Financialization and Regulation Debate

April 27:

Resistance to regulation of the finance industry is in full swing. About this, Lynn Stout, professor at Cornell University, said the following on the News Hour on April 25:

Twenty or 30 years ago, banks and investment banks were primarily involved in the capital-raising business. They helped connect up savers with entrepreneurs who were building new projects, building new companies. That was a very socially valuable activity.

But over the past '80s, '90s, and into 2000s, what happened is that the financial sector increasingly moved away from its basic and important capital-raising function and became a trading center, where people were just passing securities back and forth, trading bits of existing businesses or even trading derivatives on businesses.

Professor Stout appears to be in agreement with the author of Extreme Money, Satyajit Das, and the economist Nouriel Roubini, both of whom look with scorn upon development in the financial industry (chart) in the past 30 years.

My understanding of trading is common. Buying stocks in a good company helps that company grow, but there is also trading that doesn't benefit society. A trade often has a winner and a loser. The winning player buys when the price is low and sells when it's high. The loser is sucked into buying just before price peaks and then watches the price begin a prolonged decline. This I take to be a zero-sum game of the kind mentioned by Professor Lynn.

Arguing opposite Lynn Stout and against regulations on the News Hour was Peter Wallison. He said:

Well, there has been a large-scale change, but that's because the world has changed because of technology and for other reasons.

The world has gone from a world in which loans were made by banks or capital was raised by banks through selling shares for companies, to a world in which most companies are now accessing the capital markets to finance themselves.

I don't see Wallison as having made much of an argument. Would someone explain to me how companies playing the winner-loser game benefit the economy better than did the old fashioned investing before the 1980s?