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Via Zubin Jelveh, this chart comes from Princeton economics professor Hyun Song Shin. The data is taken from the Fed's Flow of Funds report, which shows you — unsurprisingly — how much money is flowing through various sectors of the economy.
Basically, from 1954 through 1980, the household sector grew 10x. The corporate sector grew 10x. Commercial banks grew 10x. And the securities sector grew 10x. All very balanced.
The came the great deregulation. Between 1980 and 2008, the household, corporate, and commercial bank sectors once again grew by about 10x. But securities dealers? They exploded. The securities sector grew by nearly 100x.
And then imploded, taking the rest of us with them. Roughly speaking, though, the securities sector still needs to shrink by a factor of about five before they get back to the size they should be. Here's Shin:
Overall, it would be reasonable to speculate that the securities sector that emerges from the current crisis in sustainable form will be smaller, with shorter intermediation chains, perhaps less profitable in aggregate, and with less maturity transformation. The backdrop to this development will be the regulatory checks and balances that are aimed at moderating the fluctuations in leverage and balance sheet size that were instrumental in making the current financial crisis the most severe since the Great Depression.
I'm not feeling especially optimistic right now about the the creation of new "checks and balances that are aimed at moderating the fluctuations in leverage and balance sheet size," but here's hoping he's right.