Finance: Is Bigger Badder?

AbstractLast year, I was a discussant of a session at this conference on the social productivity of the financial sector, and those of us at that session—Ross Levine, Alex Popov, and Josh Lerner — must have really whet appetites for the subject, as it was decided to make that the theme of the conference this year. Further discussion is timely, as the questioning of the role of the contributions of the financial system, suggestions to break up banks—now coming even from several within the Federal Reserve System, with Governor Tarullo being the latest to weigh in—and suggestions on the need to cap the size of the financial sector or intervene with other restrictions have gained a new currency, one not seen since the 1930s. When Sandy Weil is suggesting the downsizing of banks, it is clear that the debate has shifted. Financial restraint has been urged before—Joe Stiglitz has been recommending that for most of his professional career—and financial repression, mild or not, is likely not only when the intellectual climate is accommodating, but even more important, when financing the government becomes onerous…