The Tithe

clipped from www.ft.com The protracted debate over how to clean up after the financial crisis – and how to reform our accident-prone financial system to prevent another such episode – is stuck on the problem of how to regulate markets without undermining the benefits they bring. What is sorely missing is any real discussion of what function our financial system is supposed to perform and how well it is doing that job – and, just as important, at what cost. The crucial role of the financial system in a mostly free-enterprise economy is to allocate capital investment towards the most productive applications. The energetic growth and technological advance of the western economies suggest that our financial system has done this job pretty well over long periods. Aside from the recession, it is important to ask what this once-admired mechanism costs to run. Beneath those losses are real economic costs due to wasted resources: mortgage mis-pricing led the US to build far too many houses.