The Future of Finance and Financial Economics

Abstract

The last eighteen months have witnessed extraordinary financial market disruptions, a contagion of bank failures or near failures, an unprecedented loss of confidence in the global financial system, and wide-ranging strategies by governments of major economies to unlock credit markets and restore confidence in their respective banking systems. Relative unpreparedness for the disruptions triggered by the subprime mortgage crisis originating in the Unites States in 2007 has prompted serious questioning of the focus and usefulness of academic finance and the lack of transparency in some components of the global financial system. This article provides an overview of major questions that have surfaced and the issues that are likely to be areas of focus for years to come. Undoubtedly the modern financial system has a pervasive influence over economic performance and well-being in contemporary economies, and the events of the past eighteen months have highlighted the significance of this influence. The spectacular growth of the global financial system relative to the growth in global output over the past decade has resulted in a historically high ratio of global financial assets to global output. In the context of the current economic and financial crisis, this has prompted searching questions about the sustainability of this ratio and of the relationship between financial structure and systemic instability in the global economic system. In 2007, the measured economic output of the entire world was worth around $54.5 trillion. 1 The total market capitalization of the 1