At a recent breakfast event for the Next American Economy, Roosevelt Institute Senior Fellow Bo Cutter invited Amir Bhide to discuss the reasons he thinks our economic system is malfunctioning. Bhide notes that GDP has skyrocketed in just the past two centuries. Why? Much of it is due to innovation. But while the U.S. is one of the top innovators in the world, “we have a great innovation system in spite of the financial sector, not because of the financial sector,” he adds. We need to move from the “pathological” finance we have now to good finance.
So what is “good” finance? A system that mirrors the real economy, he says, by having decentralized judgment, relying on dialogue and relationships, and requiring real responsibility. “Technological innovation does not require financial innovation,” he notes. It needs lending that’s based on financiers who have actual conversations with borrowers (what a concept).
But instead of this kind of system, we have what Bhide calls “pathological” finance — and it doesn’t take a stretch of the imagination to call a system that crashed the global economy just that. Our system has “replaced decentralization with a high degree of centralization and concentration, we have eliminated judgement-based finance and replaced it with mechanistic models, we have gotten rid of dialogue and relationships, and as a necessary consequence of this massive centralization we have eliminated almost virtually responsibility for bad outcomes,” he explains.
It’s time to hit the reset button and start again.