Shortly before the subprime crisis, US treasury secretary Hank Paulson insisted that it is best to leave the financial sector alone to do its work. This is not a surprising statement for a former CEO of investment bank Goldman Sachs, whom we would expect to have the interests of the financial industry close to his heart. However, the statement also embodies the prevailing view espoused by textbook economics and economists giving policy advice. According to this view, competition among financial service providers, issuers of securities and investors will ensure that prices of financial instruments reflect their value at all times and that scarce financial resources are allocated to their best uses. It also holds that financial markets tend toward equilibrium and accurately reflect all available information about the future.

The laissez-faire attitude of mainstream economics stands in contrast to popular wisdom. “Money is Power” goes the saying. Those who have a lot of money tend to have commensurate power.