Following is a quote from an article at the Economist entitled “Greed and fear.” “When the financial system fails, everyone suffers. Over the past 22 months the shock has spread from American housing, sector by sector, economy by economy. Some markets have seized up; others are being pounded by volatility. Everywhere good businesses are going bankrupt and jobs are being destroyed. For the first time since 1991 global average income per head is falling. Even as growth in emerging markets has come to a halt, the rich economies look set to shrink. Financial markets promised prosperity; instead they have brought hardship.”

Financial firms come in all forms but they serve the same purpose – to channel funds from those who wish to save to those who need to borrow. Finance is like any other market matching demand and supply for loanable or investible funds. Finance, in fact, is defined as the allocation of scarce resources over time. They link the present and the future, allowing savers to convert current income into future spending, and borrowers to reverse the process. In this manner, modern finance helps spur growth and improves lives globally.

Many studies have shown that there is a strong link between financial development and economic growth. Countries with well developed banking system and capital markets enjoy faster growth than those without. Rich economies have stock and bond markets bigger in relation to GDP than poor ones. In emerging economies, the banking sectors develop quickly but capital markets take a lot longer.

But the global crisis has led to questions about the functionality of finance. Insurance and savings institutions were supposed to serve as shelters from misfortunes. But many have seen their investments go in disarray. And we are not just talking about the U.S. where the problems of Lehman and AIG were exposed, where even rich savers fell victims to the ploys of the infamous Bernie Madoff, and where values of savings set aside plummeted as the market went south. On a smaller but no less debilitating scale, we have the educational pension plan problems and the Legacy rural bank collapse affecting thousands in the Philippines.

As the Economist observes, the concern is that finance works because we believe in the system. Trust is a most important element in the transaction. “Financial transactions are a series of promises. You hand your money to a bank, which promises to pay it back when you ask; you invest in a company, which promises you a share of its future profits. Money itself is just a collective agreement that a piece of paper can always be exchanged for goods and services?”

So how do we now remedy a very basic issue of trust. Today, free market believers have their ideology in a corner. The free market arena has apparently rewarded the frivolous and the undeserving. Ironically those who preached the necessity of free markets are now depending a lot on government, and thus taxpayers, for economic bailouts costing tons of money. No government today is without some kind of economic stimulus package which in no small terms is leading to fiscal deficits all over the place. The crisis has placed a heavy toll on public finances.

The failure of finance, left alone, has once again brought out the need for some government intervention. There must be a plan to make finance work better. But as the same article notes, the Soviet central planning approach produced a “heap of surplus left boots without any right ones to match them.” Thus, the aim must be “neither to banish finance or to punish it, but to create a system that supports economic growth through the best mix of state-imposed stability and private initiative.”

That is why as the country enters a critical phase into the selection of its leaders, we need a new brand of leadership operationally exposed to the functions of the free market while at the same time trained and grounded in the value of affirmative action. Corrective policies must be put in place to favor those who tend to suffer from discrimination. In the finance world, there is definite room for responsible and responsive market tweaking. And hopefully, such intervention will go beyond platitudes and promises. But if, as discussed, finance is a system built on trust, we also need a leadership who we can fully trust.
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( Mr. Benel P. Lagua is the President / COO of the Small Business Corporation. He is likewise an active member of FINEX. Feedback and comments are welcome at benellagua@alumni.ksg.harvard.edu ).