"Even The Fiercest Free Marketeer Should Accept This"
Martin Wolf argues for the need to regulate our financial institutions and prepare for future problems.
Does today’s engorged financial system produce gains that justify these costs? In a recent speech, Adair Turner, chairman of the UK’s Financial Services Authority, argues it does not.* Financial systems are important servants of the economy, but poor masters. A large part of the activity of the financial sector seems to be a machine to transfer income and wealth from outsiders to insiders, while increasing the fragility of the economy as a whole. Given the extent of the government-induced distortions in the system, even the fiercest free marketeer should accept this. It is hard to see any substantial benefit from the massive leveraging up of the economy and, above all, the real estate sector, that we saw recently. This just created illusory gains on the way up and real pain on the way down.
Just as Keynes saw the need for government intervention into the economy to save capitalism rather than replace it, we need to reform our financial system so any failure by a bank doesn’t lead to a disruption of the entire economy. Capitalism depends on creative destruction – we need a system that can deal with 2nd half so we can have the 1st.