Specific questions in need of an answer

A commentary in the VoxEU Debate Why do we need a financial sector?

Posted By Wouter DenHaan , London School of Economics on 5 November 2011

To stimulate the debate a bit and possibly provide some guidance I have come up with the following set of questions.

  1. Is providing financing for small firms (through bank loans or private equity) the most important role of the financial sector?
  2. Is the financial sector just needed to smooth life-time consumption?
  3. How important are the provision of complex securities to make the world safer? Would the collapse of Enron or the dot.com bubble have had more detrimental consequences for the rest of the economy without credit default swaps and other innovative securities.
  4. Is Charles Goodhart right in thinking that intermediation services by investment banks are essential to the continued functioning of our complex modern economy?
  5. Is Charles Goodhart right when he concludes:  "The idea that, once you have carved out the ‘socially valuable’ parts of retail banking, ie the payments system and retail lending and deposit-taking, you can liquidate the rest without massive adverse effects is not only tragically mistaken but also horribly dangerous.even the help investment banks povide large firms is important for economic growth?"
  6. Are Alexander Popov and Frank Smets right when they argue that differences in the success of Europe and the US in creating innovative corporate giants and even difference in patenting between European countries is in part due to differences in financial intermediation?
  7. Does the recent vintage of DSGE models with financial intermediaries capture the essential roles of financial intermediation? Or should we believe the business cycle accounting exercise of Chari, Kehoe, and McGrattan indicating that investment wedges are of only minor importance for understanding business cycles and that consequently models with financial frictions are not promising to study business cycles.
  8. Do the less recent macroeconomic models without explicit financial institutions but with frictions in obtaining financing capture an important aspect of the problems in financial intermediation.
  9. Has the financial sector obtained in your transactions with this sector received an increasingly larger share of the surplus? Do you think you are receiving more value for your money or less?
  10. Do financial institutions many matter for long-term growth and not for smoothing out business cycles?
  11. Should we not be concerned about financial intermediation because most firms can pay investment expenditures out of profits.

Wouter Den Haan
London School of Economics and CEPR

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