The same message is conveyed by a more intuitive interpretation of key historical episodes in which finance appears to have played a key role in increasing overall welfare. I have in mind, for instance, the financing of railway expansion in the 19th century (an early form of syndicated loans), the financing of high-technology firms in the 20th century (venture capital), or “microfinance”, allowing local, small-scale business initiatives in low-income countries to tap the global capital market. The recent financial crisis, however, has prompted us to review this benign assessment. Today, there is broad support for the view that not all forms of financial development are favourable to economic stability, growth and welfare. More extreme views are also prevalent, such as Paul Volker’s, “I wish that somebody would give me some shred of neutral evidence about the relationship between financial innovation recently and the growth of the economy.” How can we reconcile the pre and post-crisis views on the question posed in the title of my address today? To try and answer this, at least partially, I will focus on one specific and very visible aspect of financial development – financial liberalisation. During the final two decades of the last century financial liberalisation led to a deepening of credit markets on a global scale. The end of what many have called “financial repression” permitted households, banks and sovereigns to accumulate increasing amounts of debt. Of course, debt is not bad per se.

Meier, S. and Sprenger, C. (2008): Charging Myopically Ahead: Evidence on Present-Biased Preferences and Credit Card Borrowing. 10  Shefrin, H. (2012), Behavioral Finance in the Financial Crisis – Market Efficiency, Minsky, and Keynes, discussion paper available at www.russellsage.org/blog/new-research-crisis-and-regulation-financial-sector. 11  Thaler R., Sunstein C. (2008), Nudge – Improving Decisions about Health, Wealth, and Happiness, Yale University Press. 12  A “default” option or “no action required” option could substantially boost participation in pension plans as individuals do not actively have to decide whether or not to make a contribution to savings. However, it does not inhibit their individual freedom to choose, as they can still adjust their contributions. BIS central bankers’ speeches  5  O’Donoghue, R. (1999): Doing it now or later, American Economic Review, Vol. 89, No.1. Rajan R. (2010), Fault Lines, Princeton University Press. Reinhart, C. and Rogoff K. (2010), Growth in a Time of Debt, American Economic Review, American Economic Association, vol. 100(2). Schumpeter, J. (1934), The Theory of Economic Development, Duncker & Humblot, Leipzig. Trans. R. Opie (1934), Cambridge, MA: Harvard University Press. Shefrin, H. (2012), Behavioral Finance in the Financial Crisis – Market Efficiency, Minsky, and Keynes, discussion paper available at www.russellsage.org/blog/new-research-crisisand-regulation-financial-sector. Thaler, R. and Sunstein, C. (2008), Nudge – Improving Decisions about Health, Wealth, and Happiness, Yale University Press. Worldbank, World Development Indicators, FS.AST.PRVT.GD.ZS/countries/1W?display=graph. 6  http://data.worldbank.org/indicator/  BIS central bankers’ speeches