Financial intermediation…

Just doing some research on financial intermediation and came across this interesting paper:

Finance vs. Wal-Mart: Why are Financial Services so Expensive? Thomas Philippon, New York University

“The finance industry of 1900 was just as able as the finance industry of 2000 to produce bonds and stocks, and it was certainly doing it more cheaply. But the recent levels of trading activities are at least three times larger than at any time in previous history. Trading costs have decreased (Hasbrouck (2009)), but the costs of active fund management are large. French (2008) estimates that investors spend 0.67% of asset value trying (in vain, by definition) to beat the market.

In the absence of evidence that increased trading led to either better prices or better risk sharing, we would have to conclude that the finance industry’s share of GDP is about 2 percentage points higher than it needs to be and this would represent an annual misallocation of resources of about $280 billions for the U.S. alone.”

And also:

Has the U.S. Finance Industry Become Less Efficient? On the Theory and Measurement of Financial Intermediation Thomas Philippon May 2012