In the words of the authors: “This evidence, together with recent experience during the financial crisis, leads us to conclude that there is a pressing need to reassess the relationship of finance and real growth in modern economic systems. More finance is definitely not always better.” Last month, the IMF released a paper that essentially reaches the same conclusions. It identifies Ireland, Japan and the US as countries that have “too much finance” for their own good. In Malaysia, the Financial Sector Blueprint clearly recognises the role of the financial system in serving the real economy. The economy is not subservient to the needs of the financial sector. 6  BIS central bankers’ speeches  Regional cooperation The final thing I wish to mention with respect to reaping the benefits and mitigating the risks of financial globalisation is regional cooperation. During the Asian Financial Crisis, we found out that contagion can occur when our neighbours experience difficulties, even if our financial systems are not closely linked. More recently, the European countries, even those that are not in the euro area, have found themselves in a similar position. The key factor is whether a country’s financial system is linked to the global financial system. Herding behaviour and generalisation among international investors and lenders will make the crisis in one country transcend borders and also affect neighbouring countries.
Policymakers have expressed concern about the low level of productivity. There are questions about whether these are new trends or trends that existed even before the crisis but were glossed over by policies aimed at sustaining consumption and growth. Structural weaknesses in economies are regularly discussed, but less regularly addressed. But despite this uncertainty, I will briefly mention two trends with respect to the global economy and financial markets that are relevant in terms of their impact on Malaysia. First, there is better growth in the AEs but the growth remains weak and uneven. The U.S. economy is showing the strongest signs of sustained economic growth, The EMEs are continuing to experience growth but that growth is now slower. Second, the monetary policies of the AEs remain very easy and are not likely to change significantly in the near term. This condition of sustained low interest rate continues to spur investors to frantically search for a few extra basis points in yields, undertaking larger and larger risks. This has fuelled the upward momentum of global financial markets and asset prices, which have risen to historical levels. Many market participants know that they are indulging in very risky behaviour, but feel that “As long as the music is playing, you’ve got to get up and dance” as one financier famously put it. But they are nervous and this nervousness is causing them to react to short-term developments and any sign that could signal that the music is about to stop.