India’s Goldilocks problem
Limiting the growth of the financial sector could have adverse consequences for growth and development
The recent financial crisis and its continuing repercussions have forced us to carefully re-evaluate the size, role, and optimal rate of growth of the financial sector. There is a sense that finance may have grown out of all proportion with its importance to the real economy. Internationally, much of the public commentary has focused on the (in)appropriateness of regulations prior to the crisis, on the continuing stories of (mis)conduct by financial sector professionals involved in setting benchmarks such as the London interbank offer rate (Libor), and on whether the level of compensation for finance-related jobs is too high relative to other occupations. Many of these issues highlight lax regulation and malfeasance that must be fixed for the financial sector to perform its proper functions. The mood is one of great anger—banker-bashing has become the obligatory prologue to most public pronouncements on the subject of finance.