38 / 46
Press, Journal Article
Policies should aim to enable financial markets to work at the service of the economy - as a
supporting function. At the same time, these policies should aim to limit those transactions that
only serve profit-maximisation while externalising costs to taxpayers. This might imply
somewhat lower volumes of financial market transactions and somewhat lower credit volumes.
What does this mean? From the perspective of banking and financial market supervisors, it
means that we need to regulate risky trading strategies and risky business models more
rigorously. Therefore, to give you just one example, we now expect institutions with such
approaches to refinance themselves to a greater extent using equity, rather than debt.
From a political perspective, this means that we cannot rely on financial markets to fix structural
political problems. For example, if it is felt that the income of low income households is
growing too slowly, it is not enough to simply rely on credit institutions to finance investments
in the hope that this will create jobs. This is because the financial markets would provide more
loans to such households - and if this is not sustainable, it could lead to yet another financial
crisis. Thus, politics must enable banks and markets to support the economy, not to fix it.
Finally, let’s turn to capital liberalisation in emerging markets. Full capital account liberalisation
may not be the best strategy for many developing and emerging economies. A careful analysis
of national circumstances is needed here - followed by a careful choice of economic policies.
[7]
Here, too, simply hoping for more finance to lead to more development is a tempting strategy,
but not a promising one. As is the case in advanced economies, one cannot rely on financial
markets to fix structural political problems in emerging markets either.
That being said, in countries with low savings rates, the additional funds may help to foster
investment. In countries without savings restrictions, foreign capital can indirectly support the
economy by improving market structures and establishing best practices. In both types of
countries, it is crucial to have strong supervisory institutions as well as market regulation to
provide the necessary environment for markets to function. The less countries are able to
regulate and supervise markets, the more careful they should be with regard to liberalising
capital movements.
[8]
6 Conclusion
Ladies and gentlemen,
Dreams are an essential element of brain activity. Likewise, economic dreams and theories are
essential for developing policy strategies.
However, both types of dreams become problematic if taken at face value, and without careful
analysis. The dreams of finance-led growth and growth through capital liberalisation have
turned into nightmares - and clinging to them will do us no good. We need to find a new path to
guide our economies into better territory.
Credit, banks, and financial markets - no doubt - will play a key role in that strategy. But growth
will not be finance-led - it will be finance-supported.
Thank you for your attention.
38