2008 September 21 Sunday
Will New York City Enter Into Decline?
Megan McArdle points out that the financial industry basically funds the New York City government.
The anchor of New York's financial community is the independent investment banks that are all headquartered there. If their corporate center of gravity starts shifting towards Charlotte and London, will other firms begin to question whether it makes sense to pay $50 per square foot just for the privilege of being in Manhattan?
That would crush New York's renaissance like a bug. All of New York's rebound has been paid for by the taxes on the financial industry--a few hundred thousand people in the industry pay the lion's share of the taxes for the entire city. Take them away, and the city will rapidly lurch back towards bankruptcy.
Of course, that's not the sort of thing that happens overnight. But the City and State of New York are remarkably business-unfriendly places; they usually end up ranked at the very bottom of the league tables in terms of the ease of doing business there.
Is there another industry that can replace finance as the big income generator in NYC?
Is there some reason to think that finance can continue to grow in NYC? Why? The financial industry is overly large in the US for the amount of value it adds. It needs to shrink and the part of it that most needs shrinking is in New York City. The investment banks are too big.
Will hedge funds and private capital firms grow so large they can fill the void? I'm skeptical.
"The financial industry is overly large in the US for the amount of value it adds."
The financial industry may move, but there is no reason to say the financial industry is "overly large".
The government did not create Wall Street. Its genesis was not artificially manufactured. Powerful free market forces created it. If the financial industry were "overly large" the free market would have never allowed this industry to become so influential in the first place. The industry legitimately earned its reputation for vital, high quality services.
There is a substantial demand for high IQ financial analysts. The industry is large because the free market has determined excellent financial analysis is highly valuable for the economy.
The real risk to New York City is that in the age of modern communications, there is not much reason to have so many financial Titans located in one, overregulated, high tax, welfare dependent minority soaked city.
If the entire financial industry moved to, say, Charlotte, those businesses could do EXACTLY what they do today in New York. And they would save an absolute fortune in taxes.
Indeed, why not just scatter their businesses across the country instead of concentrating everything in one place - especially in the age of terrorism?
JBS's commet bears reading again. Its absolutely perfect.
Think the market knows best? In fact the market is showing that, yes, the investment banks are too big. The investment banks over-leveraged themselves and over-expanded with risky investments. They had staffs far larger than they should have had if they ahd invested wisely only in investments they understood. This is why they are going bankrupt and laying people off.
The vast bulk of active managers underperform index funds. Tons of active managers have jobs because of market failures. The vast bulk of investors do not know that actively managed stock market funds are a bad deal.
High IQ analyst performance sucks in other ways. Take the ratings firms. They assigned AAA ratings to all manner of total toxic junk. If they were so smart then the default rate on AAA securities wouldn't be so high.
The government certainly has a big role in making Wall Street as big as it is. A big chunk of the mortgage industry was made possible by the willingess of government-created Fannie Mae and Freddie Mac to buy large amounts of mortgage securities. Freddie and Fannie could do that because they could borrow money for less than totally private entities could.
more likely to move to hartford.
It seemed like all the hedge funds already *were* on CT.