The GFCs and the following “great recession” brought sharply to the fore the scale and nature of the workings of the financial sector and its inherent fragilities and instabilities. It served as a sharp reminder that the financial sectors and the non-financial (“real”) sectors were closely intertwined and could not be viewed through the spectrum of the “classical dichotomy” of mainstream macroeconomics that separates monetary factors from real ones.

Financialization has involved the growth of the financial sector and changes in its structure, and the changing relationships between finance and the non-financial “real” economy. The financial sector uses resources that could be deployed elsewhere and financial institutions and some of their employees benefit handsomely (as indicated in Chapter 7). The processes of financialization have involved a substantial increase in the resources, both capital and labour, deployed in the financial sector. The question then can be asked as to whether the use of those additional resources has improved the quality of financial activity (see Kay 2015: 5). Also, has the financial sector become “too big” (see Epstein & Crotty 2013) and has it become dysfunctional for the economy and society?

It can also be asked whether the ways in which the financial system has evolved during financialization (such as a shift to activities undertaken through financial markets rather than by financial institutions, developments of a wide range of financial instruments) have adverse impacts. Asking the question of whether the financial sector is in some senses “too big” is (at least implicitly) to acknowledge that the financial sector can make positive contributions to society and the economy but that it can also have negative effects (the GFCs being a notable example).

It is helpful to begin by considering the perceived functions of the financial sector that would aid the performance of the real economy. Kay (2015), for example, lists four: the provision of a payments systems; matching lenders with borrowers and directing saving; aiding management of personal finances over our lifetime and between generations; and aiding the management of risk. Minsky (1993) identified six functions of a banking and financial system in which, by comparison with those given by Kay, splits down the provision of finance into housing finance, consumer credit and investment banking, and also adds provision of portfolio advice and asset management for households.