Finance and Industry: Complementary, Not Substitutes
The crisis crippling financial and credit markets has given new life to those who oppose finance and firms, the paper and the real economy. This accusation was also frequently made in the 70s, especially in Italy. But the situation is altogether different today. Back then, the financial crisis of Italian firms found its roots in the existing imbalance between chronically insufficient industrial capital and banking debt. The interest rate hike in the wake of the first oil crisis had thrown companies in disarray by substantially increasing the cost of credit.
While the crisis in the 70s originated in the business sector and threatened to engulf banks and financial intermediaries, today's situation is practically the opposite. The crisis originated in the financial sectors and is being transmitted to the business sector because banks and other intermediaries are illiquid (with difficulty obtaining new credits, requests of early reimbursements), as more and more financial actors become averse to taking risks (as Frank Knight said, this happens when banks lose trust even in their own judgment).
But although finance could now damage business, we have to maintain a rational vision of the relationship between finance and industry. We should remember that the same financial risk management which has so miserably failed today, has also propelled industrial and service firms for years, by enabling the financing of industrial initiatives that would have been inconceivable under stand-alone conditions. Also, good investment banking has financially supported industrial innovation and opened up opportunities for competitive firms, favoring rationalization and concentration processes. Thirdly, inoculating financial culture into business culture has allowed many firms, even in Italy, to grow through otherwise unimaginable leveraged acquisitions and equity-based agreements.
Thus from a longer-term perspective, it doesn't make sense to oppose finance and industry. We should rather find out why censurable financial behavior took place and understand the chain of responsibility among regulators and investment professionals, so to redesign the whole system of incentives in the financial industry.