Good old-fashioned finance - September 10, 2009

Baseline Scenario has some interesting discussions going that hover around the subject “what is finance — and what should it be?”

At the core, Simon Johnson notes, the Econ 101 definition of finance — something like, finance acts as intermediary between borrowers and savers, allowing borrowers to obtain capital to fund their ventures, projects, purchases, etc., and  savers to receive interest on their savings.  Of course, much of what qualifies as finance today extends far beyond this simple (and clearly beneficial) intermediation activity.  (And therein lies the rub, of course.)

Frustratingly, the “too big to fail” banks that benefitted from all the bailout money are still slow to return to that fundamental activity — the very thing that makes them legitimately essential to the economy.

Of course, this DOES create opportunities for smaller firms.  Community banks that can weather the storm can benefit from the same practices that have always differentiated them from global players: lending locally, to people they know, with markedly lower default rates than behemoth institutions.  And, it creates opportunities for firms like Sterling Pacific — independent lenders who choose carefully, in markets they know, can move quickly to lend on short timeframes, and reliably earn premium yields for their investors (savers).

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