A good financial system manages risk and allocates capital, with the intent of increasing the overall efficiency of the economy; it does this with low transaction costs. However, we have a financial system which created risk and misallocated capital, with high transaction costs. While capital was being misallocated to homes beyond people’s ability to pay and in places where homes were not needed, too little capital was being deployed to new start-ups, to create and expand small and medium size enterprises, which are the bases of a dynamic economy.
