Is it possible to take advantage of the financial brain’s abilities, while limiting its capacity for irresponsible, short-sighted and destructive behaviour? What are the policy issues that we would be examining if we wanted to do so.
First, for essentially political reasons, we must re-examine the taxation of income and wealth.
Second, we should recognise that emerging and small economies have to manage their involvement with the global financial system cautiously.
Third, we must also realise that the mixture of floating exchange rates with a number of important pegged rates is creating huge distortions.
Fourth, we must look more closely at how monetary policy interacts with the financial sector and asset prices.
Fifth, we should also look once again at how well vast rewards are aligned with risk in financial markets.
Finally, we must encourage regulatory and fiscal authorities to achieve higher levels of co-ordination.
We will have to live with today’s financial markets, since policymakers would seek to curtail them only after a disaster. Even their critics should fear such a disaster. The task is, instead, to exploit the many benefits, while managing the risks. This will never be done perfectly. But it can be done at least tolerably well. The alternative is too awful to consider.
These all make a lot of sense. But do they go far enough? Stay tuned.