Sunday, September 19, 2010

On Banks and the Real Economy

Newsweek has published an article by Michael Hirsch "Our Best Economic Minds are Failing Us," which challenges our continuing focus on the health of Wall Street as a measure of our overall economic health. Here is an excerpt:

Wall Street execs have been whining for two years that to reduce pay incentives and bonuses would cost the firms their best talent. The government’s response should be YES! That’s precisely the idea. Finance was once a means to an end: the growth of the real economy. Banking once served industry and services. Now finance has become the end, and the real economy is subservient to financial services (it’s no surprise that after the crisis, over-the-counter derivatives trading quickly climbed back up to more than $600 trillion). “At some point in our recent past, finance lost contact with its raison d’ĂȘtre,” European Central Bank chief Jean Claude Trichet said earlier this year. “Finance developed a life of its own…Finance became self-referential.” As long as this pathological state of affairs persists, questions of global growth and social welfare will continue to depend on Wall Street and the enduring fallacies of free-market finance.