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Hernando de Soto famously pointed out that a key difference between developed countries and developing countries was the possibility to pledge land title or real estate as a collateral to gain access to credit.
Financing, as we know, is the blood of the economy. If the economy is powered by the muscle of manufacturing, services and capital creation (read "real estate"), financing and loans are the blood to provide it with oxygen. That is also the reason why banking and shadow banking providing credit should be treated differently from traditional industry. The finance sector has to be controlled and its growth should be monitored closely. The veins carrying the blood are useless if they grow and outsize the muscles, they consume too much of the oxygen on their own, defeating their purpose.
Regulations are on the way, but not enough is being done to impose stringent rules if you ask me. Although credit has been recognized as an important factor for growth, what we have seen in the US was a huge excess, the muscle has been flooded, like an engine on Nitrox.
Pledging collateral for financing gives consumers and businesses access to much needed hard cash that can e.g. be used to build up inventory. A good example in developing countries is the possibility to set up a small shop and increase trade, one of the most important factors for growth. But too much financing acts as a choke, and when refinancing is being used carelessly for an ever increasing consumption, trouble is never far.
The US credit crisis has been covered thoroughly, with many books detailing the excesses and ruthlessness of mortgage brokers and banks. However, these are just the symptoms of the illness. These were short-term excesses that were pretty short-lived if we compare it on a scale going back to the industrial revolution. If we look at growth in developed and developing countries, George Soros clearly identified the growth over the last 30 years as being a growth fueled by a super-bubble of credit. And that is also where the theories of Soros and Hernando de Soto meet: credit.
If in developed countries credit has reached an all-time high and deleveraging is under way, there is still much to do in developing countries. Banking is not accessible to many consumers in China, India and Indonesia to name a few countries, but these countries account for 1.7 billion people!
Banking has therefore a future, the future will be in developing countries. Banking will have to go back to its roots of taking deposits and lending it to good causes with proper risk management. I don't see CDOs being created in Indonesia anytime soon. Banks still have to be seen as trustworthy, a long way from synthetic and toxic products. The question however is where will the growth in developed countries come from?
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