Tuesday, February 10, 2009

What is finance for? - Columns - livemint.com

Sort of in light of the Adam Smith quote, the following article looks at the main roles of finance. It is generally something that we forget or take for granted (often rushed through on the first few days of an introductory finance class) but it serves us all well (myself included) to stop now and then and remember what finance is here for.

From Nirvikar Singh is a professor of economics at the University of California, Santa Cruz:

What is finance for? - Columns - livemint.com:
"Discussions on how to improve regulation of the financial sector often are limited by starting from current institutions, and thinking of adjustments to these institutions. Boundaries between institutional categories, determined by historical legacies, are often taken as given. A more productive approach to considering regulatory reform could be to first answer the question, “What are the economic roles of financial institutions?” (invariably some form of intermediaries)

What roles do financial intermediaries play? Here are seven examples."

• Economizing on the costs of completing and implementing transactions.
• Matching buyers and sellers.
• Economizing on search costs.
• Providing expertise.
• Smoothing the market.
• Providing reputation.
• Transforming products.
Singh expounds on each of the seven showing what are the strengths (bringing buyers and sellers together) and weaknesses (many assets to not trade, experts are blinded by pay etc), and discusses how regulatory changes should take these facts into account.

Good stuff! Well worth a read.

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