Jan F Qvigstad: Contribution at the conference on “Welfare effects of financial innovation” Comments by Mr Jan F Qvigstad, Deputy Governor of Norges Bank (Central Bank of Norway), on Mr Frank Smets (ECB) paper “Financial markets – productivity, procyclicality, and policy”, at the Netherlands Bank conference in honour of Mr Nout Wellink on “Welfare effects of financial innovation”, Amsterdam, 11 November 2011. *  *  *  I would like to thank Birger Vikøren, Sigbjørn Atle Berg and Helle Snellingen for useful comments. Thank you for inviting me and giving me the opportunity to comment on Frank’s paper. The common starting point of the literature is that the value of financial markets lies in their contribution to real economic growth. This is the perspective we always need to have for any meaningful discussion of the social value of financial markets. A well developed financial market is not a goal in its own right. During my 30 years of service in the Treasury and the central bank, I have had my fair share of dealings with banking and financial crises. I will draw on some of that experience in my comments today as part of my modest contribution to this distinguished group. In the aftermath of the Lehman Brothers collapse the funding situation for banks became difficult, also for Norway with its oil-driven economy. Early in 2009 a swap arrangement was introduced to improve the medium-term funding situation for our banks.
1  4  Speech by Adair Tuner on 29 September 2011, Credit Creation and Social Optimality. BIS central bankers’ speeches  One key answer to the spiral described by Minsky has been to introduce macroprudential regulation. Instruments such as the countercyclical capital buffer are meant to provide a cushion when the credit cycle turns down. There is also a commonly held view that we need instruments to dampen credit growth during an expansion. We should probably look broadly at how the Minsky style spirals could be contained. Discretionary policy can be a useful tool, but due weight must be given to building strong automatic stabilisers into the financial system to reduce the risk of future bubbles. The topic of this conference is financial innovation. Both Adair Turner2 and Paul Tucker3 have raised doubts about the social value of some of these new instruments. I quite agree: Restrictive regulation of some of these instruments could contribute to stabilising financial markets. One could imagine that the regulator should evaluate the pros and cons of allowing any new instrument. At the very least, the regulator should make sure that any instrument traded in significant quantities is sufficiently transparent to be a useful risk shifter. In short, I agree with Frank that the positive relationship between financial markets and economic growth has its limits. The difficult question is naturally where these limits are. It will be hard for a regulator to draw the line. But there are few other candidates for doing it.