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Joseph Stiglitz on the Silver Lining of Financial Crises

Charlie Munger, whose Berkshire Hathaway owns huge stakes in several leading banks, said this about the financial system a few years ago:

We would be better off if we downsized the whole financial sector by about 80%. I don't think the rest of us have anything to gain having massive trading between computers which try to outwit one another with their algorithms to the extent that when one succeeds, the rest of us are all paying for it. And why should we want to encourage our brightest minds to do what amounts to code-breaking and electronic trading? I think the whole system is stark-raving mad. Why should we want 25% of our graduating engineers going into finance? ... I don't see any social contribution.

He's likely being hyperbolic about the size of the decline, but there's more than just theory here. After the financial crisis, some countries really did dramatically reduce the size of their financial sectors.

How are they doing now? I asked Nobel Prize-winning economist Joseph Stiglitz last month. Have a look (transcript follows):

Stiglitz: I was speaking to the president of Iceland, and Iceland had a financial sector that was 12 times GDP and it was the beginning of the financial crisis, and he said the silver lining of that cloud, (Iceland was devastated)... they're doing pretty well. And he said, the silver lining in the cloud is now we're getting a real economy. More of our young people are going back to doing things that are really valuable. We're getting a balance in our society and in our economy.

I think that if we can bring back the salaries, make them more commensurate with other sectors of our economy, diminish the rent-seeking opportunities, change the tax laws. If we do that, I think that there is a natural adjustment process. What I see again from students, they want to do something that's meaningful to their lives. Many of them, the excitement of finance is real, but at the end of the day, they often ask, what am I contributing? For many of them, I think there are other directions where they would feel inside of themselves, that the intrinsic rewards of what they're contributing, whether it's in teaching, whether it's in a real business sector where they're actually creating jobs, whether it's in research, whether it's in medicine, they feel that they're really, those intrinsic rewards more than compensate for maybe a somewhat lower income.

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