Taking a Step Back

I haven't commented much on the debate swirling around the vast increase in the profitability of the financial sector, and the contribution to this sector to the greater public good. Though I am still searching for comparable Canadian figures, in the U.S., at the onset of the current crisis, financial sector profits had risen from 20% to 40% of all profits in just a few years. It seems likely that Canadian figures are not all that different.

Why, then, do we allocate so much to this sector? The baseline function of any financial sector is to aggregate resources and efficiently allocate these. But more and more, the corporate sector raises its own resources. Or perhaps it is to develop innovative investment vehicles, but we all know how that has turned out.

I think Yglesias hits the nail on the head

Could it really be the case that so many people were naive enough to trust their monies to institutions that were only claiming to have brilliant investment models? Well, it seems to me that it could. And that this would explain why it might make sense for a firm financial firm to pay Larry Summers $5 million a year for a one-day-a-week job. When your company’s underlying product isn’t necessarily sound, it’s important to invest a lot in marketing. Summers is like a celebrity endorsement. This is also a reason, I think, why having gone to a fancy college seems to have been very helpful for getting a job in finance. The firms’ business models very much depend on putt (ing a certain image of themselves forward.

In other words, as I commented earlier, trust in elite MBAs, buttressed by relentless image building and a unified message (invest for the long haul, don't lock in your losses) have led investors to naively trust financial advisors and to stay with them through a devastating downturn. Our lack of financial superstars in Canada is more than offset by our deference to authority -- even incompetent authority.