In a column “Balancing Good, Bad Finance” in Wednesday’s Wall Street Journal, David Wessel asks a provocative question: “How much finance is good?”
His thesis in the column is the growth in the financial sector that led to the financial crisis was caused by too much risk taking and borrowing by financial institutions. The financial sector came to be too large of a part of the economy. Too much of the growth in the system fueled the expansion of financial firms themselves, rather than funding overall investment.
So what amount of finance, in what doses, would benefit the global economy without the financial sector careening out of control and creating another financial crisis? There are several external and internal issues that I’ll identify and elaborate on in future posts:
- Without prudent globally-consistent regulation and enforcement, the tendency of the financial sector will be to grow in an unconstrained, risky way, courting further financial crises
- When financial institutions are being subsidized by the government via bailouts and safety net subsidies (deposit insurance, anyone?) they have a responsibility to act in a more ethical and restrained manner, especially when it comes to risk
- Time horizons: corporate management, financial markets and government regulators have become insanely short-sighted. The viewpoint seems to be to either take the money and run because someone else will be there to take the fall later or deal with whatever issue is on the table with the easiest, most short term solution possible.
All of these factors are leading us right down the road into the next global financial crisis. It may not happen for a year or a decade. But I believe it’s inevitable without serious regulatory, political and philosophical reforms of the financial sector and financial regulation on a global level.