Edward Conard, author of Unintended Consequences: Why Everything You’ve Been Told About the Economy is Wrong, offers a hypothesis. He suggests the underlying cause is the (relatively recent) prevalence of risk-averse foreign capital:
With an abundance of risk-averse offshore capital, the constraint to increase investment and risk taking has been the capacity of risk underwriters, not capital providers. Today, Wall Street uses financial innovation to decouple risk from investment capital and predominantly sells risk to risk underwriters, which is no different from an insurance broker or insurance company. Wall Street deconstructs, prices, underwrites, syndicates, trades, and makes markets for risk. Because Wall Street now performs the more abstract function of syndicating risk rather than merely raising capital, people — even people as well informed as former president Bill Clinton — have naively concluded that these transactions serve “no economic purpose.” Risk underwriting is every bit as important as funding investment, perhaps even more so in today’s economy where the trade deficit leaves us awash in risk-averse short-term debt to fund investment provided someone else underwrites the risk.
So far I find parts of this book brilliant and other parts dead wrong. In any case it is full of substance, it is one of the must-read books of the year, and once I finish it I will be giving it a second read through right away.