We are not asking a very important question as a society: what is the role of finance in our economic system? This is an important and urgent question. Finance is usually treated as other types of business when in reality, it plays a special role in our economic system.
Typically, finance is viewed as a necessary intermediary between businesses and investors. Businesses need capital in order to grow and continue to provide new forms of goods and services. Investors have a desire to put their capital to productive use. Finance is the bridge that brings them together. This is rationale behind banks and stock and commodity exchanges. Ultimately, the health of the financial services firms depends on the health of the underlying economy.
Unfortunately, events have shown this view of finance to be hopelessly naive. Financial services firms have gone far beyond their role as intermediaries. They have introduced new financial products with the claim that such products would help reduce risk in the financial system; a claim that was largely true. What they did not say was that the risk would instead be sourced out to other sectors which were poorly placed to assess and take on the risk. At the same time, the financial system was deregulated and privatized in the name of efficiency. The claim was that self regulation would work because of the reputational risk factor. Thus the stage was set up for the perfect storm that engulfed the world. So the question is now urgent. What should be the proper role of finance?
Posts
No comments:
Post a Comment