The 2008-2009 global economic crisis: Criticism of financial hypertrophy theory

Authors:
Luis Alberto López Rafaschieri and José Alberto López Rafaschieri
www.morochos.net

To explain the current international financial crisis, some important intellectuals speak of a hypothesis that we have also heard at the recent World Economic Forum. The theory, which is incredibly repeated even in the most famous academies of finance, argues that the origin of the current economic problem is that contemporary economies have excessively developed the financial field, neglecting the primary production process.

"We have stopped manufacturing things to gamble at stock exchange casinos" these people say.

But if we look at the real functioning of the financial system in place, we will realize the weakness of this thesis:

Banks recycle savers' money to employ it in loans, which are used by producers, consumers and governments in their needs. Also, stock exchanges facilitate businesses growth through the inexpensive, and extremely effective, participation of new partners.

With the development of the financial sector, companies and governments now undertake larger projects, have massive manufacturing capacity, consume more goods and services, hire more employees and have increased their needs for financing, thus generating a process of continuous feedback that in the long run leads to a more integral economic growth.

The financial sector, in spite of being now underestimated by some experts, is one of the pillars of the contemporary process of production and consumption. This is why all developed economies in the world have a strong financial sector.

Without credit, or funds raised on stock markets, today's economies would not be one-tenth of what they are now, and none of the giant companies that we know would exist, all of them would be small familiar establishments at most.

Consequently, saying that current economic problems will be solved by limiting the financial sector's size and stimulating primary production, is an argument that lacks logic and historical foundations.

It is true that banking, and also trade, are processes that when viewed with simplicity appear "to produce nothing" as some experts say. But if we look at things in more depth, we'll understand that the role of these sectors is absolutely vital to manufacturers and economic progress.

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