something I guessed might be the case turns out to be. excess financial sector growth can harm other portions of the economy.
http://blogs.reuters.com/great-debate/2012/10/24/are-the-big-banks-winning/
"While Dodd-Frank is aimed at preventing another cycle of bubble-and-bust, shrinking the financial sector is crucial for other reasons. One is a mass of evidence demonstrating that hyper-financialized economies have lower growth. Another is the appalling ethical record of large financial companies. The chance of making huge paydays by risking other people’s money, it seems, can sometimes derange moral compasses.
First, the pro-growth argument for clamping down on the banks: Once the financial sector achieves a certain size, its continued expansion reduces economic growth, according to a new study by two senior economists at the Bank for International Settlements, Stephen Cecchetti and Enisse Kharroubi, using a large international data base stretching back more than 30 years.
Their conclusions are unambiguous. No country can achieve a high rate of growth without a well-functioning financial system. China, for example, lacks a deep system of consumer finance, forcing it into a lop-sided development strategy. The result is the creation of dangerous imbalances that could threaten continued rapid growth.
An outsized financial sector expansion can actually reduce economic growth, according to their data. This relationship holds for country after country, and the tipping points are fairly consistent. When private credit grows to between 90 percent and 100 percent of gross domestic product, it is tilting toward too big. In the runup to the 1997-98 Asian financial crises, Thai private credit outstanding grew to 150 percent of GDP and growth turned sharply down. As soon as credit was ratcheted back to 95 percent of GDP, however, Thai productivity picked up sharply.
New Zealand’s economy offers much the same picture. As its financial sector expanded beyond the 100 percent mark, productivity dropped sharply, then rose again as credit was brought under control. Ireland and Spain show a similar pattern."
-- and here's the study itself.
http://www.bis.org/publ/work381.pdf
"It is fair to say that recent experience has led both academics and policymakers to
reconsider their prior conclusions. Is it true regardless of the size and growth rate of the
financial system? Or, like a person who eats too much, does a bloated financial system
become a drag on the rest of the economy?
In this paper, we address this question by examining the impact of the size and growth of the
financial system on productivity growth at the level of aggregate economies. We present two
very striking conclusions.
First, as is the case with many things in life, with finance you can
have too much of a good thing. That is, at low levels, a larger financial system goes hand in
hand with higher productivity growth. But there comes a point – one that many advanced
economies passed long ago – where more banking and more credit are associated with
lower growth.
Our second result comes from looking at the impact of growth in the financial system –
measured as growth in either employment or value added – on real productivity growth. Here
we find evidence that is unambiguous: faster growth in finance is bad for aggregate real
growth. One interpretation of this finding is that financial booms are inherently bad for trend
growth."
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