Transcripts

"Reviving the Economy"-Saving the Financial System

SUZANNE PRATT: As we continue our "Reviving the Economy" coverage, tonight's commentator has a few thoughts on what the government can do to get us back on track. Here's Justin Fox, economics columnist at "Time" magazine and author of "The Myth of the Rational Market."

JUSTIN FOX, AUTHOR, "THE MYTH OF THE RATIONAL MARKET": Government has spent trillions of dollars over the past few months making sure that banks and other financial institutions don't collapse. I'm fine with that. I'm not thrilled with every particular, but I prefer the mess we've got to the complete disaster that could have befallen us in October and November. As we all try to figure out what should be done next to get the U.S. economy growing, though, helping out the financial sector needs to move pretty quickly to the bottom of the government's list of priorities. We are in this mess to a large extent because we had too much finance: too much lending, too much borrowing, too large a share of our economy eaten up by financial endeavors. Finance doesn't create anything. You'll hear people on Wall Street say they deserve such big paychecks because they perform the crucial function of steering capital to its best uses. There's something to that. Lots of economic studies have shown that countries with underdeveloped financial systems don't grow as fast as those with thriving banks and financial markets. But there also seems to be a point beyond which a financial system becomes overdeveloped. We passed that point in the U.S. sometime in the past decade or maybe even before. More activity and higher profits among financial firms led to a less efficient allocation of capital. Or, to move away from the business school jargon, an overgrown Wall Street, with help from government, foreign investors and you and me, threw a whole bunch of money down a bottomless hole. I don't have a list of prescriptions for what exactly government should do right now to help the economy. I just know the one thing it absolutely should not do: help the financial sector return to its glory days. I'm Justin Fox.