At one level and in most economics textbooks, this is an easy question with a rather encouraging answer. The financial sector connects savers and borrowers — providing “intermediation services.” You want to save for retirement and would obviously like your savings to earn a respectable rate of return. I have a business idea but not enough money to make it happen by myself. So you put your money in the bank and the bank makes me a loan. Or I issue securities — stocks and bonds — that you or your pension fund can buy.
In this view, finance is win-win for everyone involved. And financial flows of some kind are essential to any modern economy – at least since 1800, finance has played an important role in America’s economic development.
Unfortunately, 200 years of experience with real-world finance reveal that it also has at least three serious pathologies — features that can go seriously wrong and derail an economy."
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