The Role of Finance in the Economy : Implications for Structural Reform of the Financial Sector
- Martin Neil Baily & Douglas J. Elliott
- Jul 2013
- The Brookings Institution
- International
The U.S. financial system is critical to the functioning of the economy as a whole and banks are central to the financial system. In addition to providing substantial employment, finance serves three main purposes: credit provision, liquidity provision and risk management. Many argue that the U.S. financial system grew overly large in the bubble period and is still too large today. In truth, it is very difficult to judge the right size of almost any industry and attempts at the use of central planning and other mechanisms to correct assumed problems of this nature have usually failed. Nonetheless, it is reasonable to assume that a sector will be too large if there are unwarranted economic subsidies flowing to it. This paper is a summary of the views of experts on how finance works now and how it should work in the future, given the purposes and current and optimal structures of the financial sector in USA.
