In turn, that raises the issue of why financial services companies
account for such a large proportion of corporate profits, when their
function is largely that of an intermediary. Mr Woolley suggests that
"there seems to be a grotesque misallocation of resources involved
here".
Part of this may be a monetary phenomenon. It appears to be very hard to model this effect, but with the rise of derivatives, financial companies may have found a way of "creating money". e.g. A issues a European call on GM stock to B, and B issues an identical option to A, but by creative accounting, both A and B come out ahead.
Henry CK Liu wrote some articles about this a while back, particularly regarding the repo markets.
-raghu.
