andreas dombret : could less be more? the role of finance for the economy dinner speech by dr andreas dombret, member of the executive board of the deutsche bundesbank, at the safe conference on regulating financial markets, frankfurt am main, 30 may 2016. * 1. * * introduction dear mr. kick, ladies and gentlemen given that my speech is standing between you and the next course of our dinner, i will endeavour to be brief. one colloquial definition of insanity is doing the same thing, over and over again, but expecting different results. 1 by that standard, how sound is current financial regulation? looking at the many new topics of financial regulation on the agenda of this conference, it would appear that the response to the crisis has been quite sound. your contributions and this conference in general are, in my view, very valuable in helping to understand why financial regulation needs to be strong and how it can work for the economy and our society. and since you will be debating the details of these issues all day long, i will not go into the specifics of financial regulation. instead, i will discuss a remaining fundamental problem of financial policy making – one where our current policies might fit the definition of insanity i quoted earlier. it relates to the question of how much finance we need for solving our current economic problems. for over three decades before the crisis, the simple answer was “ more is better. ” this mindset led us into the crisis, the consequences of which we are still witnessing today. to keep relying on more finance seems questionable. the core problem, i believe, is one of mind - set. i am talking about the idea that more credit and financial activity lead directly to economic growth. according to this plain idea, leverage and liquidity in banks lead to more lending, which in turn fuels investment, which then leads to more growth and economic development. in that spirit, some are, again, arguing that what the economy needs is less regulation and more lending. i refer to this ideology as a “ finance - led growth strategy ”. i am convinced that we must overcome these intuitively appealing ideas and their ideological siblings. in that spirit, tonight i will talk about our current economic challenges and the role that finance, on the one hand, and financial regulation, on the other, can play in underpinning sustainable economic development. 2. less and more in the current economy after the financial crisis, financial regulation has been hailed as a savio

##ur of the economy. yet the current state of the world economy and that of most advanced national economies are eroding this standing. in the face of populist pressures, simple political solutions that hold out even though this definition is often attributed to albert einstein, he most likely never actually said it. one verified usage of this axiom is in the novel sudden death by us author rita mae brown. bis central bankers ’ speeches the promise of jobs and participation in growth are being sought. finance offers an imaginary panacea for this situation. this situation is familiar from the pre - 2008 period. it seems to be back on the rise, as global economic growth continues its sluggish trajectory of recent years. fittingly, the imf reported in april “ too slow for too long ”. 2 moreover, the fund expects growth to remain stubbornly stagnant. these growth problems seem to be based on fundamental economic challenges, all of immense magnitude : secular stagnation, be it driven by weak demand or weak supply ; debt overhang ; and demographic change. policies that do not look beyond the end of the election cycle are not the right way to address these types of challenges. which is probably why the success of policy responses seeking to put output levels and growth back on track was only short - lived. growth has been slowing in most advanced countries. so what now? in the past, a popular response to sluggish growth was finance - led growth policy. but there are a couple of problems with that strategy which make it an unhealthy policy choice. the recent financial crisis offered yet another impressive example. however, too much finance leads not only to financial turmoil but also to economic growth being stifled by mountains of debt. the overblown financial system and the extreme leveraging have left the world economy with a severe debt overhang, a mountain of debt. it was this excessive credit creation which paved the way for the financial crisis. during the crisis itself, it was plain to see that leverage needed to be lowered, especially in the financial sector. but precious little headway has been made in this regard, leaving us with an unstable financial system. 3 what ’ s worse, the tectonic movements of these debt mountains have serious repercussions on the stability of the financial system. doubts about the sustainability of the mountains of credit increase uncertainty about the economy in general and the financial sector in particular. non - performing loans and unsustainable business models –