I had pointed earlier about a superb paper from Stehen Haber where he shows why financial systems remain under-developed.
However, what we are seeing is opposite in places where fin system is developed. It has become so powerful that the entire idea of underdevelopment has been turned on its head. In this excellent roundtable conversation the questions were raised amidst who is who (Soros, John GIeve etc):
FORD: Back to the big picture. What will happen to the financial sector in Britain and the US as a result of all this? Will it shrink? Should it? Are there areas of business which shouldn’t revive because they were fundamentally unstable and unsatisfactory?
SOROS: It should shrink. It has really got overblown. The size of the financial industry is out of proportion to the rest of the economy. It has been growing excessively over a long period, ending in this super-bubble of the last 25 years. I think this is the end of that era.
Then Dr. Reddy in his recent speech said:
whether there is, what may be called, financialisation of the political economy? The attractiveness of financial intermediaries in terms of high profitability, significant growth – especially cross-border, massive spread of investors, and the inadequate scope for application of principles of rules of origin in the financial sector could have resulted in enhanced clout for these intermediaries in the political economy. Incidentally, Professor Jagdish Bhagwati’s reference to Wall Street – Washington links is relevant in this context.
The Jagdish Bhagwati reference Dr. Reddy mentions, I covered it here. Then one must also read this interview of Dr. Liz Warren, Law Professor at Harvard:
The consumer financial services industry has been the single biggest contributor in the 2000 election cycle, in the 2002 election cycle, and they’re on target to do it again in the 2004 election cycle. George W. Bush’s single biggest contributor to his  presidential campaign was MBNA, the second biggest credit card issuer in the country.
And let’s be clear who’s on the other side: It’s a bunch of middle-class families who are in financial trouble. They don’t give money to political action committees; they don’t hire a bunch of lobbyists; they don’t take out a lot of newspaper ads; they don’t get a big public relations campaign going. … This is about as lopsided as you can get in Washington. Sen. [Russ] Feingold, of McCain-Feingold, once remarked that the bankruptcy bill should be the poster child for why we need campaign finance reform in America. It’s a great big multibillion-dollar industry talking to Congress, whispering in their ear. …
And then you have views of Joh Bogle who always questions the developments in various forums.
The irony is a large part of the world still does not have basic bank accounts. In the same roundtable pointed above, Mark Hannam of Prospect magazine says:
Half of the world or more is still un-banked. Many communities depend on microcredit for access to finance. The opportunity for growth of financial services is still enormous. Large financial institutions based in the west can carry on growing for a long time without having to lend any more money to over-indebted western consumers.
What lessons should a policymaker take from all these developments? Unfortunately, none of the committees that are set up to review financial systems in developing countries acknowledge these developments. I agree, that the main idea is to kick-start the financial system in these places and by mentioning these risks, it won’t start. But again efforts have to made early on to ensure we don’t have a financial system we are seeing in developed world where it has become a norm- all profits are mine, all losses are yours.
Clearly more thought is needed on the topic.