Goldman Sachs has raised an interesting issue regarding the future of financial intermediation following the crisis:
New bank regulations and capital requirements are “structural” changes to the industry that are more to blame for declining profits than the U.S. economic slump, Goldman Sachs Group Inc. (GS) analysts said.
Remember, we have had the failure of Lehman Brothers (the Global Financial Crisis), the sovereign debt issues in Europe (the European debt crisis), and in the NZ context the failure of the non-bank financial sector post-05. These crises can be expected to have a relatively persistent impact on economic activity – but not permanent. Once all is said and done, and financial stability is returned, economic activity should in turn recover.
However, if the “wedge” (inefficiency) in financial markets persists indefinitely this suggest that something else is the cause. Let’s also remember that at the same time that all this was going on financial regulation by central banks around the world has also changed! While these changes will increase the stability of the financial system – they come with a permanent cost in terms of economic efficiency … there could potentially be a persistent wedge between the return to lenders and the cost to borrowers due to these policies.
Given both happened at the same time we can’t “identify” what did what – which makes the outlook even more unclear than it usually is. However, it is important to keep all these disparate causes in mind when trying to understand what is going on.