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October 09, 2008

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Per Kurowski

Not at all, on the contrary, it is the ideological convenience of many that now hinders them from seeing that nothing even remotely close to this crisis would have happened, had not the regulators empowered the credit rating agencies and had these not certified as AAA those securities.

Be reasonable. How on earth was a bank, for instance in Germany, supposed to know how bad the collaterals of subprime mortgages really were? Should they have sent their own Herr Inspektor to California to check up on whether the debtor was telling all the truth regarding his income? Of course not!

And why should the German bank distrust for a second the credit rating agencies, when their own regulators had nominated the credit rating agencies for such a delicate matter as establishing the minimum capital requirements for the German bank itself.

Yes, I agree, the regulations of the shadow banks were missing, but, with respect to the banks, the regulators went way overboard, regulating.

UNCTAD, who no one could accuse of overly libertarian, in their policy brief titled “The Crisis of the Century”, released on October 6 states “There are a few quick regulatory fixes that can be taken at both the national and international levels. The first is to reassess the role of credit rating agencies. These agencies, which should solve information problems and increase transparency, seem to have played the opposite role and made the market even more opaque.”

Robert Moss

Question:
"When the facts change, I change my mind, what does The Economist do, sir?"

Answer:
Same old bankrupt ideology despite all the financial crises we've seen since 1998, and repeated dysfunction from financial systems that are too clever by half.

Keep up the excellent work Dr. Rodrik! The world needs more of your economic analysis. Much more.

robertdfeinman

I think the horse has permanently left the barn. There is too much money sloshing around in the unregulated parts of the world (Russia, the petro states, China, etc.) for "speculation" to be reined in.

All that will happen is new avenues will be found to replace the existing ones. Perhaps this means that the big western financial firms will not be part of the next cycle, but a next cycle there will be.

The multinational firms and the state controlled (directly or indirectly) resource enterprises are now bigger than most governments. Soros demonstrated a decade ago that the concentrated power of currency speculators could overwhelm the British government's currency policy - and there was only a few billion dollars involved.

Now the amount of money involved is much bigger and the mechanisms for shifting resources around the planet more highly refined. Compare the change in the nominal value of the world's oil reserves as the price has gone from $90 to $140 and back to $90. This change in value dwarfs the "meltdown" in the value of the US banking sector's assets, yet no one has commented on it.

If there is to be real reform there needs to be the equivalent of an effective world "government". So far the UN, WTO, WB and IMF have proven ineffective. Since no state is willing to give up any of its sovereignty it is unlikely that a new body will do better.

In addition tax havens need to be eliminated and laws about incorporation and governance across borders need to be systematized. When Switzerland, the Channel Islands and other black holes of finance are invaded and taken over by the regulatory authorities we will see a change.

Since this will never happen (too many billionaires like the present system) there is little prospect for fundamental regulatory change on an international level.

saku

Moss, did you steal that from Keynes or Wolf?
I do agree thougt

Martin Klein

1. James Buchanan wrote a paper whose title - though referring to a different context - sums it up nicely: Market Failure vs. Government Failure. It's not the "flexible" markets vs. the "heavy handed" government. Both sides are imperfect and - it seems - in times of crisis, government is the more robust system.

2. So what should government do in this crisis? As Warren Buffett put it: now when everybody is deleveraging, government has to leverage up. Government, he added, is the only one who can always do this. He failed to mention that the government's ability to leverage up depends on its ability to tax, which depends (among other things) on the legitimacy of its cause in the eyes of the public. Legitimacy: abuse it, and you lose it. Probably the majority of governments worldwide has lost (or never had) the ability to leverage up at will. Neither should we take it for granted that we will have it forever.

The Walrus

The section of the final paragraph that you quote from the article in The Economist omits the arguments that The Economist makes (through the course of several articles in its Special Report) to suport its claim that freer and more flexible markets are better for the world economy than government intervention.

The full paragraph reads as follows:

"The big question is what lessons the emerging students—and the disgraced teacher—should learn from recent events. How far should the balance between governments and markets shift? This special report will argue that although some rebalancing is needed, particularly in financial regulation, where innovation outpaced a sclerotic supervisory regime, it would be a mistake to blame today’s mess only, or even mainly, on modern finance and “free-market fundamentalism”. Speculative excesses existed centuries before securitisation was invented, and governments bear direct responsibility for some of today’s troubles. Misguided subsidies, on everything from biofuels to mortgage interest, have distorted markets. Loose monetary policy helped to inflate a global credit bubble. Provocative as it may sound in today’s febrile and dangerous climate, freer and more flexible markets will still do more for the world economy than the heavy hand of government."

To claim that freer markets are better than government intervetion without analysis would be ideology; to claim that The Economist states that freer markets are better than government intervetion without analysis by quoting an incomplete passage is either sloppy scholarship, or just plain dishonest.

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