Professor Yeomin Yoon has commented on an earlier article in the Financial Times which, with the benefit of hindsight, described the proximate causes of the 2008 financial crisis and discussed some relevant measures to prevent another calamity. He points out that it did not address a fundamental cause of the crisis: “financialisation” of the economy.
Financialisation is the phenomenon by which finance and its way of thinking have come to dominate every corner of business) and the damage inflicted on the entire economic system.
A few months earlier he said – also in the Financial Times – “the fundamental flaw in economics being taught at universities is the disappearance of morality from economics, which was originally a branch of moral science”. He continued:
“The national economy comprises two sectors: the real sector and the financial sector. To use a metaphor, the former is the body of a dog and the latter its tail.”
The ‘real’ sector, or economy is defined by the FT as being ‘concerned with actually producing goods and services, as opposed to the part of the economy that is concerned with buying and selling on the financial markets’. Yoon continues:
“In a healthy economy, the financial sector should serve the real sector as the lubricator of economic activities (production, distribution, consumption) by maintaining a well-functioning payment system, acting as custodian of the assets of the people and providing financial risk management tools”.
Professor Yoon asserted that the tragedy of many western nations was that their policymakers have forgotten or misunderstood the intrinsic role of finance. They allowed the tail (Wall Street) to wag the dog by letting what Adair Turner, former chairman of Britain’s Financial Services Authority, called “socially useless activities” (rampant financial speculations) ruin the national economy. He added:
“Worryingly, many policymakers still do not see the danger of the ephemeral value-added created by the make-work and make-believe practices of the industry” and ended:
“Politicians should ensure that serving the real economy is the duty and purpose of the financial sector. At a minimum, they should avoid letting financial speculators privatise gains and socialise losses by bailing them out with taxpayers’ money”.
Yeomin Yoon is Professor of Finance and International Business at Seton Hall University, NJ, US