Alan Greenspan does not like the Dodd-Frank financial regulation act. His warning against ill-considered regulation (published in Wednesday’s Financial Times) is distorted by the pro-market ideology that blinded him to the pre-crash excesses in financial markets. But the former chairman of the Federal Reserve is on more solid ground when he praises finance’s contribution to economic growth.
The statistical evidence is overwhelming. As countries get richer, their banks and capital markets grow larger relative to gross domestic product, and more complex. Mr Greenspan points out that the financial share of US GDP rose from 2.4 per cent to 7.4 per cent between 1947 and 2008.
This reflects a two-way causality. More sophisticated economies need more finance because they have more trade, capital accumulation, savings and innovative ideas in need of investment. Conversely, more sophisticated financial systems accelerate growth by mitigating the risks of trade and investment and spurring on new enterprises.