Wall Street Potholes

Chapter 5Why Is Wall Street So Inefficient?

Why Is Finance So Expensive?

Why do so many people pay so much for financial services? It's perhaps the most fundamental question policymakers could ask of today's banks and brokerage firms. Since Wall Street represents capitalism in its purest form probably more than anything else you could think of, why is the market for financial services so inefficient?

There's plenty of research that highlights the problem. For example, Wall Street's share of the economy, which is measured by looking at GDP value added of financial services, began growing in the 1980s and by 2007 had roughly doubled. I wrote about this in Bonds Are Not Forever. Finance hadn't just grown along with nominal GDP over that approximate quarter century, it had actually grown at twice the rate of GDP.

Banking jobs tend to be more highly paid than average, and this shift has in part driven the increasing income dispersion that's occurred in developed countries. Finance isn't to blame for this, but it's worth considering how we got here and if it's been the right direction.

One of the biggest innovations to impact banks was the development of the desktop computer. Banks spend enormous amounts on information technology (IT). In fact, much of today's trading in financial markets wouldn't exist in its present form without IT. My first job was in 1980 when I was a trainee broker on the floor of the London Stock Exchange (a “blue button” because of the color of the badges ...