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May 28, 2017

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Finance industry launches rocket scientists into hedge funds: experts

PARIS -- Finance drives growth, but too much of a good thing sucks the lifeblood, brains and brilliant ideas from an economy, according to "startling" findings at the Bank for International Settlements.

And advanced economies are overweight and even obese with financial services.

"Finance, literally bids rocket scientists away from the satellite industry," BIS economists warned, saying that it competes for people with high qualifications as well as for buildings and equipment.

"The result is that people who might have become scientists, who in another age dreamt of curing cancer or flying to Mars, today dream of becoming hedge fund managers."

So argue BIS economists Stephen Cecchetti and Enisse Kharroubi who offer deep insights into one aspect of the financial and debt crisis which has hit rich countries in the last four years.

Referring to the dotcom boom of the 1990s and countless other boom-and-bust experiences, they said: "Booming industries draw in resources at a phenomenal rate.

"It is only when they crash, after the bust, that we realize the extent of the overinvestment that occurred."

Beginning with the premise of economic theory that "finance is good for growth," they noted that this had been one driver of financial deregulation.

The argument was that "if finance is good for growth, shouldn't we be working to eliminate barriers to further financial development?"

The economists then set themselves a question: is this true regardless of the size and growth of the financial sector.

"Or, like a person who eats too much, does a bloated financial system become a drag on the rest of the economy?"

For an answer they said: "We present two very striking conclusions."

First, "with finance you can have too much of a good thing," they said. "At low levels, an increase in the size of the financial sector accelerates growth of productivity."

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