What can we afford to do about the financial industry?

Jamie Dimon of JPMorgan Chase would have us believe that regulators’ attempts to clip the wings of financial companies are about as misguided as trying to curb spam by shutting down the Internet. To most Americans, a financial crisis that lopped $19.2 trillion off household wealth and produced the deepest recession since the 1930s may be reason enough to limit what financial institutions can do. Andrew G. Haldane, executive director for financial stability at the Bank of England, estimates that the crisis wiped out one to 3.5 years’ worth of the world’s economic output, in present value.

Bankers, however, still hold dear to the argument that financial innovation has driven prosperity over the last 50 years. In their view, new techniques — including the credit-default swaps and mortgage-backed securities at the center of the financial crisis — improved the industry’s ability to understand risk and distribute it among a more diverse group of investors, making credit more widely available. Tying the hands of finance in the name of risk reduction would, they contend, impose incalculable costs on society as a whole.

This view may seem out of place a couple of weeks after JPMorgan admitted it lost $2 billion, maybe $3 billion, on a bad bet on the price of corporate debt. Still, it deserves investigation: how much economic damage would be inflicted by limiting what financial leviathans can do? Put differently, what has our high-tech financial industry really done for the rest of us of late?

It appears that the answer is less than Mr. Dimon would have us believe.

Part of the problem is measuring what the financial industry does. It manages our savings, runs the payment system, offers financial advice, and lends to businesses and consumers. This is valuable. Effective credit allocation increases productivity. Performing these services requires banks to bear risk. For instance, banks use deposits that we can withdraw at a moment’s notice to finance long-term loans.