According to Paul Krugman, we know that the growth estimates of the naughties are close to accurate because:
On the financial side, the point is that we measure growth by output of final goods and services, and fancy finance is an intermediate good; so if you think Wall Street was wasting resources, that just says that more of the actual growth was created by manufacturers etc., and less by Goldman Sachs, than previously estimated.
This just shows how little economists have tried to understand the nature of recent financial innovations. Wall Street can now create synthetic assets. That’s what a synthetic CDO is — it goes on someone’s balance sheet as an asset and there’s no requirement in accounting conventions that it go on somebody else’s balance sheet as a countervailing liability. AIG is just an illustration of how the accounting for such CDOs takes place.
In an environment where Wall Street can fabricate assets that enter into financial accounts in this way, it’s not realistic to claim that “fancy finance is just an intermediate good”. That used to be true in the good old days, when there was no reason to believe that the CDS contracts underlying synthetic CDOs would be enforceable contracts, but after the CFMA of 2000 (and other changes in the law), that isn’t true anymore.
For this reason, the economic assumptions underlying analyses like Krugman’s and Steindel’s do not reflect reality — and in fact they function as a blinder that prevents these economists from seeing and understanding what’s actually going on. By assuming that financial institutions can’t do what they did do, economists hobble their understanding of the nature of the current economic malaise.