Structuring Finance to Enhance Economic Growth and Stability
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Structuring Finance to Enhance Economic Growth and Stability

Douglas J. Elliott
Brookings Institution Press, 2013
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Governments responded symptomatically to the 2008 financial crisis and spent little time examining the structure and rationale of the financial system and its relationship to regulatory reform. The Economic Studies program at the Brookings Institution brought together experts and analysts from the US Federal Reserve System, universities and the financial industry to discuss fundamental issues related to the structure of finance. Among those participating were Daniel Tarullo, a member of the Board of Governors of the Federal Reserve System and the leader of the Fed’s financial reform efforts; Martin Baily, former chairman of the President’s Council of Economic Advisers; and Donald Kohn, former vice chairman of the Federal Reserve Board. Baily and Kohn are senior fellows at Brookings. They and other speakers expressed a variety of opinions but all agreed on the need for more extensive research about a range of fiscal issues. getAbstract recommends this informed discussion to anyone who wants an overview of the debate about the US financial industry and its reform.

Summary

Peculiarities and Purpose

Financial industry reform in the wake of the 2008 financial crisis has centered on preventing what went wrong then from happening again. But that response ignores an opportunity to ask basic questions about the proper purpose and structure of the financial sector. It fails to delve into what benefits finance should seek to achieve and how society can best organize the financial industry to achieve those goals.

The financial industry is unique in the way its fortunes affect the broader marketplace. Its purpose should be “to serve the real economy” by providing liquidity, acting as an intermediary between savers and borrowers, and helping to manage risk. Most experts agree that it is not necessary for the government to support the industry for its own sake but that this sector’s “proper working” is “critical for overall economic growth and activity.”

Though no longer practiced widely, “industrial organization” (IO) – the study of how industry structures achieve specific business or social objectives – could provide important ideas on how the financial sector can better address socioeconomic needs. Organizing finance more effectively could...

About the Author

Douglas J. Elliott is a fellow in economic studies at the Brookings Institution, a nonprofit public policy organization based in Washington, DC.

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