Over at FT’s Economists’ Forum some of the world’s finest economic minds debate lucidly, if lengthily, on the issues raised in columns by Martin Wolf and economics contributors such as Larry Summers and Willem Buiter.
In this occasional series we will bring you a summary of the discussion for busy Alphaville readers who might find it a bit tldr.
In his column last week Martin Wolf argued that it was intellectually untenable for Wall Street to resist more onerous regulation of capital requirements or liquidity. Moral hazard is already visible, he wrote, in the jump of investment banks’ share prices since the Bear Stearns rescue.
Ricardo Hausmann argues that tighter regulation during the past few years would not necessarily have led to better pricing of risk. He would put the blame on “a so-called Taylor rule - that sets the interest rate as low as possible, so long as the discomfort with inflation is not larger than the discomfort with unemployment”.
Robert Wade points out that a “new financial architecture” was discussed after the financial crises in in Mexico (1994–5) and East Asia/Brazil/Russia (1997–8) — but by 2000, when these crises appeared limited to the emerging markets, “discussion petered out”.
Just when you thought things could not get much worse, Guillermo Calvo warns that the current financial crisis could be distracting us from another problem: a reduction in central banks’ ability to anchor nominal prices. “In the short run this may be less noticeable in broad price indexes like the CPI but, in my view, it is already being reflected in, for instance, the dollar/euro exchange rate,” Calvo argues. This could have a deleterious effect on trade, he says, because while public policy can respond to trading partners’ technical superiority, for example — it is difficult to effectively reform against arbitrary swings in exchange rates.
Adam Posen echoes Martin’s fears that the current crisis will be interpreted by countries such as China and India as a strike against free market liberalisation. But he fears the misinterpretation will go further. “Life is complicated, so events get overdetermined.” The outcome could be an even deeper rejection of liberalisation, as the entire “anglo-saxon model” is blamed for what Posen calls a “regulatory ankle-sprain”.
The Fed has of course taken on much of Bear Stearn’s credit risk, and last week expanded its emergency lending to primary dealers. So what will Wolf and the economic pundits make of the financial regulation revamp, to be announced later today - which proposes enhanced supervision of investment banks on a temporary, rather than permanent basis?
