Is Wall Street Shrinking?

Articles:
Wall Street Journal, BofA Readies the Knife, by Dan Fitzpatrick
CNN Money, More Layoffs Looming on Wall Street, by Maureen Farrell

The Wall Street Journal reports that Bank of America is planning to cut $5 billion in costs by the end of 2013, including the elimination of about 30,000 jobs.  CNN reports that their major competitors will probably follow suit.

Is Wall Street shrinking?  Well, it depends how you measure it.  If you look at the number of people employed, yes it is.  Those of us who are producers and even consumers of financial products have seen great increases in efficiency over the years--everything from online brokerage, to ATM machines, to exchange traded funds, to decimalization have allowed Wall Street to service investors more cheaply than ever before.  As the below chart shows, the number of people dedicated to finance has barely budged since 1998 (the first year that the Bureau of Economic Analysis makes figures available), and is now trending downward.

To the extent that Wall Street is part of the "overhead" of our economy, and produces no real wealth, that is good news.   (Although this is little consolation if you are a BofA teller who gets laid off).

But look at the green line on the graph.  This is the percentage of GDP that is produced by the financial industry, which has been going nowhere but up for decades. Except for a few down years, GDP has been steadily increasing over those years, so we are seeing finance making up a steadily larger piece of a steadily growing pie, and doing it without employing more people.  In other words, some people are making a lot more money.  And who are these people?  Shareholders?  You wouldn't know it by me!  Tentatively (until someone proves me wrong) I think we are talking about individuals with out-sized compensations: hedge fund managers, traders, C-suite executives, lawyers.

And again, to the extent that financial services produce no real wealth, and are part of the overhead of our economy (which I believe is the case), this is done at an overall cost to our prosperity as a society.  How has this happened?  I guess that a big part of the answer is "financial innovation", which is a fancy word for getting more people to borrow more money at a higher cost than ever before.  For individuals this means things like new types of mortgages, home equity loans, and credit cards.  On the corporate side there are things like securitization, over the counter derivatives, credit default swaps, all generating hidden fees and spreads which over the years have greatly outpaced any efficiency gains coming from automation and downsizing of clerks.

I believe Wall Street needs to shrink more and become more efficient.  But I hope that the next arena for efficiency gains will be fees, spreads and six or seven figure bonuses, not just clerks' salaries.