Thursday, October 07, 2010

Old News: We Have Too Much US Financial Services Capacity

In a recent Wall Street Journal editorial, frequent, if often misguided contributor Andy Kessler proclaimed,

"There are too many traders, bankers and salesmen to support the new level of business. Thanks to Dodd-Frank, the shrinking of finance will continue."


Sorry to break the news, but, as I've written in prior posts on this blog over the past few years, US financial capacity has been excessive, and shrinking, since the 1990s. Even before, really.

In part, the simple applications of computer technology began to create excess capacity as long ago as the 1960s. It hasn't stopped since.

Kessler evidently thinks his insight is a surprise, or at least news.

It isn't.

He's right about the old retail brokerages and investment banks shamelessly inventing new, less efficient, higher-margin products for decades since the Big Bang deregulation of stock commissions in the 1970s. And among the consequences of the recent regulatory legislation will certainly be the elimination of prohibited activities at publicly-owned commercial banks.

But the much larger, more important trends in the sector have been the continuing growth of excess capacity, depressing margins and causing riskier trading and underwriting behavior, coupled with the exit of the best talent to hedge funds and private equity groups.

Put the two together, as Kessler failed to do, and you have your recipe for the recent financial disaster.

Forget "What's the Matter With Wall Street," the title of Kessler's editorial. There's really no Wall Street left, with Goldman Sachs' and Morgan Stanley's conversion to commercial banks.

It's more a matter of US financial services, generally, being over-supplied with capacity that simply can't be afforded. The sooner the capacity is taken out, the better for the nation and its competitive financial institutions.

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