I am currently reading Martin Wolf’s latest book, entitled, quite ambitiously, Fixing Global Finance. In these times of great financial and economic distress and loss of confidence in the global financial system, going back and think about the basics of what finance is all about can be useful. In this context let me quote two very useful and well written paragraphs (p.1o):
“Everybody loves to hate finance. The “speculator”, or worse, the bloosucking usurer, is a perennial villain. Not for nothing was Shylock – marked as an outsider by being both a jew and a moneylender – the villain of Shakespeare’s Merchant of Venice. But finance is also the engine of a sophisticated, open, and dynamic market economy. Finance allows people to set up businesses with other people’s money, to participate in the profits from other people’s ideas, to smooth expenditure over a lifetime, and to insure both lives and property. Finance gives individuals freedom and security and economies dynamism and flexibility.
At its most basic, finance provides a mechanism for shifting resources from those who own them but cannot use them productively to those who can use them but do not own them. It is, therefore, the engine of a decentralized market economy. Ideas without finance are sterile. The more flexible and responsive the financial system, the better any economy will work, for the larger will be the ranges of demands that will be financed and of ideas that will be exploited. The absence of finance is crippling.”
Wolf then adds: “But when finance goes wrong, the consequences can be devastating.” Yep, that’s where we are now.