Financialization describes the growth of financial services, instruments, and markets in the overall economy (compared industrial and agricultural parts). An important term that often accompanies financialization is financial innovation, which is often used to describe the creation of new financial instruments such as the mortgage-backed security (MBS), credit default swap (CDS), or collateralized debt obligation (CDO). Now these examples of "financial innovation" carry with them many negative connotations because their roles in the 2008 Financial Crisis. Investment banks created these products to provide investors will different risk exposures. The mortgage-backed security, for example, took grouped mortgages together and sliced them into different pieces (called "tranches"). Payments would first be distributed to the Senior tranche (which was often rated AAA) and then would be distributed to the lower Mezzanine tranches (which carried riskier credit ratings). Investors could then buy different tranches depending on how much risk they wanted to expose themselves to. Ideally, this would lead to a more efficient allocation of capital in markets as investors find investments tailored (the term bespoke is often used to describe these products) to their risk profiles. Unfortunately, however, the proliferation of these products led to a terrible buildup of leverage and risk since many people did not understand how these complicated (often called "exotic") instruments worked, culminating in the Financial Crisis.
Financialization is a general trend that is occurring in our economy due to the rise of technology, lax financial regulation, and innovation in financial services. Many argue, however, that too much financialization reaches the point where people are trading securities completely detached from the real world (I would recommend checking out CDO-Squared. Justifying the "usefulness" of such an instrument is difficult) and devolves into reckless risk taking that just moves paper around in circles. Thus financialization while theoretically better allocating capital between borrowers and investors, also endangers the economy to the boom and must cycles of market exuberance and reversal. A famous quote from Paul Volcker captures this disdain for financial innovation following the financial crisis: "The only thing useful banks have invented in the past 20 years is the ATM."
In my view, all forms of finance abstract the real world to an extent. For example, a share of a company is an abstract division of a real world entity. Different financial instruments carry with them different levels of abstraction, but we must always remember the underlying real world entity that they represent. If not, finance risks becoming detached once again from the real economy and loses sight of its purpose of allocating capital between borrowers and investors.
For more the financial crisis, I highly recommend Michael Lewis's The Big Short.