Financial Reform in Asia: Sector Must Shift from Master to Servant of Real Economy
Financial institutions were created to serve the real sector by satisfying a need for financial intermediation. They were intended to act as agents. In the years leading up to the global financial crisis of 2008, however, these institutions acted more as principals — in effect, they became masters rather than servants of the real economy. As finance became an end unto itself and tipped the real economy into crisis, conflicts of interest were laid bare and the public lost trust.
Andrew Sheng, President of Fung Global Institute, told delegates at the 66th CFA Institute Annual Conference in Singapore that the central challenge for financial reform is reining in the financial sector, which has grown to be some five times as large as the real economy, as measured by the ratio of total financial liabilities to gross domestic product. Why should a financial engineer get paid five times or more the amount earned by a “real” engineer who builds roads, bridges, houses, office complexes, and the like?
As Sheng put it, quoting his line from the Academy Award-winning documentary Inside Job: “Financial engineers build dreams. And when the dreams become nightmares, other people pay for it.”
