While it is said governments distort markets, it is often missed that markets distort society, leading to political instability and low economic growth, argues Dr Jack Gray, adjunct professor of economics at the University of Technology, Sydney.
The IMF itself came out with a report that said when you have a very large financial system it reduces growth and increases volatility, Gray told delegates at the Portfolio Construction Forum’s conference in Sydney.
“How large is too large? This same report suggests when credit becomes about 90 per cent of GDP you are in trouble. You can expect to get very large and negative consequences on society and the economy.”
“If you believe, as I do, the finance sector is increasingly disconnected from the real economy, and it doesn’t add much value, then it’s a really worrying thing.”
He added the National Bureau of Economic Research (NBER) had published work that argued the disconnection of a large financial sector from the real economy was effectively a tax on the economy, estimated to be between 4.5 and 5 per cent.
“We’ve created something that’s not in society’s best interest. It’s been ignored of course, mainly because we have power, but it’s time we started listening and thinking about it ourselves and what we can do to make it better.”
The underlying set of beliefs of the whole industry is let the markets be free and you will get an optimal economic result.
“You often hear governments distort markets, why don’t we ever hear markets distort society?
“Almost all groups argue self-interest. You can see as soon as finance is attacked, as soon as superannuation is attacked, people who hate each other – the banks and super funds – all join together and defend themselves.
“Even if you were just a rational economist and didn’t give a damn about society, the effect of that on GDP is huge.”
He added the effects stemming from massive distrust in the system by the public should not be underestimated, and that the industry needed to start acting like a profession, putting the wider society ahead of self-interest to gain this trust back.
Baby boomers curtailing investment in infrastructure
The theme of self-interest distorting the system and not providing long-term benefits was picked up in a latter session at the Portfolio Construction Forum. Luis Freitas de Oliveira, portfolio manager at Capital Group Geneva, said democracy is increasingly being run by older people as a result of the demographic shift of an aging population.
Others on the panel agreed that the shift of power to this cohort had the potential to restrain long-term thinking from governments and businesses.
For example, the building of long-term infrastructure projects were not of a high priority for this group, as they would reap very little benefit from them, with the lack of investment likely to damage society and the economy in the future.