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Press, Journal Article
do little to advance prosperity. But emerging and developing countries, too, should be careful
not to raise finance to unsustainable levels.
5 The task: Finance for the future
I would recommend all financial market participants and policy makers with an interest in
promoting public welfare to heed these findings.
But as John Maynard Keynes once wrote about the influence of academic advice: pragmatic
decision-makers who believe themselves to be quite exempt from any intellectual influence, are
usually the slaves of some defunct economist. The false and outdated assumptions of deceased
economists serve, he argued, as the basis for their decisions. At this point I make a conscious
decision not to quote the man, as his wording was not especially diplomatic.
[6]
Unfortunately,
however, the point Keynes made was spot on.
The main problem at the heart of Keynes' remark is the attraction that simple theories with clear,
universal recommendations have for policy makers. By contrast, insights which would be
useful, but which are more complex and inconvenient, are sadly often neglected in the heat of
policy arguments.
For this reason, when we contemplate the role financial markets should play in our economy, we
must discard the simplistic notion that more financial market automatically spells more
development.
Instead, what we need is a better quality of financial markets. What does that mean? By and
large, financial markets serve the economy through five quality assurance mechanisms. First:
payment services facilitate the day-to-day exchange of goods and services. Second: the pooling
of savings plays a part in funding large-scale projects. Third: the systematic review of
investments and loans reduces the workload for the individual, thus leading to an increase in
investment and lending activity. Fourth: after loans have been granted, this review is continued
in the form of controls. Fifth: because a bank offers a wide and varied range of products, it is
able to spread risks and therefore manage them better.
None of these functions contributes directly to economic growth. Rather, they are supporting
functions. The main purpose of these mechanisms is to facilitate development by contributing to
the efficient distribution of resources. Financial markets are not in themselves engines of
growth; but every engine of growth needs a powerful catalyst. And our financial system needs to
focus more on precisely that function. This is where market players, policy makers, supervisors,
researchers and, of course, qualified university graduates come into the picture. Only if we all
look at and steer the financial sector in terms of our long-term economic and social
responsibilities will the financial system perform its supporting function successfully.
We don't need financial market transactions in a financial system that is only focussed on itself.
We need banks and other institutions that take their job seriously and promote the appropriate,
forward-looking investments by distributing funds efficiently. And we need banks that are
prudent in their lending.
What should be done? Policies need to be chosen wisely, away from the extreme, ideologically
tainted positions. We should certainly not think that our modern economies can thrive without
the catalytic functions of banks and financial markets. On the other hand, we should not fall
prey to claims that regulatory reform and limitations of market freedoms will hurt development.
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