How Banking Failed the World Economy

Before the world economy lost its mojo, banking lost its purpose:

[Today,] only a minority of bank activity concerns the channelling of savings to businesses investing in productive assets, what you might call the classic raison d'être of banking. Instead, lending is dominated by the residential- and commercial-property cycle. These cycles are self-reinforcing: more lending pushes up property prices, which encourages more lending. At the margin, the property cycles might lead to the construction of better buildings, but such modest benefits are outweighed by the accompanying financial and economic instability.

The financial industry has done so well for itself, in short, because it has been given the licence to make a leveraged bet on property. The riskiness of that bet was underestimated because almost everyone from bankers through regulators to politicians missed one simple truth: that property prices cannot keep rising faster than the economy or the ability to service property-related debts. The cost of that lesson is now being borne by the developed world's taxpayers.

Read the full story at The Economist.