4): 1408–1438. Philippon, Thomas, and Ariell Reshef. 2012. “Wages and Human Capital in the U.S. Finance Industry, 1909–2006.” Quarterly Journal of Economics 127, no. 4 (November): 1551–1609. Phillips, Tim, and Rebecca Clare. 2015. Game of Thrones on Business: Strategy, Morality and Leadership Lessons from the World’s Most Talked-About TV Show.

Stigum's Money Market, 4E
by Marcia Stigum and Anthony Crescenzi
Published 9 Feb 2007

It is intended for people working in banks, in dealerships, and in other financial institutions; for people running liquidity portfolios; and for accountants, lawyers, students, and others who have an interest in the markets discussed. The book begins with an introduction to what goes on in fixed-income financial markets—financial intermediation and money creation—plus an introduction to how fixed-income securities work, including various concepts of yield, the meaning and importance of the yield curve and the messages embedded in it, and the concepts and calculation of duration and convexity. Next, the book analyzes the operations (domestic and Eurodollar) of money center banks, of money market dealers and brokers, of the Federal Reserve, and of managers of liquidity portfolios.

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Financial intermediaries use the funds they receive in exchange for the indirect securities they issue to invest in stocks, bonds, and other securities issued by ultimate funds-deficit units, that is, primary securities. All this sounds a touch harmless, so let’s look at a simple example of financial intermediation. Jones, a consumer, runs a $20,000 funds surplus, which she receives in cash. She promptly deposits her cash in a demand deposit at a bank. Simultaneously, some other spending unit, say, the Alpha Company, runs a temporary funds deficit. Jones’s bank trades the funds Jones has deposited with it for a loan note (IOU) issued by Alpha.

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In doing this—accepting Jones’s deposit and acquiring the note—the bank is funneling funds from Jones, an ultimate funds-surplus unit, to Alpha, an ultimate funds-deficit unit; in other words, it is acting as a financial intermediary between Jones and this company. Federal Reserve statistics on the assets and liabilities of different sectors in the economy show the importance of financial intermediation. In particular, at the beginning of 2006, households, personal trusts, and nonprofit organizations, who, as a group, have historically been the major suppliers of external financing, held $35.4 trillion of financial assets. Of this total, $7.0 trillion represented time and savings deposits at commercial banks, other thrift institutions, and money market funds; $1.0 trillion, the cash value of their life insurance policies; $11.1 trillion, the reserves backing pensions eventually due them; and $4.5 trillion, mutual fund (other than money market) shares.

More: The 10,000-Year Rise of the World Economy
by Philip Coggan
Published 6 Feb 2020

Many in the financial sector point to the fall in the cost of trading as a sign of the greater efficiency brought by this approach. But while the cost of individual transactions has dropped, money is changing hands more often. A study by Thomas Philippon of New York University found that the overall costs of financial intermediation (the cut taken by the finance industry) have hovered at around 1.5% to 2% since the 19th century.37 Taking a small percentage out of trillions of dollars of trading volume generates a lot of wealth, and wealth brings influence. In their book 13 Bankers, Simon Johnson and James Kwak recount how Brooksley Born, the chairwoman of the Commodity Futures Trading Commission, wanted to regulate financial derivatives in 1998.

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, IMF World Economic Outlook, April 2011 35. Robert L. Cutts, “Power from the ground up: Japan’s land bubble”, Harvard Business Review, May–June 1990 36. Coggan, Paper Promises, op. cit. 37. Thomas Philippon, “Has the US finance industry become less efficient? On the theory and measurement of financial intermediation”, September 2014, http://pages.stern.nyu.edu/~tphilipp/papers/Finance_Efficiency.pdf 38. Barry Eichengreen and Charles Wyplosz, “The unstable EMS”, https://www.Brookings.Edu/Wp-Content/Uploads/1993/01/1993a_Bpea_Eichengreen_Wyplosz_Branson_Dornbusch.Pdf 39. Source: https://www.nber.org/cycles.html 40.

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A People’s History of Modern Europe, Pluto Press, 2016 Pethokoukis, James “What the story of ATMs and bank tellers reveals about the ‘rise of the robots’ and jobs”, American Enterprise Institute, June 6th 2016, http://www.aei.org/publication/what-atms-bank-tellers-rise-robots-and-jobs Petzinger, Thomas Hard Landing: The Epic Contest for Power and Profits That Plunged the Airlines into Chaos, Random House, 1995 Pfeffer, Jeffrey Dying for a Paycheck: How Modern Management Harms Employee Health and Company Performance – And What We Can Do About It, HarperBusiness, 2018 Philippon, Thomas “Has the US finance industry become less efficient? On the theory and measurement of financial intermediation”, September 2014, http://pages.stern.nyu.edu/~tphilipp/papers/Finance_Efficiency.pdf Philipsen, Dirk The Little Big Number: How GDP Came to Rule the World and What to Do about It, Princeton University Press, 2015 Piketty, Thomas Capital in the 21st Century, Harvard University Press, 2014 Pilling, David Bending Adversity: Japan and the Art of Survival, Penguin, 2014 —— The Growth Delusion: The Wealth and Well-Being of Nations, Bloomsbury, 2018 Pinker, Steven The Better Angels of Our Nature: A History of Violence and Humanity, Penguin, 2011 —— Enlightenment Now: The Case for Reason, Science, Humanism and Progress, Viking, 2018 Pollard, Sidney Peaceful Conquest: The Industrialization of Europe, 1760–1970, Oxford University Press, 1981 Pomeranz, Kenneth The Great Divergence: China, Europe, and the Making of the Modern World, Princeton University Press, 2000 Portes, Jonathan “How small is small?

Money: 5,000 Years of Debt and Power
by Michel Aglietta
Published 23 Oct 2018

This transition could restructure our perspectives on the future and revive the incentives to invest. We still need political measures to establish a social value for carbon, thus orienting investment towards the objective of sustainable growth in those countries where political priorities are evolving. What also remains to be done is to redefine financial intermediation, and to do so in connection with the development of the role of money as a principle of value realisation. We should recognise that fighting greenhouse gases through fresh productive investment has a universal social value, whose monetary expression is differentiated across the various sovereign countries.

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Low-carbon investment is immersed in a both ecological and technological uncertainty, yet it is itself long term, with income flows staggered across time and with costs concentrated on the initial phase. In the current conditions of secular stagnation, characterised by a mass of idle savings and a low level of productive investment, organising a financial intermediation that could reallocate these savings with the aid of public guarantees for private risk-taking would mean retrieving a form of financial organisation that allowed the historical development of public transport. It is bewildering that we no longer know how to finance public and private investment, when we did a hundred and fifty years ago.

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Up until the general crisis in 2008, this market intermediation system operated through opaque risk transfer chains, unknown to market regulators and central banks. Trends in credit drive far-reaching cycles in the prices of financial assets. When these trends are reversed, financial crises are prompted. Figure 6.3 portrays the macroeconomic sequences of this amplification process. At the beginning of the cycle, the low cost of financial intermediation is self-sustaining. Through its interaction with the fall in the price of risk, and the leverage and speculative valorisation of assets, the expansionist boom is nourished. This boom spreads to the real economy through the increased wealth of non-financial agents. Figure 6.3 The chain of the expansive phase of the financial cycle Market actors are financed on credit, against a collateral which is the speculative asset itself.

In Pursuit of the Perfect Portfolio: The Stories, Voices, and Key Insights of the Pioneers Who Shaped the Way We Invest
by Andrew W. Lo and Stephen R. Foerster
Published 16 Aug 2021

And if you think the markets are highly efficient, and they’re not, you’re going to pay a penalty for that. And that happens periodically. But the CMH always works.”72 In light of the CMH, his call to arms is unambiguous and resounding: “It’s high time we turn more of our attention to the CMH. We need to know just how much our system of financial intermediation has come to cost, to know whether high turnover pays, to know the real net returns that managers deliver to investors, and to evaluate the perverse impact on investors of the irrational investment choices offered by the mutual fund industry. And it’s high time we become more serious about accepting the merits of passive all-stock-market investing as a separate and distinct asset class.

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Efficient Market Hypothesis Cost ­Matters Hypothesis Strong evidence Overwhelming evidence Sound explanation Obvious explanation Mostly true Tautologically true Bogle based the reasoning behind the CMH on the cold logic of subtraction. Gross returns in the financial markets minus the costs of financial intermediation equal the net returns actually delivered to investors. “No matter how efficient or inefficient markets may be, the returns earned by investors as a group must fall short of the market returns by precisely the amount of the aggregate costs they incur. It is the central fact of investing,”74 he states.

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The theory became richer. And the two of them together were hand in glove. Some things were rejected. Some new things were born. Puzzles came about into the profession. And as a result of that, it builds a much richer science.”57 In 1990, Scholes’s interests shifted to the role of derivatives in financial intermediation. Financial intermediaries such as investment banks often act as matchmakers between buyers and sellers of securities. Scholes served as a consultant to the investment bank Salomon Brothers and became its managing director and cohead of the fixed-income derivatives sales and trading group while still at Stanford (where he has remained as professor emeritus since 1996).

The Making of a World City: London 1991 to 2021
by Greg Clark
Published 31 Dec 2014

These sectors combined grew at a rate of almost 6 per cent a year in the decade up to the financial crisis. The city’s share of financial services among the major economic regions of Europe, the USA and Japan grew from 2.0 per cent in 1998 to 3.7 per cent by 2008 (Oxford Economics, 2011). Business and management consultancy activities, financial intermediation, legal and accounting services are all extremely advanced and concentrated in London. Other sectors which have been critical to London’s economic dynamism are media, telecoms, tourism and software consultancy. In terms of creating the environment for such growth, a number of business-led organisations have been influential in agenda-setting and in aspects of practical implementation.

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Since 2008, London has helped mitigate declining or stagnating public and private sector activity in all of the UK regions (Mayor of London, 2005; Gordon et al., 2009). It will continue to offer the best gateway for international trade and inward investment, because of its responsibility for over half of the UK exports in financial intermediation and legal services, and over two-fifths of UK exports for accounting and other monetary intermediation (Oxford Economics, 2011: 27). It also acts as an essential meeting place for decision-makers and executives who are often responsible for goods and manufacturing industries elsewhere in the country.

Capitalism: Money, Morals and Markets
by John Plender
Published 27 Jul 2015

As a result, to take an obvious example, young people with a lifetime’s earning power ahead of them, but no significant savings, can borrow for house purchase through the good offices of banks from people in their fifties and sixties who are saving for retirement. The banking system brings the two groups together in the process known as financial intermediation. Yet this is more common in the English-speaking countries than elsewhere. In much of continental Europe, regulations hinder borrowing for house purchase by requiring the borrower to save a significant amount as a pre-condition of the loan or by imposing tough loan-to-value ratios and short repayment periods.

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S. 1, 2 Elizabeth II 1 Engels, Friedrich 1, 2, 3, 4, 5 Enlightenment 1, 2, 3, 4, 5 Enron 1 entrepreneurs 1 environmental damage 1 Epistle to Allen Lord Bathurst (Alexander Pope) 1 Esterházy, Prince Nikolaus 1 European Monetary Union 1 European Union 1, 2, 3, 4 eurozone 1, 2, 3, 4, 5 Faber, Marc 1 Fable of the Bees, The (Bernard Mandeville) 1, 2, 3, 4, 5, 6 Facebook 1 Faerie Queene, The (Spenser) 1 Fama, Eugene 1, 2, 3, 4, 5 Farmers’ State Alliance (US) 1 fatal embrace 1, 2 Faust (Goethe) 1, 2, 3, 4 Federal Reserve (Fed) 1, 2, 3, 4 Federal Reserve Act (US 1913) 1 Ferguson, Niall 1 feudalism 1, 2, 3 fiat currencies 1 Fidelity Magellan fund 1 financial crisis (2007–08) 1, 2, 3, 4, 5, 6, 7, 8 financial intermediation 1 financial services 1 financial weapons of mass destruction 1 Finley, Moses 1 Fitzgerald, F. Scott 1 Ford, Henry 1, 2 Fors Clavigera (John Ruskin) 1 fractional reserve banking 1 France 1, 2, 3 art market 1 taxation 1, 2, 3, 4 François I of France 1, 2, 3 Frankel, Jeff 1, 2 Franklin, Benjamin 1 Frederick the Great of Prussia 1, 2 Freeland, Chrystia 1 French Revolution 1, 2 Frick, Henry Clay 1, 2 Friedman, Milton 1, 2 Fukushima nuclear spill 1 Fuld, Dick 1 fund managers 1, 2, 3 Fürstenberg, Carl 1 Galbraith, J.

Escape From Rome: The Failure of Empire and the Road to Prosperity
by Walter Scheidel
Published 14 Oct 2019

The share of indirect taxes in government revenue rose from about a third at the end of the tenth century to two-thirds by the 1070s. Excise taxes focused on urban consumption and long-distance trade. Massive urban growth, unfettered marketplaces, a huge expansion of water transport and exchange, and the growing sophistication of financial intermediation led to an economic boom that filled the state’s coffers: the silver value of revenue increased 140 percent between the end of the tenth and the late eleventh centuries.158 This boom also heightened demand for credit. From the late Tang period onward—a time of fading state capacity—merchants had developed novel financial instruments.

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They traded off fiscal capacity for appeasement of local ruling groups, a compromise that left them with lower per capita revenue. Not only late imperial China but also the Ottoman and Mughal empires consequently lacked the European system of taxes and public debt that “promoted the development of institutions for financial intermediation and better-regulated supply of money for the economy at large.”222 Likewise, Middle Eastern and South Asian merchants were just as institutionally marginalized as their Chinese counterparts. The Ottoman authorities prioritized the provisioning of the capital and the military, forcing merchants into an unequal relationship to ensure this objective, which overrode any desire to protect their own commercial constituents: “While European states focused on production and protection for local enterprises and workers, Ottoman officialdom was concerned with consumption and the adequacy of supplies of goods at the right price without regard to their place of origin.”

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Britain is an outlier: as we have seen, its industrialization was meaningfully linked to mercantilist protections and the economic incentives it created. Overseas trade encouraged the growth of manufacture and urban services. Britain exported perhaps a third of its increase in industrial output that occurred from the mid-seventeenth to the early nineteenth centuries. Profits from servicing global commerce—from transport and financial intermediation—helped London grow, and made merchants wealthier and more influential in politics. Whether empire paid overall is a moot point as long as it benefited the entrepreneurial class.16 Yet even such profits from trade were modest compared to British GDP—a few percent at best in the late eighteenth century—even if they made some monopolists very rich.

The Butterfly Defect: How Globalization Creates Systemic Risks, and What to Do About It
by Ian Goldin and Mike Mariathasan
Published 15 Mar 2014

George Kanatas and Jianping Qi, 2003, “Integration of Lending and Underwriting: Implications of Scope Economies,” Journal of Finance 58 (3): 1167–1191; George Kanatas and Jianping Qi, 1998, “Underwriting by Commercial Banks: Incentive Conflicts, Scope Economies, and Project Quality,” Journal of Money, Credit, and Banking 30: 119–133; and Xavier Freixas, Gyöngyi Lórànth, and Alan D. Morrison, 2007, “Regulating Financial Conglomerates,” Journal of Financial Intermediation 16: 479–514. 36. Tom Foreman, 2008, “Culprits of the Collapse—#7 Phil Gramm,” CNN website, 14 October, accessed 22 January 2013, http://ac360.blogs.cnn.com/2008/10/14/culprits-of-the-collapse-7-phil-gramm/; and Goldin and Vogel, 2010, 7. This follows a long-established pattern of a revolving door between Wall Street and the leadership of the U.S.

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Global Governance 15 (1): 37–42. Frankel, Jeffrey A., and Andrew K. Rose. 2005. “Is Trade Good or Bad for the Environment? Sorting Out the Causality.” Review of Economics and Statistics 87 (1): 85–91. Freixas, Xavier, Gyöngyi Lórànth, and Alan D. Morrison. 2007. “Regulating Financial Conglomerates.” Journal of Financial Intermediation 16: 479–514. French, Shaun, Andrew Leyshon, and Nigel Thrift. 2009. “A Very Geographical Crisis: The Making and Breaking of the 2007–2008 Financial Crisis.” Cambridge Journal of Regions, Economy, and Society 2 (2): 287–302. G8 (Group of Eight). 2013. “Lough Erne Declaration.” 18 June. Lough Erne Summit, Northern Ireland.

Phishing for Phools: The Economics of Manipulation and Deception
by George A. Akerlof , Robert J. Shiller and Stanley B Resor Professor Of Economics Robert J Shiller
Published 21 Sep 2015

All of these books served as important background for the interpretive story that we are telling in this chapter. 2. Carl Shapiro, “Consumer Information, Product Quality, and Seller Reputation,” Bell Journal of Economics 13, no. 1 (1982): 20–35. 3. Tobias Adrian and Hyun Song Shin, “Liquidity and Leverage,” Journal of Financial Intermediation 19, no. 3 (July 2010): 418–37. Adrian and Shin calculated average balance sheets from sometime in the 1990s (varying by the bank) to the first quarter of 2008 for the five leading investment banks: Bear Stearns, Goldman Sachs, Lehman Brothers, Merrill Lynch, and Morgan Stanley. They held total assets averaging $345 billion; had average liabilities of $331 billion, with average equity of $13.3 billion.

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BIBLIOGRAPHY “200 West Street.” Wikipedia. Accessed October 22, 2014. http://en.wikipedia.org/wiki/200_West_Street. Abramson, John. Overdosed America: The Broken Promise of American Medicine. 3rd ed. New York: Harper Perennial, 2008. Adrian, Tobias, and Hyun Song Shin. “Liquidity and Leverage.” Journal of Financial Intermediation 19, no. 3 (July 2010): 418–37. Agarwal, Sumit, John C. Driscoll, Xavier Gabaix, and David Laibson. “The Age of Reason: Financial Decisions over the Life Cycle and Implications for Regulation.” Brookings Papers on Economic Activity (Fall 2009): 51–101. Akerlof, George A., and Rachel E. Kranton.

Modernising Money: Why Our Monetary System Is Broken and How It Can Be Fixed
by Andrew Jackson (economist) and Ben Dyson (economist)
Published 15 Nov 2012

Figure 3.4 shows the total sterling amounts of loans outstanding in the UK since 1997. By far the greatest proportion of bank lending is to the property market: In 2010, 45% of the value of total loans outstanding in the UK was to individuals (and secured on property), with an additional 15% to commercial real estate companies.14 A further 20% of lending was for financial intermediation,15 7% was unsecured personal debt, 1% went to insurance companies and pension funds and 9% was to ‘public and other services’. Meanwhile, the value of loans outstanding to the productive part of the economy (i.e. those sectors which contribute to GDP) accounted for just 8% of total lending.

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Rather, it is determined by the likelihood of repayment, and the ability to collateralise loans to ensure that non-repayment does not result in a loss to the bank. In fact, less than 10% of all bank lending today goes to businesses that contribute to GDP – the vast majority goes towards mortgages, real estate companies, and financial intermediation. If these lending decisions had been made by local bank managers who were in touch with the local economy and knew where any investment could be most productive, then banks having greater ‘spending power’ than government may not be such a matter for concern. However, lending decisions are not made by local branch managers, instead they are made by senior managers at the head offices of the banks, based on a statistical analysis of the relative likelihoods of repayment.

Money: The Unauthorized Biography
by Felix Martin
Published 5 Jun 2013

But at a fundamental level, all these modifications had been mere mopping-up operations. The real battle fought by Bagehot and Keynes had long ago been lost. The elephant in the room—the fact that the primary analytical workhorse of academics and policy-makers was not a theory of a monetary economy and “lacks an account of financial intermediation, so money, credit, and banking play no meaningful role,” as the Governor of the Bank of England put it in 2012—had, as Lawrence Summers lamented, long since been forgotten.20 Such was the Lazarus-like destiny of the moneyless economics of the classical school. The fate of Bagehot’s original concerns with the central importance of money, banking, and finance was initially less happy.

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Above all, it is financial stability that is the stated goal of all the new legislation.14 Yet for all the sound and fury, there remains a deafening silence when it comes to the obvious question this raises: what exactly is financial stability? It is a question to which neither of the dominant intellectual frameworks for contemporary economic policy-making are equipped to provide a sensible answer. As the Governor of the Bank of England has pointed out, modern, orthodox macroeconomics “lacks an account of financial intermediation, so money, credit, and banking play no meaningful role.”15 So as one of the founding members of the Bank of England’s Monetary Policy Committee has lamented, it “excludes everything relevant to the pursuit of financial stability.”16 But neither does the modern theory of finance, with its blind spot for money’s macroeconomic role, supply any new and specialised theory of financial stability to slake the thirst of the expectant reformers.

Crashed: How a Decade of Financial Crises Changed the World
by Adam Tooze
Published 31 Jul 2018

Rajan, an Indian by birth but a fully paid-up member of the American economics elite, professor at the Chicago Booth business school and chief economist at the IMF. His paper bore the heretical title “Has Financial Development Made the World Riskier?”57 Rajan worried that the dramatic expansion of modern financial intermediation was building up a dangerous new appetite for risk. At Greenspan’s farewell party, the message was not welcome. Rajan was slapped down by Larry Summers. Wielding his full authority as former Treasury secretary, Summers introduced himself as “someone who has learned a great deal about this subject from Alan Greenspan . . . and . . . who finds the basic, slightly Luddite premise of this paper to be largely misguided.”58 To highlight risks in a complex, modern financial system, as Rajan was tactlessly doing, was to invite “restriction” and other “misguided policy impulses.”

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Shin, “Globalisation: Real and Financial,” BIS 87th Annual General Meeting, https://www.bis.org/speeches/sp170625b_slides.pdf. 23. M. Obstfeld and A. M. Taylor, “International Monetary Relations: Taking Finance Seriously” (CEPR Discussion Paper No. DP12079, June 2017), https://ssrn.com/abstract=2980858. 24. Some of the key texts are T. Adrian and H. S. Shin, “Liquidity and Leverage,” Journal of Financial Intermediation 19 (July 2010), 418–437; C. Borio and P. Disyatat, “Global Imbalances and the Financial Crisis: Link or No Link?” (BIS Working Paper 346, 2011); and S. Avdjiev, R. N. McCauly and H. S. Shin, “Breaking Free of the Triple Coincidence in International Finance,” Economic Policy 31 (2016), 409–451. 25.

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Pozsar, “Institutional Cash Pools and the Triffin Dilemma of the US Banking System” (IMF Working Paper 11/109, August 2011). 31. P. Gowan, “Crisis in the Heartland,” New Left Review 55 (January/February 2009). 32. Augar, Greed Merchants, 34. 33. Tobias T. Adrian and H. S. Shin, “Liquidity and Lleverage,” Journal of Financial Intermediation 19 (2010), 418–437. 34. D. MacKenzie, An Engine, Not a Camera: How Financial Models Shape Markets (Cambridge, MA: MIT Press, 2006), 211–242. 35. G. F. Davis and M. S. Mizruchi, “The Money Center Cannot Hold: Commercial Banks in the US System of Corporate Governance,” Administrative Science Quarterly 44 (June 1999), 215–239. 36.

The Blockchain Alternative: Rethinking Macroeconomic Policy and Economic Theory
by Kariappa Bheemaiah
Published 26 Feb 2017

The porosity of the inter-financial system with other banks, hedge funds, and asset managers ultimately resulted in the balance sheets of banks being filled increasingly with these shadow banking assets. Although it is broadly defined as credit intermediation outside the conventional banking system, shadow banking constitutes about one-fourth of total financial intermediation worldwide (IMF, 2014). The shadow banking system also trades in the OTC derivatives market, which had grown rapidly in the decade up to the 2008 financial crisis (BIS, 2008). As of June 2015, after significant reductions and regulations, the OTC derivatives market was valued at $553 trillion (BIS, 2015).

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California: O’Reilly Media, Inc. . Rizzo, P. ( 2015, October 8). Ripple Releases Interledger to Connect Banks and Blockchains . Retrieved from Coindesk: http://www.coindesk.com/ripple-interledger-connect-bank-blockchain/ Santos, V. M. (2012). The Rise of the Originate-to-Distribute Model and the Role of Banks in Financial Intermediation . New York City: Federal Reserve Bank of New York Economic Policy Review. Scannell, K. ( 2016, February 23). London Whale complains of unfair blame for $6.2bn JPMorgan losses . Retrieved from Financial Times: https://next.ft.com/content/3f558d16-da51-11e5-a72f-1e7744c66818 Smaghi, L. B. (2010).

Seasteading: How Floating Nations Will Restore the Environment, Enrich the Poor, Cure the Sick, and Liberate Humanity From Politicians
by Joe Quirk and Patri Friedman
Published 21 Mar 2017

Mauritians managed this heady growth magisterially, diversifying their economy rapidly from sugar to textiles to tourism to banking, attracting more than nine thousand offshore companies to the island. Investment in the banking sector alone brought in a cool $1 billion. Looking at the World Bank graphs of percentage of GDP makes Meade’s prognostication downright funny. Between 1976 and 2009, sugar dropped from 40 percent to about 5 percent of GDP, while “financial intermediation” commanded the largest percentage of GDP by 2009. While ethnic diversity would go on to spur genocides in Rwanda and Burundi and civil wars in Nigeria and Guinea, the diverse population of Mauritians behaved like a smart start-up. Ever flexible in their structural reforms, committed to winning investors with sound and transparent legal systems, friendly to entrepreneurs local and foreign, they speedily integrated their island economy into the global marketplace.

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James Meade, later a Nobel Prize recipient in economics, predicted in 1961 that Mauritius was doomed: Meade expressed his doubts in a book first published in 1961 that has since been reissued: James E. Meade, Economic and Social Structure of Mauritius (New York: Routledge, 2011). the island nation’s GDP per person grew tenfold . . . financial intermediation”: Ali Zafar, “Mauritius: An Economic Success Story” (draft), World Bank Group, Africa Success Stories Project, January 2011, http://siteresources.worldbank.org/AFRICAEXT/Resources/Mauritius_success.pdf. per capita income is one of the highest in all Africa: Mauritius: Economy. Global Edge.

Topics in Market Microstructure
by Ilija I. Zovko
Published 1 Nov 2008

The Review of Econoics and Statistics, 78(1):94–110, 1996. J. Carlson and M. Lo. One minute in the life of the dm/usd: Public news in an electronic market. Journal of International Money and Finance, Jan 2006. S. Chakravarty and C. W. Holden. An integrated model of market and limit orders. Journal of Financial Intermediation, 4(3):213– 41, 1995. D. Challet and R. Stinchcombe. Analyzing and modeling 1+1d markets. Physica A, 300(1-2):285–299, 2001. C. Chiarella and G. Iori. A simulation analysis of the microstructure of double auction markets. Quantitative Finance, 2:346–353, 2002. 100 BIBLIOGRAPHY W. S. Choi, S.

Money Free and Unfree
by George A. Selgin
Published 14 Jun 2017

Among other things, the “expectations effect” of the Fed’s unorthodox policies gave banks and other firms a greater inclination than ever to hold cash rather than invest it, undermining the potential for quantitative easing to either reduce long-term rates or revive aggregate demand. Instead, the easing served merely to further redistribute credit, while dramatically enhancing the Fed’s share of the total extent of financial intermediation. Despite such criticisms, the belief that the Fed “saved us from another Great Depression” (Li 2013) is now well on its way to becoming conventional wisdom. The Fed has thus managed to achieve what is surely its greatest public relations coup of all. It has taken its most notorious lemon, and made lemonade from it

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Westcott. Williamson, S. D. (1989) “Bank Failures, Financial Restrictions, and Aggregate Fluctuations: Canada and the United States, 1870–1913.” Federal Reserve Bank of Minneapolis Quarterly Review 13 (3): 20–40. ——— (1992) “Laissez-Faire Banking and Circulating Media of Exchange.” Journal of Financial Intermediation 2 (2): 134–64. Willis, H. P. (1903) “The Status of the Currency Reform Movement.” Sound Currency 10 (4): 117–46. Wojnilower, A. M. (1980) “The Central Role of Credit Crunches in Recent Financial History.” Brookings Papers on Economic Activity 2: 277–326. Wu, T. (2011) “The U.S. Money Market and the Term Auction Facility in the Financial Crisis of 2007–2009.”

Seven Crashes: The Economic Crises That Shaped Globalization
by Harold James
Published 15 Jan 2023

The crisis that shook the world in 2007–2008 unambiguously had its roots in the overblown financial system. At the time, it appeared as a collective nervous breakdown that originated in a collapse of property prices (see Figure 6.1). The mystery was how losses in the subprime sector, a relatively small sector of the U.S. housing market, could produce a general collapse of financial intermediation. The whole of finance suddenly looked like a minefield, where no one could know where the unexploded detonators lay, and in consequence financial players, and retail depositors, could trust no one. Large and complex financial institutions, vertically integrated and often including mortgage originating and repackaging, were vulnerable.

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See Alan Blinder, After the Music Stopped: The Financial Crisis, the Response, and the Work Ahead (New York: Penguin, 2013), 187–203. 16. Luc Laeven and Fabian Valencia, “Resolution of Banking Crises: The Good, the Bad, and the Ugly,” IMF Working Papers 10.146, 2010; Timotej Homar and Sweder J. G. van Wijnbergen, “Bank Recapitalization and Economic Recovery after Financial Crises,” Journal of Financial Intermediation 32 (2017): 16 –28. 17. Atif Mian and Amir Sufi, House of Debt: How They (and You) Caused the Great Recession, and How We Can Prevent It from Happening Again (Chicago: University of Chicago Press, 2014). 18. See Manuel Adelino, Antoinette Schoar, and Felipe Severino, “Dynamics of Housing Debt in the Recent Boom and Great Recession,” NBER Macroeconomics Annual 32, no. 1 (2018): 265 –311. 19.

Money, Real Quick: The Story of M-PESA
by Tonny K. Omwansa , Nicholas P. Sullivan and The Guardian
Published 28 Feb 2012

Two metrics show just how positive the development of M-PESA has been for banks. Since 2007, when M-PESA was introduced, the amount of currency outside banks has been declining steadily, as a percentage of overall money supply and reserve currency. Central Bank Governor Ndung’u cites this an a signal of increased financial intermediation, implying that many who had previously been excluded from banking services were now using more appropriate financial instruments. As Ndemo, the permanent secretary of Kenya’s ICT Ministry notes: “Mobile money has brought money that used to be under the pillows into circulation. And I would attribute the increased liquidity in the banks to greater circulation of that resource.

Democracy at Work: A Cure for Capitalism
by Richard D. Wolff
Published 1 Oct 2012

If private financial enterprises purchase insurance (CDS) on outstanding loans, they need to be sure that the private financial insurers can pay legitimate claims in the event of defaults by borrowers. In fact, since 2007, the crisis has repeatedly demonstrated that most of the larger private financial enterprises (and many smaller ones as well) performed their obligations disastrously. Their failures to serve society’s need for safe and effective financial intermediation led to huge social losses and costs. Yet there was an effective taboo against drawing one obvious inference from those failures. Almost no one in politics, the establishment media, or academia dared to say that such failures of a private finance system raised the question of how a public financial system might function better.

The Age of Turbulence: Adventures in a New World (Hardback) - Common
by Alan Greenspan
Published 14 Jun 2007

Whenever I addressed a Western audience, I could judge its interests and level of knowledge and pitch my remarks accordingly. But at Spaso House, I had to guess. The lecture I had prepared was a dry, diffuse presentation on banks in market economies. It delved into such topics as the value of financial intermediation, various types of risk commercial banks face, the pluses and minuses of regulation, and the duties of central banks. The talk was very slow going, especially as I had to pause paragraph by paragraph for the translator to render my words into Russian. Yet the audience was quite attentive—people stayed alert throughout, and several seemed to be taking detailed notes.

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With the real estate market at a virtual standstill, banks could not make realistic estimates of the value of the collateral that supported their assets, and hence could not judge whether they themselves were still solvent. Caution accordingly dictated that bank lending to new customers be constrained, and, since banks dominated Japan's financial system, the financial intermediation so vital to any large developed economy virtually dried up. Deflationary forces took hold. It was not until the long decline in real estate prices bottomed out in 2006 that reasonable judgments of bank solvency were possible. Only then were new loans forthcoming, producing a marked resurgence of economic activity.

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These paper claims represent purchasing power that can quite readily be used to buy a car, say, or a company. The market value of stock and the liabilities of nonfinancial corporations and governments is the source of investments and hence the creation of liabilities by banks and other financial institutions. This process of financial intermediation is a major cause of the overwhelming sense of liquidity that has suffused financial markets for a quarter century. If interest rates start to rise and asset prices broadly fall, "excess" liquidity will dry up, possibly fairly quickly. Remember, the market value of an income-earning security is its expected future income leavened by a discount factor that changes according to euphoria and fear as well as more rational assessments of the future.

The Production of Money: How to Break the Power of Banks
by Ann Pettifor
Published 27 Mar 2017

Staggering though it might seem to a non-academic audience, the overwhelming majority of mainstream economists do not understand, nor do economists study, the nature of credit and money, or indeed the wider financial and monetary system. As the governor of the Bank of England at the time, Mervyn King, explained in 2012, ‘The dominant school of modern monetary policy theory – the New Keynesian model as it is called – lacks an account of financial intermediation, so money, credit and banking play no meaningful role.’2 Yet policies based on this vacuum in economic theory still prevail in all western treasuries and in major university economics departments. Unbelievably, they are informed by the economist Paul Samuelson’s barter-based theory of money and credit: ‘Even in the most advanced industrial economies, if we strip exchange down to its barest essentials and peel off the obscuring layer of money, we find that trade between individuals or nations largely boils down to barter.’3 With money and money-creation helpfully obscured by economists, and regulation trained on meaningless capital adequacy targets, business is better than usual for credit-creating commercial bankers, even while their balance sheets effectively remain under water.

The Age of Em: Work, Love and Life When Robots Rule the Earth
by Robin Hanson
Published 31 Mar 2016

Today, we spend a large fraction of our energy and wealth on such “signaling,” both because humans naturally care greatly about gaining status and respect in the eyes of others, and because being rich allows us to attend more to such concerns. As mentioned in Chapter 2, Era Values section, in terms of simple functionality, we seem today to spend excessive amounts on schools, medicine, financial intermediation, and huge projects. In contrast, while ems share most of our desires for respect, they live in a more competitive world, where they can less afford to indulge such desires. Thus ems are likely to spend less of their energies signaling to gain status. However, as signaling has functional value in assigning ems to tasks and teams, and as it can be hard to coordinate to discourage signaling, ems will likely still do a lot of signaling.

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The Association between Worrying and Job Performance.” Personality and Individual Differences 38(1): 25–31. Pfeffer, Jeffrey. 2010. Power: Why Some People Have It—and Others Don’t. HarperCollins. September 14. Philippon, Thomas. 2015. “Has the US Finance Industry Become Less Efficient? On the Theory and Measurement of Financial Intermediation.” American Economic Review 105(4): 1408–1438. Pickena, David, and Ben Ilozora. 2003. “Height and Construction Costs of Buildings in Hong Kong.” Construction Management and Economics 21(2): 107–111. Piller, Frank. 2008. “Mass Customization.” In The Handbook of 21st Century Management, edited by Charles Wankel, 420–430.

China's Future
by David Shambaugh
Published 11 Mar 2016

But there are a variety of deep structural challenges in this sector that are not easily rectified. On the surface China’s financial system appears to have all the elements of modernity: banks, credit agencies, insurance companies, payments systems, equity and bond markets, etc. But banks dominate financial intermediation, providing about 60 percent of loans to the private sector, according to the Asian Development Bank. Moreover, the banking system is concentrated in the four main state banks (which provide 50 percent of loans). These enormous banks all rank among the ten largest in the world by capitalization.

Dead Aid: Why Aid Is Not Working and How There Is a Better Way for Africa
by Dambisa Moyo
Published 17 Mar 2009

Third, they should continue to press for genuine free trade in agricultural products, which means that the US, the EU and Japan must scrap the various subsidies they pay to their farmers, enabling African countries to increase their earnings from primary product exports. Fourth, they should encourage financial intermediation. Specifically, they need to foster the spread of microfinance institutions of the sort that have flourished in Asia and Latin America. They should also follow the Peruvian economist Hernando de Soto’s advice and grant the inhabitants of shanty towns secure legal title to their homes, so that these can be used as collateral.

The Globalization of Inequality
by François Bourguignon
Published 1 Aug 2012

Based on this simple theoretical interpretation, the total impact would seem to be ambiguous.13 But financial liberalization has had other effects that have been more clearly inegalitarian. Even if the initial aim was to encourage competition, today the financial sector as a whole is clearly oligopolistic, if only because of economies of scale in financial intermediation, which are themselves partly tied to innovations in information and communications technology. The existence of substantial rents and the nature of the financial sector’s activities have made 13 For a review of the ties between the development of finance and income distribution, see Asli Demirguc-­Kunt and Robert Levine, “Finance and Inequality: Theory and Evidence,” Annual Review of Financial Economics 1 (2009): 287–318. 

Sabotage: The Financial System's Nasty Business
by Anastasia Nesvetailova and Ronen Palan
Published 28 Jan 2020

While in the immediate aftermath of the crisis there were a few endeavours to focus on fostering a new ‘culture’ of banking and better ethics in the industry, most of these initiatives have remained vacuous. Unsavoury practices, including behaviour bordering on criminality, continue to be treated as aberrations, as random and highly unusual deviations from the otherwise stable, market-governed process of financial intermediation. Nor does the post-crisis literature dwell much on the link between competitive markets, profitability and the tactics of market control in today’s finance, control that inevitably causes harm. Not a surprise, you may think. The notion of the degrees and effects of market competition appears rather theoretical.

Rentier Capitalism: Who Owns the Economy, and Who Pays for It?
by Brett Christophers
Published 17 Nov 2020

Outstanding overseas and local bank claims, Q1 2018, by location of reporting bank (loans and debt securities) 1.3. Net interest income, UK-based banks, 1994–2017 1.4. Share of total net income by type, UK-based banks, 1995–2017 1.5. UK real short-term interest rates, 1971–2017 1.6. Lending spreads, UK-based banks, 1997–2017 1.7. Dynamics of UK-based banks’ financial intermediation business, 2001–2017 1.8. Share of gross operating surplus represented by financial income, UK non-financial corporations, 1987–2017 1.9. Financial wealth by percentile, Great Britain, July 2012 to June 2014 1.10. UK household income by type, by decile group, 2016/17 2.1. Mining and quarrying (including extraction of oil and gas) share of UK gross value-added, 1970–2016 2.2.

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The result was, firstly, an increase in the ratio of net to gross interest income from 15.5 per cent in 2008 to 39.3 per cent in 2013, and fully 50 per cent by 2016; and, secondly, growing absolute levels of net interest income in spite of the dramatic fall in gross interest receipts (Figure 1.3). The classic financial rentier, let us be clear, has not just survived the end of capital scarcity; the classic rentier is thriving. Figure 1.7 Dynamics of UK-based banks’ financial intermediation business, 2001–2017 If substantially stretched spreads represent the proximate explanation for this good fortune, the more interesting and important question concerns how, in turn, we should understand them. How, in short, has it been possible for UK-based banks to realize these spreads?

Internet for the People: The Fight for Our Digital Future
by Ben Tarnoff
Published 13 Jun 2022

Travis Kalanick: Eliot Brown, “Uber Co-Founder Travis Kalanick Cuts Stake in Company by More Than 90%,” Wall Street Journal, December 21, 2019. 122, Just because Uber is … For data on the growing GDP share of the financial industry, see Thomas Philippon, “Has the U.S. Finance Industry Become Less Efficient? On the Theory and Measurement of Financial Intermediation,” American Economic Review 105, no. 4 (2015): 1408–38. 123, These companies were so successful … Facebook acquisitions: Mark Glick and Catherine Ruetschlin, “Big Tech Acquisitions and the Potential Competition Doctrine: The Case of Facebook,” Institute for New Economic Thinking Working Paper Series 104 (2019): 57–60.

Adaptive Markets: Financial Evolution at the Speed of Thought
by Andrew W. Lo
Published 3 Apr 2017

“Theory of Rational Option Pricing.” Bell Journal of Economics and Management Science 4: 141–183. ___. 1989. “On the Application of the Continuous-Time Theory of Finance to Financial Intermediation and Insurance.” Geneva Papers on Risk and Insurance 14: 225–262. ___. 1995a. “Financial Innovation and the Management and Regulation of Financial Institutions.” Journal of Banking and Finance 19: 461–481. ___. 1995b. “A Functional Perspective of Financial Intermediation.” Financial Management 24: 23–41. Merton, Robert C., Monica Billio, Mila Getmansky, Dale Gray, Andrew W. Lo, and Loriana Pelizzon. 2013. “On a New Approach for Analyzing and Managing Macrofinancial Risks.”

The Price of Time: The Real Story of Interest
by Edward Chancellor
Published 15 Aug 2022

Petty, Sir William, A Treatise of Taxes and Contributions (London, 1662). Petty, Sir William, ‘Quantulumcunque Concerning Money’ [1682] (London, 1695). Peyrefitte, Alain, The Immobile Empire (New York, 1992). Philippon, Thomas, ‘Has the US Finance Industry Become Less Efficient? On the Theory and Measurement of Financial Intermediation’, American Economic Review, April 2015: 1408–38. Phillips, C. A., McManus, T. F. and Nelson, R. W., Banking and the Business Cycle: A Study of the Great Depression in the United States (New York, 1937). Pigou, Arthur C., The Veil of Money [1949] (London, 1962). Piketty, Thomas, Capital in the Twenty-First Century (Cambridge, Mass., 2014).

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By 2018, the FIRE sectors contributed a record 20.5 per cent to GDP; https://www.bea.gov/data/gdp/gdp-industry. 40. See Robin Greenwood and David Scharfstein, ‘The Growth of Finance’, Journal of Economic Perspectives, Spring 2013; Thomas Philippon, ‘Has the US Finance Industry Become Less Efficient? On the Theory and Measurement of Financial Intermediation’, American Economic Review, April 2015. 41. Comment by Anthony Deden at Grant’s Conference, New York City, 9 October 2018. 42. Chris Brightman et al., ‘Public Policy, Profits, and Populism’, Research Affiliates, June 2017. 43. Virgil Jordan, ‘Inflation as a Political Must’, American Affairs, 10, January 1948: 12. 44.

The Only Game in Town: Central Banks, Instability, and Avoiding the Next Collapse
by Mohamed A. El-Erian
Published 26 Jan 2016

In doing so, it feels that it would be well placed to continue to influence private sector expectations and thus align both private and public actions. Indeed, as noted by Ben Bernanke, “the more guidance a central bank can provide the public about how policy is likely to evolve, the greater the chance that market participants will make appropriate inferences.”2 — Meanwhile, less hindered by concerns about subdued financial intermediation fueling economic growth, regulation and supervision will be strengthened and expanded. Specifically, it will continue to encompass a larger set of institutions (including nonbanks) and seek to take into account a greater array of risks (including, as discussed earlier, the liquidity delusion that leads to periods of patchy liquidity, especially during shifts in market consensus).

Technological Revolutions and Financial Capital: The Dynamics of Bubbles and Golden Ages
by Carlota Pérez
Published 1 Jan 2002

For example, from the 1970s onward and with greater intensity in the 1990s, many financial ‘innovations’ can be classified as taking advantage of legal loopholes to evade regulation, such as seeking to hold funds that are not classified as deposits to reduce the reserve ratios or the many new ways of earning commissions for performing financial intermediation ‘off-the-record’.170 166. See Chancellor (1999) Ch. 9 and Reading (1992:1993) Ch. 7. 167. Minsky (1982) uses the term as a category for any sort of highly risky credit, including those which became so because of external conditions. 168. A sample of notorious frauds 1980–95 is given in Kindleberger (1978:1996 revised edn) pp. 78–9. 169.

Financial Market Meltdown: Everything You Need to Know to Understand and Survive the Global Credit Crisis
by Kevin Mellyn
Published 30 Sep 2009

That is why the contract is one sided: You agree to the terms setting out how you can operate your account, and you may even agree to pay certain fees, but the bank can do what it wants. The Financial Market Made Simple BANK INTERMEDIATION Once you understand a financial contract between you and the bank this way, it is fairly easy to grasp the concept of ‘‘financial intermediation.’’ In theory, you or anyone with surplus deposit money or cash at a given time could find somebody somewhere in the world who at the same moment needed to use that money more than you did and was willing to pay you for its use. In reality, most of us want to get on with our lives and have neither the time nor the knowledge to find people who will pay for us for the use of our extra money.

Global Governance and Financial Crises
by Meghnad Desai and Yahia Said
Published 12 Nov 2003

The drawing on the CCL, which must be redeemed three months ahead, could be financed by short-term borrowing of the Fund from the central banks issuing the currencies demanded. 66 Michel Aglietta Until now, the CCL has been an utter failure since no country has applied to be qualified. This rejection points out to the impossibility to transform a model of collective action in a piecemeal way. The changeover from a model of financial intermediation for developing countries to a model of crisis management requires the consistent reform of all its components: conditionality, surveillance, involvement of creditors in debt restructuring, leadership in the coordination of the official institutions participating to the containment of systemic risk, flexible liquidity assistance.

The Rise of Carry: The Dangerous Consequences of Volatility Suppression and the New Financial Order of Decaying Growth and Recurring Crisis
by Tim Lee , Jamie Lee and Kevin Coldiron
Published 13 Dec 2019

From an economic perspective, a carry bubble can be characterized as a mispricing of risk, at least relative to a classical economic equilibrium. The Ponzi bubble, of course, is simple fraud—although the distinction is blurred 1. Utpal Bhattacharya, “The Optimal Design of Ponzi Schemes in Finite Economies,” Journal of Financial Intermediation, January 2003. Carry, Financial Bubbles, and the Business Cycle 143 in the case of the rational Ponzi bubble. The more fundamental difference between carry and Ponzi is that the carry regime is a more subtle manifestation of power imbalances in society, or indeed in the global economy.

The Crisis of Crowding: Quant Copycats, Ugly Models, and the New Crash Normal
by Ludwig B. Chincarini
Published 29 Jul 2012

PGAM worked to find imbalances, hedge away all unwanted or little-understood risk, and focus on the core risk that interested the firm. It used leverage to amplify returns, as most of its strategies had high Sharpe ratios and small absolute returns. The LTCM disaster had pointed to a key problem with financial intermediation: It contained tail risks during financial crises, including the August 1998 Russian crises that sealed LTCM’s fate. PGAM used about a quarter of the leverage that LTCM had used. Less leverage meant lower returns. PGAM’s returns were also about a quarter of LTCM’s returns before the 1998 crisis.

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Maybe a broker-dealer should just be a broker-dealer, a bank should just be a bank, and an insurance provider should just be an insurance provider.6 Systemic risk is ultimately a bigger risk for the entire economy than are “too big to fail” firms. Systemic risk is the widespread failure of financial institutions, or frozen capital markets that impair both financial intermediation payment systems and lending to corporations and households. More generally, systemic risk is an event that leads to the widespread loss of significantly important, linked institutions associated with economic functioning. The 2008 financial crisis had its roots in real estate exposure, which was the common link between banking institutions, including regular banks, investment banks, hedge funds, insurance companies, and government-sponsored enterprises.

Before Babylon, Beyond Bitcoin: From Money That We Understand to Money That Understands Us (Perspectives)
by David Birch
Published 14 Jun 2017

He went on to die of apoplexy – which may well be a common fate for those who truly understand money – and left an astonishing legacy. Thus we move on to the critical point in this story. The development of banking institutions posed a threat to the existing sovereign state monopoly over money. If the benefits from banking and financial intermediation were not to be lost, the emergent nation state had to cope with the threat without actually suppressing the banks (Glasner 1998). Tulips from Amsterdam I cannot help but imagine that the London bankers of the early seventeenth century looked at free-thinking Amsterdam – the epicentre of innovation in financial services – as they look at the blockchain now: as a strange and exotic place where all sorts of bizarre experimentation in finance and financial services is underway, with outcomes that can only be guessed at.

A Brief History of Neoliberalism
by David Harvey
Published 2 Jan 1995

Heavy reliance upon foreign direct investment (a completely different economic development strategy to that taken by Japan and South Korea) has kept the power of capitalist class ownership offshore (Table 5.1), making it somewhat easier, at least in the Chinese case, for the state to control.4 The barriers erected to foreign portfolio investment effectively limit the powers of international finance capital over the Chinese state. The reluctance to permit forms of financial intermediation other than the state-owned banks—such as stock markets and capital markets— deprives capital of one of its key weapons vis-à-vis state power. The long-standing attempt to keep structures of state ownership intact while liberating managerial autonomy likewise smacks of an attempt to inhibit capitalist class formation.

Crisis and Dollarization in Ecuador: Stability, Growth, and Social Equity
by Paul Ely Beckerman and Andrés Solimano
Published 30 Apr 2002

In such circumstances debt stocks could grow more rapidly than ECUADOR UNDER DOLLARIZATION: OPPORTUNITIES AND RISKS 85 anticipated, for the dubious reason that anticipated depreciation failed to occur. Dollarization has several important advantages over conventional fixed exchange rates. Unless the permanence of the pegged exchange rate is extremely credible, residual fears of depreciation could affect financial intermediation. This is one reason why Latin American economies have generally been unable to place longer-term domestic-currency debt: Latin America’s longer-term financial markets are all dollar-denominated or index-linked, often leading to serious mismatches in corporations’ and individuals’ balance sheets.

The Vanishing Middle Class: Prejudice and Power in a Dual Economy
by Peter Temin
Published 17 Mar 2017

He was interested in gathering data on income inequality over several centuries, and he restricted his data on wealth to assets traded on markets. He then could sum varied forms of capital at market prices to get national capital stocks by adding their prices. Piketty drew on a literature that argued for the role of finance in economic growth. Economists collected data on the growth of financial intermediation and showed that while finance grew as a result of economic growth, there was good evidence that financial development caused economic growth. Piketty did not discuss this research directly, focusing instead on more concrete issues such as the imputed rent from owner-occupied houses.5 This procedure raises an important question of national income analysis.

The Economics of Belonging: A Radical Plan to Win Back the Left Behind and Achieve Prosperity for All
by Martin Sandbu
Published 15 Jun 2020

Over the last decade or so, the Bank for International Settlements, the International Monetary Fund, and the OECD—traditionally seen as the commanding heights of economic policy orthodoxy—and leading financial economists have all been producing research documenting that beyond a certain point, a larger financial sector (in particular banking) and more credit in the economy reduce growth, weaken productivity, and increase inequality.16 The reason is that while expanding financial intermediation can make the economy more efficient by providing finance for investment projects, continued expansion ends up drawing resources away from where they are best deployed. Rather than providing capital to people with good ideas and the businesses with the greatest potential for growth, an overgrown financial sector directs funding to activities such as construction, which are nicely suited to the banks’ model of secured lending but offer low productivity growth.

A Pelican Introduction: Basic Income
by Guy Standing
Published 3 May 2017

Then there are hypotheses that relate to the effects on the local economy and local society, such as the following: g. A basic income scheme leads to an improvement in income distribution, lessening income inequality, and it does so by more than a simple addition of the cash transfer. h. A basic income leads to the establishment of local financial agencies, leading to a growth of financial intermediation. i. A basic income scheme leads to the development of local businesses and more employment in the community. Hypothesis (g), for instance, is crucial to a proper evaluation of a basic income system. If the pilot design was not able to measure the impact on income distribution, it would fail to evaluate a key aspect of basic income.

The Great Convergence: Information Technology and the New Globalization
by Richard Baldwin
Published 14 Nov 2016

This set up a situation where the Old World had too many people and not enough land—an imbalance mirrored by the opposite imbalance in the New World. Note the scale for the Old World chart is about ten times that of the New World chart. DATA SOURCE: Maddison database (2013 version). The whole process was fostered by the rapid development of financial intermediation (centered on London). As a result, the British economy was reoriented from agriculture to manufacturing and the population shifted from rural to urban. The big changes were at first limited mostly to Britain, as the French Revolution of 1789 and decades-long Napoleonic Wars delayed the Industrial Revolution’s spread to the Continent.

Rethinking the Economics of Land and Housing
by Josh Ryan-Collins , Toby Lloyd and Laurie Macfarlane
Published 28 Feb 2017

Blöchliger, Hansjörg. 2015. ‘Reforming the Tax on Immovable Property’. OECD Economics Department Working Papers No. 1205. Bogdanor, Vernon, and Robert J. A. Skidelsky. 1970. The Age of Affluence, 1951–1964. Macmillan. Boot, Arnoud W. A. 2000. ‘Relationship Banking: What Do We Know?’ Journal of Financial Intermediation 9 (1): 7–25. Booth, Robert. 2014. ‘Inside “Billionaires Row”: London’s Rotting, Derelict Mansions Worth £350m’. The Guardian, 31 January. Borio, Claudio. 2014. ‘The Financial Cycle and Macroeconomics: What Have We Learnt?’ Journal of Banking and Finance 45: 182–198. Borio, Claudio, R.

Straight Talk on Trade: Ideas for a Sane World Economy
by Dani Rodrik
Published 8 Oct 2017

A focus on binding constraints helps us see why remedies that are not well targeted—broad structural reforms—are ineffective, at best, and sometimes counterproductive. Cutting red tape and reducing regulation does little to spur private economic activity when the constraint lies on the finance side. Improving financial intermediation does not raise private investment when entrepreneurs expect low profits. Successful policy design must rely more on domestic experimentation and local institutional innovations—and much less on “best practices” and blueprints adopted from international experience. Going back to Greece, where was the binding constraint on that economy while structural reforms and fiscal austerity were being applied?

Expected Returns: An Investor's Guide to Harvesting Market Rewards
by Antti Ilmanen
Published 4 Apr 2011

• Although neoclassical models do not emphasize this, it seems plausible that financial crises are important “high MU” environments, especially if financial institutions have a major role in setting asset prices. If we can equate bad times with stock market losses we get back the old CAPM, but “bad times” are likely to be more multi-dimensional. Sometimes other aspects of financial crises—a bond or housing market selloff, vanishing liquidity, de-leveraging spirals, a breakdown in financial intermediation, spiking volatility, high correlations that limit diversification—boost MU even when stock markets are relatively stable. • The worst times are characterized by both financial and economic turbulence. Table 5.1 lists some periods that, in Justice Stewart’s spirit, were manifestly bad times.

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Bharath (2010), “Liquidity risk of corporate bond returns,” New York University Stern School of Business working paper, available at SSRN: http://ssrn.com/abstract=1612287 Acharya, Viral; and Lasse H. Pedersen (2005), “Asset pricing with liquidity risk,” Journal of Financial Economics 77, 375–410. Adrian, Tobias; Emanuel Moench; and Hyun Song Shin (2010), “Financial intermediation, asset prices and macroeconomic dynamics,” Federal Reserve Bank of New York, Staff Report 422. Agarwal, Vikas; Gurdip S. Bakshi; and Joop Huij (2007), “Do higher-moment equity risks explain hedge fund returns?” Robert H. Smith School, Research Paper 06-066 available at SSRN: http://ssrn.com/abstract=1108635 Agarwal, Vikas; Naveen Daniel; and Narayan Y.

The Curse of Cash
by Kenneth S Rogoff
Published 29 Aug 2016

Bellingham, Washington: Western Washington University. Pew Research Center. 2014. “As Growth Stalls, Unauthorized Immigrant Population Becomes More Settled” (September). Washington, DC: Pew Foundation. Philippon, Thomas. 2015. “Has the US Finance Industry Become Less Efficient? On the Theory and Measurement of Financial Intermediation.”American Economic Review 105 (4): 1408–38. Pissarides, Christopher A., and Guglielmo Weber. 1989. “An Expenditure-Based Estimate of Britain’s Black Economy.” Journal of Public Economics 39 (1): 17–32. Porter, Richard D. 1993. “Estimates of Foreign Holdings of U.S. Currency—An Approach Based on Relative Cross-Country Seasonal Variations.”

The Truth Machine: The Blockchain and the Future of Everything
by Paul Vigna and Michael J. Casey
Published 27 Feb 2018

But on the other, the idea of a consortium of the world’s biggest banks having say-so over who and what gets included within the financial system’s single and only distributed ledger conjured up fears of excessive banking power and of the politically unpopular bailouts that happened after the crisis. Might Wall Street be building a “too-big-to-fail” blockchain? A Fix for Financial Crises? Let’s face it: even though it would be great to see the unnecessary layers of financial intermediation stripped away from the old boys’ club, regulatory and economic barriers make such revolutionary change almost impossible to achieve from within. None of this is to say, however, that the big brains at R3, as well as those of its member banks’ in-house blockchain labs and of distributed ledger startups such as Digital Asset Holdings and Symbiont, aren’t producing phenomenally powerful reforms to improve a bottlenecked financial system.

The City
by Tony Norfield

By the early 1960s, not only had a number of former colonies been successful in their fight for independence – although they still had strong links with British business – but British finance had begun to take advantage of the developing euromarkets and to switch operations to the US dollar. This initiated a process that would end up with the City depending far less on sterling for its business and much more upon transactions and financial intermediation. It was an important step for British finance on the road to where the City is today. 3. Finance and the Major Powers The 1970s was an extraordinary decade, both for the global economy and in terms of the changes in the financial relationships between the major powers. A steep fall in rates of economic growth and a sharp recession signalled the end of the postwar boom, with higher unemployment, inflation and government fiscal deficits.

In FED We Trust: Ben Bernanke's War on the Great Panic
by David Wessel
Published 3 Aug 2009

For instance, there was this 2005 passage in one of his speeches: “We are in the midst of an unusual dynamic in financial markets, in which low realized volatility in macroeconomic outcomes [Translation: everyone thinks we’ve licked the boom-bust cycle], low realized credit losses [Translation: even deadbeats are paying their loans], greater confidence in the near term path of monetary policy [Translation: everyone assumes the Fed will never surprise them], low uncertainty about future inflation and interest rate [Translation: everyone really believes the Fed will never surprise them], rapid changes in the nature of financial intermediation [Translation: the rise of finance outside the core banking system in the securities markets], and a large increase in the share of global savings that is willing to move across borders [Translation: the huge sums of money sloshing around the world economy], have worked together to bring risk premia down across many asset prices [Translation: all of which have led prices of stocks and other assets to rise awfully high].”

Rewriting the Rules of the European Economy: An Agenda for Growth and Shared Prosperity
by Joseph E. Stiglitz
Published 28 Jan 2020

No modern economy can function well without a well-functioning financial sector. But this sector worked poorly in both Europe and the United States. Both regions need a financial sector that will perform certain essential services, from managing the wealth of individuals for their retirement, to running a modern payments mechanism, to providing prudent financial intermediation. The financial system must ensure that scarce capital is allocated to the highest-return activities, thus providing the funds necessary for creating new firms and expanding old ones. Had they performed these services well, those in the financial sector would have been amply rewarded. However, their greed knew no bounds, and they realized that their position of trust gave them an unprecedented opportunity to exploit others.

Broke: How to Survive the Middle Class Crisis
by David Boyle
Published 15 Jan 2014

It hasn’t all gone to the financial intermediaries, but most of it has.[25] ‘While the owners of business enjoy the dividend yields and earnings growth that our capitalistic system creates,’ wrote Bogle, ‘those who play in the financial markets capture those investment gains only after the costs of financial intermediation are deducted — a vast “losers game”.’ Like problem gamblers, our financial intermediaries — those we have given charge of our pensions — dip in and out of the markets with increasing frequency, constantly going back for more, ostensibly doing so on our behalf, but constantly extracting the croupier’s cut.

The AI Economy: Work, Wealth and Welfare in the Robot Age
by Roger Bootle
Published 4 Sep 2019

The growth of manufacturing is not a prerequisite for the advance of developing economies nor is it the key to preventing a major gap between “good” and “bad” jobs. Moreover, the study found that several service sectors exhibited productivity growth equal to the top performing manufacturing industries. It cited postal services and telecommunications, financial intermediation and wholesale and retail distribution. The study concluded that “skipping” a traditional industrialization phase need not be a drag on economy-wide productivity growth for developing countries.30 Conclusion In the earlier discussion about the impact of the AI revolution on income inequality I argued that it is too soon to be sure of the overall effect and we need to keep an open mind.

Boom and Bust: A Global History of Financial Bubbles
by William Quinn and John D. Turner
Published 5 Aug 2020

Dehesh, A. and Pugh, C. ‘The internationalization of post-1980 property cycles and the Japanese “bubble” economy, 1986–96’, International Journal of Urban and Region Research, 23, 147–64, 1999. Dell’Ariccia, G., Detragiache, E. and Rajan, R. ‘The real effect of banking crises’, Journal of Financial Intermediation, 17, 89–112, 2008. Dell’Arriccia, G., Igan, D. and Laeven, L. ‘Credit booms and lending standards: evidence from the subprime mortgage market’, Journal of Money, Credit and Banking, 44, 367–84, 2012. Dellepiane, S., Hardiman, N. and Heras J. L. ‘Building on easy money: the political economy of housing bubbles in Ireland and Spain’, UCD Geary Institute Discussion Papers, WP2103/18, 2013.

Trillion Dollar Triage: How Jay Powell and the Fed Battled a President and a Pandemic---And Prevented Economic Disaster
by Nick Timiraos
Published 1 Mar 2022

Richard Rubin and Kate Davidson, “Steven Mnuchin, a Newcomer, Tilts at Washington’s Hardest Target: The Tax Code,” The Wall Street Journal, September 25, 2017. https://www.wsj.com/articles/steven-mnuchin-a-newcomer-tilts-at-washingtons-hardest-target-the-tax-code-1506350555 5. Max Abelson and Zachary Mider, “Trump’s Top Fundraiser Eyes the Deal of a Lifetime,” Bloomberg News, August 31, 2016. https://www.bloomberg.com/news/articles/2016-08-31/steven-mnuchin-businessweek 6. Kevin Warsh, “Financial Intermediation and Complete Markets,” speech at the European Economics and Financial Centre, London, June 5, 2007. https://www.federalreserve.gov/newsevents/speech/warsh20070605a.htm 7. Philip Rucker, Josh Dawsey, and Damian Paletta, “Trump criticizes Fed’s policies as ‘way off-base,’” The Washington Post, November 27, 2018, https://www.washingtonpost.com/politics/trump-slams-fed-chair-questions-climate-change-and-threatens-to-cancel-putin-meeting-in-wide-ranging-interview-with-the-post/2018/11/27/4362fae8-f26c-11e8-aeea-b85fd44449f5_story.html 8.

EuroTragedy: A Drama in Nine Acts
by Ashoka Mody
Published 7 May 2018

“State of the Union Address 2013,” September 11. http://​europa.eu/​rapid/​press-​release_​SPEECH-​13-​684_​en.htm. Barta, Patrick, and Mark Whitehouse. 2011. “Crisis Adds New Risk to Global Recovery.” Wall Street Journal, March 16. Barth, James, Gerard Caprio Jr., and Ross Levine. 2004. “Bank Regulation and Supervision: What Works Best?” Journal of Financial Intermediation 13: 205–​248. Bases, Daniel. 2012. “The Governments’ Man When Creditors Bay.” Reuters News, May 23. Batini, Nicoletta, Giovanni Callegari, and Giovanni Melina. 2012. “Successful Austerity in the United States, Europe and Japan.” IMF Working Paper 12/​190, Washington, D.C. Batsaikhan, Uuriintuya. 2017.

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Stigler Center for the Study of the Economy and the State, University of Chicago Booth School of Business New Working Paper Series 14, Chicago, October. Peyrefitte, Alain. 1994. C’etait de Gaulle [It Was about de Gaulle]. Paris: Fayard. Philippon, Thomas. 2015. “Has the US Finance Industry Become Less Efficient? On the Theory and Measurement of Financial Intermediation.” American Economic Review 105, no. 4: 1408–​1438. Philippon, Thomas, and Ariell Reshef. 2013. “An International Look at the Growth of Modern Finance.” Journal of Economic Perspectives 27, no. 2: 73–​96. Phillips, Matt. 2010. “Can Words Still Soothe the Market’s Greece Worries?” Wall Street Journal Blogs, April 9.

Planet Ponzi
by Mitch Feierstein
Published 2 Feb 2012

What happened in the period after 1996 was historically unprecedented‌—‌and inherently implausible. And remember that value added is a measure of output, not profit. If you examine profits, rather than value added, Planet Ponzi’s London division appears even more distended. Between 1948 and 1978, financial intermediation (a subsection of the financial services sector) accounted for around 1.5% of profits in the total economy. By 2008, that ratio had risen tenfold to 15%. That’s such an extreme change as to be effectively impossible. Banks weren’t making those profits, they were simply pretending that they did: manipulating their books to show profits that weren’t, in truth, ever there.

Prosperity Without Growth: Foundations for the Economy of Tomorrow
by Tim Jackson
Published 8 Dec 2016

They have the potential for low carbon footprints and they provide meaningful work. There will still be some role for traditional economic sectors. Resource extraction will diminish in importance, as fewer materials are used and more are recycled. But manufacturing, construction, food and agriculture, retail, communication and financial intermediation will still be important. Doubtless, the digital economy will transform many of these activities. Certainly, they will need to look rather different from the way they do right now. Agriculture will pay more attention to the integrity of the land and the welfare of livestock. Manufacturing will pay more attention to durability and repairability.

The Code of Capital: How the Law Creates Wealth and Inequality
by Katharina Pistor
Published 27 May 2019

Although functionally the equivalent of issuing a note that promises redemption in species on demand, deposit accounts passed legal muster and have since become the standard for raising funds from the broader public—another example of effective regulatory arbitrage.34 Competition in finance will always push some to find new ways of making money. State money is boring, as every banker would tell you; it can be used as a means of exchange and to store value, but it does not create much of a return. While every textbook about banking describes financial intermediation as the process by which household savings will be channeled to productive investments, more gains have always been made by minting debt. This private money, however, carries a risk that state money does not, and that is liquidity risk. Only state money comes potentially in unlimited quantities; private money is limited by the willingness of other private actors to accept it and that depends on its prospects to generate future returns.

Winner-Take-All Politics: How Washington Made the Rich Richer-And Turned Its Back on the Middle Class
by Paul Pierson and Jacob S. Hacker
Published 14 Sep 2010

In response to market failures on all these dimensions, the New Deal ushered in extensive new federal regulations designed to ensure investor confidence and align private ambitions more closely with broad economic goals such as financial stability.62 Over the last three decades, these relatively quiet and stable financial markets have given way to much more dynamic and unstable ones with far more pervasive effects on the rest of the economy. Some of the shift was clearly driven by changes in the nature of economic activity and the possibilities for financial intermediation. Technological innovation made possible the development of new financial instruments and facilitated spectacular experiments with securitization. Computers helped Wall Street transform from million-share trading days in the 1980s to billion-share trading days in the late 1990s, magnifying the possibilities for gains—and losses.63 The shredding of the post–New Deal rule book for financial markets did not, however, simply result from the impersonal forces of “financial innovation.”

The Ascent of Money: A Financial History of the World
by Niall Ferguson
Published 13 Nov 2007

And, from the twentieth, households were encouraged, for political reasons, to increase leverage and skew their portfolios in favour of real estate. Economies that combined all these institutional innovations - banks, bond markets, stock markets, insurance and property-owning democracy - performed better over the long run than those that did not, because financial intermediation generally permits a more efficient allocation of resources than, say, feudalism or central planning. For this reason, it is not wholly surprising that the Western financial model tended to spread around the world, first in the guise of imperialism, then in the guise of globalization.1 From ancient Mesopotamia to present-day China, in short, the ascent of money has been one of the driving forces behind human progress: a complex process of innovation, intermediation and integration that has been as vital as the advance of science or the spread of law in mankind’s escape from the drudgery of subsistence agriculture and the misery of the Malthusian trap.

Republic, Lost: How Money Corrupts Congress--And a Plan to Stop It
by Lawrence Lessig
Published 4 Oct 2011

Technology not only enabled the crafting of complex mortgage-backed securities, but it also allowed mortgage lenders to lend on the basis of a portfolio of borrowers rather than the judgment a che ex bout the creditworthiness of one borrower at a time. See, e.g., William R. Emmons and Stuart I. Greenbaum, “Twin Information Revolutions and the Future of Financial Intermediation,” in Y. Amihud and G. Miller, eds., Mergers and Acquisitions (1998), 37–56; and Mitchell Petersen and Raghuram G. Rajan, “Does Distance Still Matter? The Information Revolution in Small Business Lending,” Journal of Finance 57 (Dec. 2002): 2533–70. 9. Frank Partnoy, Infectious Greed: How Deceit and Risk Corrupted the Financial Markets (New York: Times Books, 2003), 110–13.

How the Other Half Banks: Exclusion, Exploitation, and the Threat to Democracy
by Mehrsa Baradaran
Published 5 Oct 2015

Perhaps people will want some insurance to protect them against loan losses. Then, P2P companies begin to look much more like banks. In a way, P2P seems to be reinventing the wheel and substituting one financial intermediary for another. Perhaps the reinvention is necessary because the current wheel is broken, but P2P lending is just another form of financial intermediation for the Internet age. As such, it will likely face the same sorts of problems as banks face, such as profitability concerns for small loans and market pressure from other lenders. P2P lending has been and will likely continue to be a boon to small businesses—especially to artists, musicians, designers, and makers of all sorts who are too small for banks to bother with.

Capital Ideas: The Improbable Origins of Modern Wall Street
by Peter L. Bernstein
Published 19 Jun 2005

“Paul Samuelson’s Financial Economics.” In Paul Samuelson and Modern Economic Theory, Cary E. Brown and Robert M. Solow, eds. New York: McGraw-Hill Book Company. Merton, Robert C. 1988. Personal statement (unpublished manuscript). Merton, Robert C. 1989. “On the Application of the Continuous-Time Theory of Finance to Financial Intermediation and Insurance.” The Geneva Papers on Risk and Insurance, Vol. 14 (July), pp. 225–262. Merton, Robert C. 1990. Continuous-Time Finance. Cambridge, MA: Basil Blackwell. Miller, Merton H. 1986. “The Academic Field of Finance: Some Observations on Its History and Prospects.” Address at Katholieke Universiteit te Leuven, Leuven, Belgium, May 15.

World Cities and Nation States
by Greg Clark and Tim Moonen
Published 19 Dec 2016

Under the moral and ­political aegis of the United Nations, the nation state was ratified and sustained as a sovereign institutional platform that had the final say on the trade of goods, 22 World Cities and Nation States Table 2.1: Differences between traditional and new development policies (developed from OECD) Traditional development policies: ‘Regional planning’ 1950s to 1990s Objectives Strategies Geographical focus Target Balance national economies by compensating for disparities Narrow economic focus Sectoral approach Political regions Lagging regions Context Tools National economy Subsidies, incentives, State aid and regulations Actors National governments and sometimes regional governments New development policies: ‘Territorial development’ 1990s to present Increase regional development performance across the whole nation Integrate economic with spatial, environmental and social development measures Integrated development programmes and projects Metropolitan regions and economic regions All regions – Metropolitan regions – connections between regions and across national borders International economy and local economies Assets, drivers of growth/productivity, soft and hard infrastructures, skills and entrepreneurship, collaboration incentives, development agencies, co‐operative governance, financial intermediation, investment incentives Multiple levels of government, private and civic actors, implementation agencies, collaborative governance. A major role for business and civic institutions the attraction and investment of capital and on the negotiation of trade agreements and strategic alliances.

The Missing Billionaires: A Guide to Better Financial Decisions
by Victor Haghani and James White
Published 27 Aug 2023

To the extent that one views all investors who diverge from the market portfolio as “stock pickers” then we get the result that stock pickers in aggregate will earn the market return, less whatever fees and costs are associated with their activities. This is known as “Sharpe's arithmetic,” in honor of Bill Sharpe who popularized the idea. The same idea was expressed by John Bogle in his cost matters hypothesis (CMH): The overarching reality is simple: Gross returns in the financial markets minus the costs of financial intermediation equal the net returns actually delivered to investors. Although truly staggering amounts of investment literature have been devoted to the widely understood EMH (the efficient market hypothesis), precious little has been devoted to what I call the CMH (the cost matters hypothesis). To explain the dire odds that investors face in their quest to beat the market, however, we don't need the EMH; we need only the CMH.

The End of Alchemy: Money, Banking and the Future of the Global Economy
by Mervyn King
Published 3 Mar 2016

Second, the complete separation of banks into two extreme types – narrow and wide – denies the chance to exploit potential economic benefits from allowing financial intermediaries to explore and develop different ways of linking savers, with a preference for safety and liquidity, and borrowers, with a desire to borrow flexibly and over a long period. Constraining financial intermediation would mean that the cost of financing investment in plant and equipment, houses and other real assets would be higher. The potential efficiencies in using different ways of bringing savers and investors together would be lost by legally mandating a complete prohibition on the financing of risky assets by safe deposits – provided that we could find other ways, as I discuss below, of following a path that would lead to the end of alchemy.

The Death of Money: The Coming Collapse of the International Monetary System
by James Rickards
Published 7 Apr 2014

Min Zhu is helping the IMF to develop a working risk-management model based on complexity, one that is far more advanced than those used by individual central banks or private financial institutions. ■ Updating Keynes Zhu is showing traditional Keynesians how their model of policy action, in conjunction with an individual or corporate response, is obsolete. This two-part action-response model must be modified to place financial intermediation between the policy maker and the economic agent. This distinction is illustrated as follows: Classic Keynesian Model Fiscal/Monetary Policy > Individual/Corporate Response New IMF Model Fiscal/Monetary Policy > Financial Intermediary > Individual/Corporate Response While financial institutions in earlier decades had been predictable and passive players in policy transmission to individual economic actors, today’s financial intermediaries are more active and materially mute or amplify policy makers’ wishes.

How Markets Fail: The Logic of Economic Calamities
by John Cassidy
Published 10 Nov 2009

But the fact of the matter is that banks and other financial institutions provide more than half of the financing for American businesses. (The rest comes from the financial markets and from funds that corporations generate internally.) A quick mental experiment might help to explain the principle of financial intermediation. Imagine that you had $100,000 of surplus funds that you wanted to loan out at a reasonable interest rate, say 5 percent a year. If you placed an ad in the local newspaper, or on Craigslist, you would surely get plenty of responses, but would you trust your money to any of the people who replied?

People, Power, and Profits: Progressive Capitalism for an Age of Discontent
by Joseph E. Stiglitz
Published 22 Apr 2019

Stiglitz and Andrew Weiss, “Credit Rationing in Markets with Imperfect Information,” American Economic Review 71, no. 3 (1981): 393–410. 18.Though it had its origins back in the early 1990s. See Vitaly M. Bord and Joao A. C. Santos, “The Rise of the Originate-to-Distribute Model and the Role of Banks In Financial Intermediation,” Federal Reserve Bank of New York Policy Review, July 2012, 21–34, available at https://www.newyorkfed.org/medialibrary/media/research/epr/12v18n2/1207bord.pdf. 19.The role of reserves can be seen quite simply. Assume the bank has deposits of $1000 and lends $1000, but a net worth of $100 held in reserves; if more than 10 percent of the loans go bad, it gets back less than $900, which with the $100 in reserves, is insufficient to repay the depositors.

Adam Smith: Father of Economics
by Jesse Norman
Published 30 Jun 2018

As Andy Haldane, the Chief Economist of the Bank of England, has pointed out, ‘In 1980, there was one UK regulator for roughly every 11,000 people employed in the UK financial sector. By 2011, there was one regulator for every 300 people.’ The effect of these trends has largely been to reduce competition, drive up costs and further disconnect the banking system from the public interest. Thus the unit cost of US financial intermediation has not fallen in a hundred years, as Haldane shows, despite astonishing breakthroughs in technology and immense cost reductions in other service industries. In the UK, far from commercial banks supporting business growth, only around 10 per cent of bank lending goes towards company and enterprise investment outside commercial property.

Limitless: The Federal Reserve Takes on a New Age of Crisis
by Jeanna Smialek
Published 27 Feb 2023

Vulnerabilities Associated with Leveraged Loans and Collateralised Loan Obligations, December 19. https://www.fsb.org/​wp-content/​uploads/​P191219.pdf. ——— . 2020a. Holistic Review of the March Market Turmoil, November 17. https://www.fsb.org/​wp-content/​uploads/​P171120-2.pdf. ——— . 2020b. Global Monitoring Report on Non-Bank Financial Intermediation, December 16. https://www.fsb.org/​wp-content/​uploads/​P161220.pdf. Fisher, Richard. 2014. “Monetary Policy and the Maginot Line.” Federal Reserve Bank of Dallas, July 16. https://www.dallasfed.org/​news/​speeches/​fisher/​2014/​fs140716.cfm. Flaherty, Michael, and Emily Stephenson. 2014.

Principles of Corporate Finance
by Richard A. Brealey , Stewart C. Myers and Franklin Allen
Published 15 Feb 2014

For a discussion of the allocation of control rights and cash-flow rights between stockholders and debt holders, see: O. Hart, Firms, Contracts, and Financial Structure (Oxford: Oxford University Press, 1995). Robert Merton gives an excellent overview of the functions of financial institutions in: R. Merton, “A Functional Perspective of Financial Intermediation,” Financial Management 24 (Summer 1995), 23–41. The Winter 2009 issue of the Journal of Financial Perspectives contains several articles on the crisis of 2007–2009. See also: V. V. Acharya and M. W. Richardson, eds., Restoring Financial Stability (Hoboken, NJ: John Wiley & Sons, 2009).

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Do you think that this same type of organization will work in other countries with different laws and financial institutions? For a start in thinking about this question, review Section 15.1 and read the following article: S. Kaplan, F. Martel and P. Stromberg, “How do Legal Institutions and Experience Affect Financial Contracts?” Journal of Financial Intermediation 16 (2007), pp. 273–311. ___________ 1N. Mohan and C. R. Chen track the abnormal returns of RJR securities in “A Review of the RJR Nabisco Buyout,” Journal of Applied Corporate Finance 3 (Summer 1990), pp. 102–108. 2The whole story is reconstructed by B. Burrough and J. Helyar in Barbarians at the Gate: The Fall of RJR Nabisco (New York: Harper & Row 1990)—see especially Chapter 18—and in a movie with the same title. 3C.

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Porter, “Capital Disadvantage: America’s Failing Capital Investment System,” Harvard Business Review, September/October 1992, pp. 65–82. 29There are counterexamples, such as the development of the chemical industry on a large scale in nineteenth-century Germany. 30See F. Allen and D. Gale, “Diversity of Opinion and the Financing of New Technologies,” Journal of Financial Intermediation 8 (April 1999), pp. 68–89. 31See R. Rajan and L. Zingales, “Banks and Markets: The Changing Character of European Finance,” in V. Gaspar, P. Hartmann, O. Sleijpen (eds.), The Transformation of the European Financial System, Second ECB Central Banking Conference, October 2002, Frankfurt, Germany (Frankfurt: European Central Bank, 2003), pp. 123–167. 32T.

Inflated: How Money and Debt Built the American Dream
by R. Christopher Whalen
Published 7 Dec 2010

In fact it would not be until the late 1990s, or half a century later, when U.S. economic growth levels had begun to slow and financial speculation again grew to significant levels, that the amount of private debt to GDP would again reach 200 percent and then go even higher.14 The decline in the rate of private investment during the New Deal and the fact that private debt in the United States did not reach the levels of the Roaring Twenties until 1996 has implications for how to interpret the subsequent decades. Benjamin Friedman found that there were three major trends in the U.S. financial markets in the postwar period: an increase in private borrowing, the rise of the use of financial intermediaries, and the increased reliance upon government guarantees, regulation, and financial intermediation by government agencies.15 The sustained rise in private debt financing observed following the end of WWII was made more dramatic by the sharp decline in the previous 20 years. Likewise the introduction of government support for housing and other types of domestic infrastructure projects, such as roads, bridges and other improvements, slowly changed the nature of the U.S. economy and made possible the real estate boom of the 1990s and 2000s.

The fortune at the bottom of the pyramid
by C. K. Prahalad
Published 15 Jan 2005

inefficiencies. ICICI saw a real opportunity in this area because many of the problems and risks with microfinance could be alleviated by the capital, expertise, scale, and reach of a major bank. By entering the microfinance field, ICICI has taken on the role of social mobilization as well as financial intermediation. In addition to looking at microfinance, ICICI also wanted to increase its banking presence in rural areas. To do this, the bank needed to rapidly proliferate its points-of-presence or distribution points. However, the traditional brick-and-mortar approach to expansion is prohibitively expensive given the vast and varied landscape of India.

India's Long Road
by Vijay Joshi
Published 21 Feb 2017

These have to have a larger capital base than payments banks and will be allowed to lend, with the restriction that 75 per cent of lending will have to be for priority sectors such as agriculture and small and medium enterprises. Despite teething problems, these various moves have the potential to increase financial intermediation at the lower end of the market, shake up the sclerotic Indian banking system by increasing competition, and eventually spur economic growth. (Needless to say, increased competition will have to be accompanied by sensible regulation.) AGRICULTURE Agriculture now accounts for only 15 per cent of GDP but the sector still contains nearly half of the country’s workforce and two-​thirds of the country’s poor.

Why We Can't Afford the Rich
by Andrew Sayer
Published 6 Nov 2014

(As we saw, even if it isn’t a rentier organisation, their position still allows them to take a bigger share than others, over and above what their contribution might warrant.) So the fact that they are smart and workaholic doesn’t mean that they deserve their huge salaries. In the UK, it’s no surprise that the biggest concentration of the top 0.1%, with gross incomes of over £351,137, is in jobs where wealth-extraction opportunities are prominent – in financial intermediation (30%) and real estate, renting and other business activities (39%). Bonus payments are heavily concentrated at the top of the income distribution; the top 1% of employees get 40% of their annual pay in bonuses, while the bottom 90% get only 5% of their pay in bonuses. In the financial sector, over 25% of pay is in the form of cash bonuses, again heavily concentrated at the top, and often supplemented by bonuses in shares and options.121 Nor is it a surprise that 34% of the top 0.1% are company directors, and 24% of those in the rest of the top 1% are too, for this is a job that allows control over the disposal of company revenues.122 Those at the top are always likely to look after themselves before others.

Them And Us: Politics, Greed And Inequality - Why We Need A Fair Society
by Will Hutton
Published 30 Sep 2010

Harvey and Shiva Rajgopal (2005) ‘The Economic Implications of Corporate Financial Reporting’, Journal of Accounting and Economics 40: 3–73. 24 Sanjeev Bhojraj, Paul Hribar, Marc Picconi and John McInnis (2009) ‘Making Sense of Cents: An Examination of Firms That Marginally Miss or Beat Analysts Forecasts’, Journal of Finance 64: 2359–86. 25 Stephen Davis, Jon Lukomnik and David Pitt-Watson (2006) The New Capitalists: How Citizen Investors Are Reshaping the Corporate Agenda, Harvard Business School Press. 26 Peter Hall and David Soskice (2001) Varieties of Capitalism: The Institutional Foundations of Comparative Advantage, Oxford University Press. See also Wendy Carlin and Colin Mayer, ‘Finance, Investment and Growth’, Journal of Financial Economics 69 (1): 191–226. 27 Franklin Allen, ‘Stock Markets and Resource Allocation’, in Colin Mayer and Xavier Vives (eds) (1993) Capital Markets and Financial Intermediation, Cambridge University Press. 28 Marcos Mollica and Luigi Zingales (2007) ‘The Impact of Venture Capital on Innovation and the Creation of New Businesses’, mimeo, University of Chicago. 29 Figures from Nottingham University Business School’s Centre for Management Buy-out Research, at http://www.nottingham.ac.uk/business/cmbor/Privateequity.html. 30 Nick Bloom, Raffaella Sadun and John Van Reenen (2009) ‘Do Private Equity Owned Firms Have Better Management Practices?’

Why Nations Fail: The Origins of Power, Prosperity, and Poverty
by Daron Acemoglu and James Robinson
Published 20 Mar 2012

(He had a world-record 1,093 patents issued to him in the United States and 1,500 worldwide.) The real way to make money from a patent was to start your own business. But to start a business, you need capital, and you need banks to lend the capital to you. Inventors in the United States were once again fortunate. During the nineteenth century there was a rapid expansion of financial intermediation and banking that was a crucial facilitator of the rapid growth and industrialization that the economy experienced. While in 1818 there were 338 banks in operation in the United States, with total assets of $160 million, by 1914 there were 27,864 banks, with total assets of $27.3 billion.

More Money Than God: Hedge Funds and the Making of a New Elite
by Sebastian Mallaby
Published 9 Jun 2010

See the introduction to Peter Blair Henry, “Capital Account Liberalization: Theory, Evidence and Speculation,” Journal of Economic Literature 45 (December 2007), pp. 887–935. For the sevenfold increase in manufacturing wages, see Peter Blair Henry and Diego Sasson, “Capital Account Liberalization, Real Wages and Productivity” (working paper, March 2008). Also relevant is Ross Levine, Norman Loayza, and Thorsten Beck, “Financial Intermediation and Growth: Causality and Causes,” Journal of Monetary Economics 46, no. 1 (2000). This paper finds that a doubling in the size of private credit in an average developing country is associated with a 2 percentage point rise in annual economic growth, meaning that after thirty-five years the economy would be twice as large as it would have been without ample opportunities to borrow. 7.

The Making of Global Capitalism
by Leo Panitch and Sam Gindin
Published 8 Oct 2012

Nevertheless, the generally decentralized and fragmented nature of American finance remained, and, as Konings has shown, it was largely because of this feature that the US financial system “held together by intricate networks of domestically grown institutional relations . . . [and] a complex set of linkages between banks and the stock market . . . was marked by capacities for liquidity creation and a degree of dynamism that had never been available to British banks.”20 Although this distinctive kind of financial intermediation would leave the US economy more prone to financial crises and initially limit the international role of the dollar, it would prove important for the eventual global dominance of US finance. American capital had in fact begun to invest and accumulate abroad long before the 1890s, although the banks played a very small part in this, at least until World War I.

Migrant City: A New History of London
by Panikos Panayi
Published 4 Feb 2020

Jews also revealed a much higher rate of university education.118 Such trends have continued into the twenty-first century. Jews held higher educational qualifications than the population as a whole,119 were more likely to work in ‘real estate, renting and business activities’, education and ‘financial intermediation’, and were also more likely to hold positions as ‘managers and senior officials’ as well as ‘corporate managers’, and ‘managers and proprietors in services’.120 The wealthiest Jews in Britain have included the descendants of both the nineteenth-century elites and the Russian refugees. We can reel out numerous names such as the Rothschilds, the Samuels, descended from Marcus Samuel who founded Shell, the Goldsmids and the Waley-Cohens amongst the former category, for example.121 These had originated as international families and continued to remain so, despite their assimilation and Anglicization.

Unelected Power: The Quest for Legitimacy in Central Banking and the Regulatory State
by Paul Tucker
Published 21 Apr 2018

(While in office, I discussed inviting in materially interested observers with at least one overseas counterpart.) 24 Lehmann, “Varying Standards.” 22 Central Banking and the Fiscal State BALANCE-SHEET POLICY AND THE FISCAL CARVE-OUT The Federal Reserve … is, in effect, acting as the world’s largest financial intermediator.… Independence in a democratic society ultimately depends on … not be[ing] asked to do too much. —Paul Volcker, August 20131 Perhaps the most charged area for central bankers and their political overseers is their role in what is known as credit policy: public policy designed directly to stimulate the supply of credit by private sector institutions to private sector borrowers and, perhaps, even to steer it toward particular sectors or regions.

The Meritocracy Trap: How America's Foundational Myth Feeds Inequality, Dismantles the Middle Class, and Devours the Elite
by Daniel Markovits
Published 14 Sep 2019

The gains that elite workers produce in a meritocratic world—where inequality-induced innovation has biased production toward their peculiar skills—should therefore be discounted by the reduced productivity that these innovations impose on non-elite workers. The precise balance between gain and loss of course remains speculative. But the best evidence suggests that the elite’s true product may be near zero. For all its innovations, modern finance seems not to have reduced the total transaction costs of financial intermediation or to have reduced the share of fundamental economic risk borne by the median household, for example. And modern management seems not to have improved the overall performance of American firms (although it may have increased returns specifically to investors). More generally, rising meritocratic inequality has not been accompanied by accelerating economic growth or increasing productivity.