Paul Krugman on The Size of Finance

I don’t always agree with Paul Krugman, but in this op-ed from a couple of days ago he makes some good points about the size of the financial services industry. He’s prompted to do so by Michael Lewis’s new book Flash Boys (although Paul Krugman probably needs little encouragement to whack Wall Street). But the dead straight tunnel from Chicago to New York, built that way to save milliseconds off the time it takes to transmit a market order between the two cities, may be the catalyst that draws a needed review of all this computerized trading activity. The fact that the tunnel was apparently a good investment highlights that the market is not as focused on serving end-users as it should be.

As Krugman points out, drawing on work by Thomas Philippon (whose research I found helpful in writing Bonds Are Not Forever) the financial services industry has grown much faster than GDP since 1980 and the abovementioned tunnel inspires one to question whether more is always better for this sector. Channeling savings to productive forms of capital formation is society’s legitimate objective; the less this is done, the greater should be the subsequent public policy examination of financial services.

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2 replies
  1. Roger Taylor
    Roger Taylor says:

    As an “economist,” Krugman resides on the last three feathers of the aggressive left wing of the Democratic Party. His fondness for bashing capitalism and extolling the benefits of a vastly expanded public sector is legendary. His analysis of this case of “high frequency trading” is characteristically weak and political in that he refers to the participants as “speculators.” I am sure he meant for that term to strike the appropriately negative responsive chord in his loyal readers, but there was little speculative about this front running activity other than how long the participants could wet their beaks on each trade before getting exposed and shut down. His broad brush conclusion thet,”It’s the whole financial industry…that’s undermining our economy and our society,” is similarly stupid.

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  2. Scott Jordan
    Scott Jordan says:

    There is nothing new or original in Paul Krugman’s comments about the size and growth of the financial industry. It baffles me that his name needs to be invoked as a prelude to discussing the topic. His contributions to constructive dialog towards the improvement of our society are negligible. He is truly the Walter Winchell of economics.

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