When I was invited to give the Maxwell Fry Global Finance Lecture in Birmingham last year, I decided to stay in the tradition of Maxwell Fry (1988) and focus on the role of government in the financial sector, a continuously controversial issue. Maxwell Fry was one of the first economists drawing the attention to the importance of the financial sector for economic development, well before the empirical finance and growth literature took off in the 1990s, while at the same time documenting the negative effect of excessive government intervention into financial markets, also referred to as financial repression.
Financial development has been identified as a key policy area for economic development, while at the same time rapid credit expansion often results in systemic fragility and economic crisis. The critical issue has been the question of what explains the variation in financial sector development (both shallow markets in some, but also over-expanding markets in other countries and periods). Economists have provided three different kinds of answer. In the following I will refer to them as the (i) policy approach, (ii) political approach and (iii) historical approach. While these three views are not incompatible with each other, they imply very different views on the nature and role of government within the financial system.