Andrew Haldane: The contribution of the financial sector – miracle or mirage? Speech by Mr Andrew Haldane, Executive Director, Financial Stability, of the Bank of England, at the Future of Finance conference, London, 14 July 2010. This text is taken from a co-authored chapter by Andrew Haldane, Simon Brennan and Vasileios Madouros in “The Future of Finance: The LSE Report” published today by The London School of Economics. *  *  *  We would like to thank Stephen Burgess, Melissa Davey, Rob Elder, Perry Francis, Jen Han, Sam Knott, Nick Oulton, Peter Richardson, Jeremy Rowe, Chris Shadforth, Sally Srinivasan and Iain de Weymarn for comments and discussion on earlier drafts, and Alexander Haywood and Laura Wightman for research assistance. The views expressed are those of the authors and not necessarily those of the Bank of England. 1. Introduction  The financial crisis of the past three years has, on any measure, been extremely costly. As in past financial crises, public sector debt seems set to double relative to national income in a number of countries (Reinhart and Rogoff (2009)). And measures of foregone output, now and in the future, put the net present value cost of the crisis at anywhere between one and five times annual world GDP (Haldane (2010)). Either way, the scars from the current crisis seem likely to be felt for a generation. It is against this backdrop that an intense debate is underway internationally about reform of finance (Goodhart (2010)).
The economic policy response in this second phase of the crisis Naturally, the economic policy response to this crisis should adapt to how the pandemic unfolds healthwise. At this second phase of the crisis, with the characteristics I mentioned, the economic policy response must combine two objectives: to support the recovery - which advises avoiding a premature withdrawal of the support measures that would raise the risk of economic growth undergoing more lasting damage - and to smooth the adjustment of the economy to the post-pandemic scenario. 3  The importance of European support To achieve these objectives, the economic policy response in this second phase of the crisis should have the firmly resolute backing of the European Union (EU). Indeed, given the enormous economic and financial interactions across the area’s various economies, joint action is the most effective means of ensuring that the economic effects of the pandemic will be overcome in a shorter time and at a lower cost to each and every country. This is particularly important in the current situation, where we face a global crisis, but which is exerting asymmetrical economic effects on the different countries. European action is particularly important so as to avoid an uneven exit from the crisis that bears down on overall economic growth for a longer period. These arguments, beyond those relating to necessary European solidarity, highlight the importance of the agreement reached by the European Council last Tuesday with the approval of the European recovery fund.