Jeremy Grantham's quarterly letter analyzes the outsized growth of the banking industry in Western economies. Grantham argues that the 3% of GDP devoted to financial services in 1965 was sufficient, while the increase to 7.5% of GDP by 2007 provided little real value and instead taxed the rest of the economy. This extra spending on banking slowed the growth rate of the non-financial sector from 3.5% annually before 1965 to 2.4% between 1980 and 2007. Grantham believes the benefits of banking industry growth have accrued mostly to those receiving outsized bonuses, rather than the broader economy.

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Jeremy Grantham: Summer Essays
Jeremy Grantham quarterly letter is always enjoyable thanks to the deep analysis it
contains. The July one is a must read. Many times, Jeremy expressed his deep disbelief
about the size the banking industry reached in the West and the lack of benefit for the
economy as a whole but the few taking advantage of it via insane bonuses. His mea culpa is
just a few words but worth their weigh.
Here is an excerpt:
"My previous argument in the Economist debate* was that the 3% of GDP that was made
up of financial services in 1965 was clearly sufficient to the task, the proof being that the
decade was a strong candidate for the greatest economic decade of the 20th century. We
should be suspicious, therefore, of the benefits derived from the extra 4.5% of the pie that
went to pay for financial services by 2007, as the financial services share of GDP expanded
to a remarkable 7.5%. This extra 4.5% would seem to be without material value except to
the recipients. Yet it is a form of tax on the remaining real economy and should reduce by
4.5% a year its ability to save and invest, both of which did slow down. This, in turn,
should eventually reduce the growth rate of the non-financial sector, which it indeed did:
from 3.5% a year before 1965, this growth rate slowed to 2.4% between 1980 and 2007,
even before the crisis."
Source:
GMO: Summer Essays
https://www.gmo.com/America/CMSAttachmentDownload.aspx?target=JUBRxi51IIC04
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