The widely held belief that financial deepening benefits the economy by efficiently allocating capital and diversifying risk was shaken to its core by the breadth and scope of the 2008/09 financial crisis. Advanced economies saw a steady increase in financial intensity, measured by the volume of credit to output, since the Second World War. But as the tremendous costs of the last crisis are still being tallied, doubtful questions naturally arise: Was it worth it? What where the benefits of the remarkable growth of leverage and credit in the last three decades? Was finance promoting growth or was financialization of the economy allowed to proceed to unsustainable, inefficient, and ultimately destabilizing levels? In the wake of the recent crisis, careful answers are required to prevent another meltdown and weigh the benefits and costs of tighter financial regulation.
Finance and the Welfare of Nations: The View from Economic History