The modern architect Mies van der Rohe is well known for stating that “Less is more.” Whilst he stated that in reference to architecture, it is a very good motto for the financial sector as well. This thought came to mind as I read a Paul Krugman essay in the New York Times. Although his essay related to the US presidential primaries, it also cited a Phillipon/Reshef paper referencing that “the financial sector itself doubled as a share of the economy, which meant that it was pulling lots of capital and many smart people away from productive activities.”
The citation from Krugman and the paper cited got me to look further into analysis regarding the size of the financial sector and its impact on the economy. Benoît Cœuré in a speech in 2014 correctly noted that “(w)hile finance per se is necessary for growth, an oversized financial industry can be detrimental to real economic activity.” This conclusion is further supported in a paper published by the Dutch Central Bank in 2018 found “that the size of the banking sector as a percentage of GDP is significantly correlated with most systemic risk measures.” There is nuance in this paper and the speech by Cœuré that should be considered but both note a large financial sector does not bring only good consequences.
There is now often gnashing of teeth as banks undergo cost cutting exercises to reduce the number of employees they have. But perhaps this reduction in the size of the financial sector although painful for some individuals and some local economies may have a great benefit for society. Bankers should be seriously considering the advice of van der Rohe and find ways for LESS to be MORE.
