- 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. 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. practical men who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back [ … ] ” ( jm keynes ( 1936 ), the general theory of employment, interest and money. macmillan, p 383 ). bis central bankers ’ speeches 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. r hausmann, d rodrik & a velasco ( 2005 ) in : n serra & j stiglitz ( eds ) the washington consensus reconsidered : towards a new global governance, chapter 15 : 324 – 355 ; d rodrik ( 2005 ) growth strategies. in : p aghion & sn durlauf ( eds ) handbook of economic growth, volume 1, part a, chapter 14 : 967 – 1014. es prasad & rg rajan ( 2008 ) a pragmatic approach to capital account liberalization. in : the journal of economic perspectives, 22 ( 3 ) 149 – 172. bis central bankers ’ speeches