The Future of Finance

Did you know that the London School of Economics has a “Paul Woolley Centre for the Study of Capital Market Dysfunctionality?”

Me neither!

But I found out about them a few weeks ago via MIT’s Simon Johnson, writing in the NYT’s  Economix blog about the LSE’s publication of The Future of Finance, and The Theory That Underpins It (London School of Economics Press).

The report has its own website: The Future of Finance: The LSE Report.

Here is an excerpt from the intro:

The financial crash of 2008-9 has been the most damaging economic event since the Great Depression – affecting the lives of hundreds of millions of people. The most immediate problem now is to prevent a repeat performance.

Much has been written about reforming the world financial system. But it is rarely based on a searching in-depth analysis of the underlying weaknesses within the system. Nor does it usually tackle the key question of what a financial system is for.

To correct this omission, we invited eighteen leading British thinkers on these issues to form a Future of Finance Group. They included journalists, academics, financiers and officials from the Financial Services Authority, the Bank of England and the Treasury. We have met twelve times, for what many of those present described as the best and most searching discussions they had ever participated in. The result is this book.

The issues at stake are extraordinarily difficult and profound. The central question is what the financial system is for? Standard texts list five main functions – channelling savings into real investment, transferring risk, maturity transformation (including smoothing of life-cycle consumption), effecting payments and making markets. But if we study how financial companies make their money, it is extraordinarily difficult to see how closely this corresponds to the stated functions, and it is often difficult to explain why the rewards are often so high. Any explanation must also explain why the system is so prone to boom and bust.

This is your weekend reading . . .

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