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June 25, 2008



Dearth? I would rather say there are many proposals of more efficient (as expected by their authors) financial regulation than the current one. Just to list one e.g. recent Anavish Persaud's column: http://www.voxeu.org/index.php?q=node/1102
Consequently, more efficient financial regulation at important marketplaces should motivate important players to take into account worse regulations elsewhere, otherwise they would not be able to do business in important places. It is crucial that big marketplaces achieve the same minimal level of regulation, not allowing infinite race to the bottom.


Exactly! Without a world government, backed by the ability to enforce its rulings there is no way to get nations to sacrifice their own interests for the "greater good".

As this will never happen, the best that can be hoped for is that some mechanisms be worked out where the drawbacks to state A for adopting some policy that benefits B can be compensated is some other (non economic) way.

This is the same balance that has to be used within countries. For example:
taking money from the wealthy and redistributing it downward is "worth" it to them because the alternative might be civil unrest that would affect them in a worse way. There is no sign of this type of evaluating being undertaken on an international scale.

In fact, the US has adopted a policy of world domination of resources backed by unsurpassed military might. That this policy has failed to work since the end of WWII has not changed the plans for the future or current activities.

In a state of anarchy, "might makes right", still rules, and global relations are anarchic, not withstanding all the attempts to cover this ugly fact up with the UN, WTO, IMF, etc. etc.


I was lucky to listen you live at the congress and take notes but as the time constrained your presentation you had to skip many parts and I missed some points.
Can you please share your presentation with your blog readers who are not lucky enough to be at the Anadolu auditorium and who are there but want to see it again? I have also recorded your speech from beginning to the end and I can share it if you would like? I don't know how I can do this as I am not good at IT but I am sure there are some readers who can help me in doing this.
(I also had the privilege of talking to face to face and I feel just as you felt after Turkey-Croatia match)


I have also recorded Mr. Calvo's presentation and he will kindly send me its powerpoint version. I will ask him whether I can share it with you and your readers after he sends it.


A way to help keep global contagion from happening again would be international rating agencies with the power to look over lenders' shoulders if they wanted the agencies imprimatur.

You could ban pension funds or mutual funds from investing without the seal of approval from three or four of the best.

National governments would pay for their international organizations such as the EU to do the snooping.

This would also help faciliate international standards.


wjd123: International rating agencies with such power? If we know that rating agencies are one of key factors contributing to the current crisis?

Tord Steiro

"International rating agencies with such power? If we know that rating agencies are one of key factors contributing to the current crisis?"

- I believe that depends on what kind of incentives the rating agencies have. It may be easier to ensure the right incentives for these agencies if they are organized differently than today. And it may not. But if we do not try, we will never know. Information is not perfect, is it?


"If we do not try, we will never know."

That is quite frequent argument in many areas, but the policy setting cannot work this way. It is rather advisable to think hard ahead about consequences of proposed solutions - and it is possible that actually we might find out the outcome even without running the experiment. After all, such eperiments are quite expensive :-)

In my view you are quite right about incentives. Any more specific idea how to set them? And then also any proposal for process of moving from the current status quo to the desired status?

What I find quite surprising is that (despite critical voices on the role of rating agencies) regulators of the whole world have not done anything to limit the impact of rating agencies on the regulated institutions (disclaimer: nothing I would hear about - any pointers to actions welcome). Naturally, there is nothing better available right now, but should the overall regulatory framework (funds regulations, Basel II, Solvency II, ...) rely so heavily on the rating agencies as now in the first place?

Richard H. Serlin

With regard to Dani's true statement, "financial crises can hit you regardless of whether you are a saint or a sinner.", a tip to the readers: Paul Krugman's book, accessible to well educated laypeople, "The Return of Depression Economics", explains this very intuitively and well. And, like all of Krugman's popular writings, it's very interesting and entertaining to read.

Jorge Romero-Habeych

"efficient Regulation"..isn't that an oxymoron. A world lender of last resort..that creates an incentive alright!
It appears we have not learned anything from the last 100 years......the answer to chaos created by government is.....MORE GOVERNMENT!

Barkley Rosser

I heard all of Calvo's speech, and I did not hear much of talk of either the global lender of last resort, beyond what we already have in the IMF (whose main paying client these days happens to be the IEA host country, Turkey, which has led some wags to describe the IMF as the "Turkish Monetary Fund"), or of any increase in global financial regulation. Indeed, Calvo mostly focused on past crises such as Mexico, East Asia (not much on that), Russia, Argentina, and Turkey, which were more "traditional" crises involving rising international indebtedness triggering capital inflow "stops." The most curious conclusion he had was that in almost all of these cases the crises and massive devaluations were followed by fairly robust growth performances, although he was unable to supply any general explanation for how these came about, and noted that a number of likely mechanisms in fact did not take place.

This left his abbreviated comments about the most recent international crises somewhat disconnected and ad hoc. There was no clear message or lesson from these earlier episodes, and he admitted that the most recent events are quite different in a number of ways from those earlier ones. All a bit vague in the end, despite some useful presentation of data.

BTW, I note that in contrast with previous congresses there was a very poor attendance by persons from China. I heard it speculated that this was due to oppostion to the positions of Calvo by many in China, who perceive him as partly blaming China (failure to appreciate rmb/yuan sufficiently) for current global financial problems, in contrast to Mundell, whom apparently they like a lot.

BTW, this was my first opportunity to meet this blog's capable and personable host, even if I did not get to speak to him at great length. Sorry about the outcome of that Turkey-Germany game, Dani, ... :-(.


Goodhart's law, a twist on the Heisenberg Uncertainty Principle, applies to financial regulation as much as it does to monetary policy. that is, attempts to control financial instability through reliance on quantitative measures (e.g., capital, leverage, VaR, etc.) leads to behaviors and risks that are not captured by such metrics. like Smeed's Law regarding traffic accidents, financial instability is probably relatively invariant to levels of regulation or even the existence (or not) of lender of last resort facilities.

that doesn't mean do nothing. (i am not a libertarian nor have libertarian tendencies.) it means that the objective function of regulation needs more carefully thought out. in making a similar point, J.Tirole once pointed out that all international financial crisis could be avoided by simply ceasing all international lending. most, i believe, are not advocating a prevention of financial crisis by doing away with banking. that said, i know of few well-articulated, public arguments for what the objective function of financial regulation should be. "safety and soundness" is a good catchphrase and a conveniently flexible legal concept, but provides little objective guidance.

to me, the point of financial regulation is to maintain enough trust and confidence to permit efficient financial intermediation. what is enough? what is efficient? these are open questions. in any case, i'm not sure a global lender of last resort helps that much substantively (though it may help optically, and in a world where perception can be reality, this is not insignificant). to me, real work needs to be internally within financial institutions and market participants. there is a lot of laziness (see, reliance on credit ratings), which is largely a of function of the many, many principal-agent gaps out there. plugging those will require a lot of work. as, perhaps, it should...

Barkley Rosser

Actually, the major person at the conference who was more clearly pushing for global lender of last resort along with an international money a la Keynes's "bancor" was Joseph Stiglitz, following along lines advoctaed in his book, _Making Globalization Work_.

Not all financial regulation is useless. For example, bank failures have been far fewer in the US since the introduction of deposit insurance with the FDIC in 1935 than before.


Oh Dani, where art thou?

Barkley Rosser

At the close of the IEA Congress, the president of the Turkish Economic Association said that Dani was taking a holiday in Turkey with his family. So, everybody should just relax and let him have his holiday.


I will commit suicide if you dont start posting on youre blog soon!!

Michael Seifu

What about your thoughts on the recent events in Zimbabwe? Is it actually totally a matter for politics that is going on there? These days everybody from political leaders to scholars provide a very simplistic explanation of the events there. People speak of in nostalgic ways of the old times where a bunch of big commercial farmers used to feed that nation and how an autocratic rules changed all that. And yet, we know that economic efficiency often justifiably is sacrificied for political purposes. Isn't the primacy of politics that kept inefficient farmers in advanced countries at the expense of millions who are chronically poor?

Tord Steiro


The problems in Zim have a lot more to it than meets the eye, at least though our Western press.

And, with all due respect, I think economic efficiency is relatively far down the priority list.

Elijah N. Munyi

Hello Dani,
You are a brilliant and useful. Keep up. After reading your 2004 paper on "Industrial Policy for the 21st Century" and sharing those ideas with my boss I could see his closely held beleif in trade protectionism as 'the' indispensable means of industrial policy begin to dissapear.

But I still do have some questions regarding the real world of your industrial policy.

My boss is an Economics PhD, by the way.

eCurrency Arbitrage

Mutual Funds are one of the way for finical ways to develop in democratic.Some of industrial policy as to be brought under consideration.



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