Wednesday, September 08, 2010

Gigantic Parasites.

Andy Xie, the Morgan Stanley maven, talking about the future of the financial services industry:

Financial services providers are intermediaries by definition. They match buyers and sellers of stocks, bonds, commodities and other financial products. They fit perfectly the definition of information broker. They can still make a living by brokering among institutional investors who are, by definition, few.

But institutional investors are intermediaries, too. Why should savers give them money to manage? Not for superior performance: More than 90 percent of institutional investors underperform market indexes. The main justification is that they bring down costs of information acquisition and processing, as well as transactions. This justification looks shakier by the day. Any individual can have access to as much information as a fund manager at virtually no cost. I'm afraid the financial services industry is likely to decline structurally.

As financial services industry loses value-added to customers and the real economy, it is increasingly dependent on gaming the system and profiting from customer ignorance. This makes the industry and financial market more volatile and bubble-prone. In the last financial crisis, the financial sector survived by holding the real economy hostage.

Unless policymakers understand that the financial industry isn't necessary for the real economy anymore, and that it should scale down dramatically, the sector will remain a gigantic parasite on top of the real economy.

You can read the whole thing by clicking here. (via Business Insider)