Macroeconomic and financial sector policies to better serve the economy and society

Financialisation processes have been generated by the widespread liberalization and deregulation measures adopted in most developed and emerging economies. The result of these processes has been an unparalleled increase in the size of financial systems. Recent empirical research is showing that the relation between the size of financial system and economic activity is not a linear one and that in many countries we can talk of a an excessive size of financial systems as far as the current size of finances is well above the threshold that leads to a negative impact of finance on economic activity and growth and welfare. On the other hand, financialisation has come in parallel, fuelling them and being fuelled by, a change in the macroeconomic policy strategy (with the dominance of a monetary policy focused on price stability), a re-distribution of income in favour of top incomes and capital incomes, and a de-regulation and liberalization of financial markets and institutions. The paper argues that to promote a better financial system, economic authorities must adopt measures rationalizing (i.e., reducing) the size of financial markets at the same time that a more strict regulation of all financial markets and units be implemented. Moreover, the strategy of macroeconomic policy must be reformed, upgrading the current role given to fiscal policy and giving more relevance to real economic objectives, like economic growth and full employment. Finally, there must be an income redistribution in favour of lowest incomes and labour incomes.