Two quick notes on financial markets in the I-Cubed Economy.
From a recent speech by Fed Chairman Bernanke comes this reminder of the importance of that intangible we call money — The Financial Accelerator and the Credit Channel–June 15, 2007:
Economic growth and prosperity are created primarily by what economists call “real” factors–the productivity of the workforce, the quantity and quality of the capital stock, the availability of land and natural resources, the state of technical knowledge, and the creativity and skills of entrepreneurs and managers. But extensive practical experience as well as much formal research highlights the crucial supporting role that financial factors play in the economy. An entrepreneur with a great new idea for building a better mousetrap typically must tap financial capital, perhaps from a bank or a venture capitalist, to transform that idea into a profitable commercial enterprise. To expand and modernize their plants and increase their staffs, most firms must turn to financial markets or to financial institutions to secure this essential input. Families rely on the financial markets to obtain mortgages or to help finance their children’s educations. In short, healthy financial conditions help a modern economy realize its full potential. For this reason, one of the critical priorities of developing economies is establishing a modern, well-functioning financial system. In the United States, a deep and liquid financial system has promoted growth by effectively allocating capital and has increased economic resilience by increasing our ability to share and diversify risks both domestically and globally.
I thought that was a good summary of the role of financial markets. The rest of the paper is a discussion of the interplay of financial conditions and monetary policy
But Bernanke also points out the other role of financial markets:
By developing expertise in gathering relevant information, as well as by maintaining ongoing relationships with customers, banks and similar intermediaries develop “informational capital.”
Informational capital is one of the financial markets greatest intangibles. When studies are done on the competitiveness of the US financial system, that fact needs to be front and center in any analysis. Ongoing relationships and other tacit knowledge may be one of the reasons companies seem to still pay a premium to raise capital in the US. Let’s keep that in mind as we “reform” the system.
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The second is Martin Wolf argument that capitalism itself is changing – FT.com / Comment & analysis / Analysis – Unfettered finance is fast reshaping the global economy:
It is capitalism, not communism, that generates what the communist Leon Trotsky once called “permanent revolution”. It is the only economic system of which that is true. Joseph Schumpeter called it “creative destruction”. Now, after the fall of its adversary, has come another revolutionary period. Capitalism is mutating once again.
Much of the institutional scenery of two decades ago – distinct national business elites, stable managerial control over companies and long-term relationships with financial institutions – is disappearing into economic history. We have, instead the triumph of the global over the local, of the speculator over the manager and of the financier over the producer. We are witnessing the transformation of mid-20th century managerial capitalism into global financial capitalism.
PS Thanks to Dani Rodrik’s blog Dani Rodrik’s weblog: Martin Wolf makes my day for pointing this out.