The Growth of Modern Finance*
Robin Greenwood Harvard Business School and NBER David Scharfstein Harvard Business School and NBER July 2012
The U.S. financial services industry grew from 4.9% of GDP in 1980 to 7.9% of GDP in 2007. A sizeable portion of the growth can be explained by rising asset management fees, which in turn were driven by increases in the valuation of tradable assets, particularly equity. Another important factor was growth in fees associated with an expansion in household credit, particularly fees associated with residential mortgages. This expansion was itself fueled by the development of non-bank credit intermediation (or “shadow banking”). We offer a preliminary assessment of whether the growth of active asset management, household credit, and shadow banking – the main areas of growth in the financial sector – has been socially beneficial.
We thank Toomas Laarits for excellent research assistance. We are grateful to Lewis Alexander, John Campbell, Darrell Duffie, Sam Hanson, Anil Kashyap, Morgan Ricks, Andrei Shleifer, Jeremy Stein, Adi Sunderam, Paul Tucker, Bob Turley, Luigi Zingales, and especially David Autor and Tim Taylor for very helpful suggestions. We also thank Erin Ludlow, James Green, Rodger Smith, Karen Lanzetta, Justyna Podziemka, Covie Edwards-Pitt for their help and advice on financial services data, and the Securities Industry and Financial Markets Association (SIFMA) and Greenwich Associates for providing some of the data.