The future of finance

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Abstract

The central question is what the financial system is for? Standard texts list five main functions: channelling savings into real investment; transferring risk; maturity transformation (including smoothing of lifecycle consumption); effecting payments; and making markets. But looking at how financial companies make their money, it is extraordinarily difficult to see how closely this corresponds to the stated functions, and it is often difficult to explain why the rewards can be so high. Any explanation must also explain why the system is so prone to boom and bust.