Saturday culminated with a plenary symposium: “Perspectives on the Post-Crisis Financial Reform in the U.S. and Europe.”
The first speaker, Dr. Robert Eisenbeis, spoke about the three banking crises of the past century. Two of them I was familiar with: the recent one (epicenter 2008) and the one that unfolded during the Great Depression (1929-39). He added a third crisis, the bank and Savings-and-Loan institutions failing during the 1980s, though noted that this crisis was a “slow-burner” that spread over many years and didn’t put the economy into recession.
Note above the large differences. Blue = unemployment rate Green = Inflation, Red = GDP growth rate.
The recent crisis most resembled the Great Depression, hence its nickname, “The Little Depression.”
Each crisis had its own causes for failure: in chronological order, overinvestment is risky assets (notably stocks), high inflation of the last 1970s reducing the real value of their outstanding loans, and the housing bubble combined with financial derivatives. Crises played out in different ways, as did the federal response to each crisis. He was less impressed with the partial-solutions (the Dodd-Frank bill) to the more recent crisis than with the more robust solutions to previous crises.
Next came a speaker, professor Richard Herring of the University of Pennsylvania saying something which makes a ton of common sense: regulations are there for a reason. If a financial product is so complex that it’s hard to understand, it becomes effectively unreglated, which is bad. Hence, there are good reasons to require that any financial products be simple. I’ve heard this before. Not that it has been done..
Apparently I should’ve stood a bit higher to take this photo.
He continued, stating that “large companies multinational in life, but national in death.” Meaning when they declare bankrupcy it’s up to their country of origin to track down all their assets and unwind everything fairly. This is a monumentally difficult task, and he speculated that one reason big financial institutions were bailed out in 2008-9 was that national governments didn’t feel up to this task and worried it would do more damage. His conclusion was to give regulators more power to summarily fine companies found in violation of regulations designed to minimize risk. Also, because we taxpayers are implicitly guaranteeing these large financial institutions, we need to share of their success.
The final speaker talked about the culture of institutions. That institutional culture matters, and that the institutional culture at many of these mega-banks is deeply sick. The culture needs to be fixed or we’ll be back in financial trouble:
I’ll admit to being pleasantly surprised by this symposium. A distressingly highly percentage of economist are really right-wing and ignore human reality, but the speakers at this symposium were spot-on.
There was nothing going on in the evening, so I headed home and went back the next day. Expect two most posts: one of the Sunday plenary sessions, and then my final thoughts on the conference…as there was a major punchline which I’m saving for then.