the banking system is now converging towards a...

“the banking system is now converging towards a more heavily regulated “utilities model”. It will be slimmer, less risky and less profitable. Society can no longer underwrite the risk of a banking system that is seen to privatise the gains and socialise the losses. In the process, the growth potential of the US economy will be negatively impacted. Third, with the disappearance of investment banks, institutional investors must get used to a world with fewer counterparties. Judging from the experience of other countries, this may favour large institutional investors and encourage consolidation, especially among hedge funds.”

Mohamed El-Erian, Co-CEO Pimco

FT.com / Home UK / UK - Financial system learns to adapt to cruel necessity

(via fred-wilson)

(via mikehudack)

This actually sounds like a good thing to me. Utilities generally suck because they have such little incentive to spend. The cable companies didn’t start upgrading until faced with competition they had barely imagined little more than a decade ago. The power companies won’t do much even after an event like the black out of 2003. With the financial industry there’s no big depreciating asset at the center of the business. Only inflation. And all firms could compete for every customer without massive upfront capital expenses as in other utility industries. Maybe securitization wouldn’t have developed as early, maybe we wouldn’t yet know what CDS or CDO means but maybe that’s not so bad. I generally think that innovations like securitization lower interest rates but if there’s less chance of a blow up, that should bring down interest rates also.

I need an explanation of why this would significantly impact the US economic growth potential. I would think credit availability would be more consistent with fewer/smaller credit bubbles, fewer/smaller crashes. Maybe bankruptcies would increase because it would be slightly harder to borrow as your business starts to struggle? Fine, someone takes over with a lower cost basis after you wipe out the creditors or money starts flowing towards the better ideas. That’s what capitalism is, right? Profits would also be redistributed to all other industries if they are reduced in finance (say, maximum fees, lower usury rates, etc.). Why wouldn’t general innovation increase as a result?