Only the Jews were predominantly to lend money for interest

The Europeans and Americans spend public money by billions of euros and dollars to save their banking systems. These Governments because they are convinced that the banks are essential to the proper functioning of the economy. But they really contribute to economic growth It is more difficult than it seems to answer this question. Many studies have shown the existence of a positive correlation between the financial institutions development and growth. But correlation is not causation. Banking development and growth could both be caused by a third factor, as the existence of a certain type of legal system for example. It would be wrong to conclude that the banks have a positive effect on growth: the real decisive growth would be the legal system and the banks. How can we then estimate the true effect of the banks on the economy It would have to find a factor that predicts the existence of banks not be correlated with any other variable that may have an effect on growth. Thus it could isolate the pure causal effect of the financial institutions on the economy. A young Economist, Luigi Pascali (1), recently wrote a very ingenious article which does exactly this.

Using Italian data, it shows that the development of banks in some Italian cities and not in others can be related to the existence of a Jewish community in the middle ages. In the fifteenth century, it was contrary to the Catholic to become a banker dogma. Only the Jews were predominantly to lend money for interest. However Pascali shows that there are many persistence in financial development over time. Italian cities who have hosted Jewish communities in the middle ages were, even today, financial institutions the most impor aunts. Since the establishment of Jewish communities cannot be connected to any other economic or institutional cities characteristics, Pascali can isolate the pure causal effect of the banks on growth.

It is a non-negligible effect. An increase in bank credit (as a percentage of the local GDP) of 1 increases the GDP per capita of 0.2 on average. The positive effect of the banks through a better allocation of capital to the more productive enterprises. It is therefore established, in the case of the Italy, that banks have historically had a favourable growth role. These positive effects are likely similar to other European countries where the banking system is the main source of business financing.

But what is today Banks allocate a growing portion of their capital investment in financial assets. Has financial innovation, which goes far beyond the traditional role of banks to invest the savings in productive enterprises contributed to strengthening growth The growth of derivatives and structured products has been dizzying. But we have to date no rigorous study proving that financial innovation has contributed to growth. In fact, the historical data tend to show that financial innovation, far from reducing the risk, tends to increase at the macroeconomic level. The periods where banking deregulation has been the most important, the sophistication of financial markets has been the highest and the most disproportionate bankers to the average wages are the years 1920 and 2000 years. These periods were followed by the implosion of the economy. Correlation does not imply causation. But regulators should wonder about the social value of most financial innovations of the past decade. They have enriched the bankers but led the economy on the brink. It is amazing that after the recent crisis, it has not occurred, for example, a strengthening of the regulation of the market of "credit default swaps". Until a rigorous study proves the contrary, I therefore share the view of Paul Volcker, the former boss of the Federal Reserve: "the only financial innovation of the past 25 years indisputable social utility is the ATM!