Monday, June 25, 2012

Too much finance can suffocate a country - BIS economist

    Like cancer, a nation’s financial sector can grow so large that it starts to devour its host, according to the chief economist of the respected Bank for International Settlements (BIS).
    “Beyond a certain point, financial development is bad for an economy. Instead of supplying the oxygen that the real economy needs for healthy growth, it sucks the air out of the system and starts to slowly suffocate it,” said Stephen Cecchetti, chief economic adviser to the BIS, known as the central bankers’ bank.
    “Households and firms end up with too much debt. And valuable resources are wasted.”

    In his remarks, which were made to a BIS conference in Switzerland last week, Cecchetti not only questioned the benefit to societies from a large financial sector, but he also questioned financial globalization: the trend of some countries to rely on other countries for financial services.
    Cecchetti’s speech to central bankers at the conference would seem to fly in the face of the widely-accepted beliefs among economists that globalization always benefits societies and a growing financial sector is a sign of progress.
    “Many of us have started to ask if finance has a dark side,” he said, pointing to the ongoing detrimental effects on economies from the global financial crises.
    Evidence suggests, Cecchetti said, that a growing share of the financial system actually slows overall economic growth and countries can become vulnerable by either specializing excessively on finance or relying too much on other countries to provide such services.
    “Has financial globalisation gone too far in some countries?” Cecchetti asked.
    Click to read "Is Globalisation Great?" by Stephen Cecchetti


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