Regulatory reform: The pessimism panel

By Felix Salmon
September 25, 2009
discussion last night about financial regulation between Joe Stiglitz, Jesse Eisinger, and Roberta Karmel.

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I enjoyed the discussion last night about financial regulation between Joe Stiglitz, Jesse Eisinger, and Roberta Karmel.

Stiglitz and Eisinger, especially, were on form. Stiglitz has an interesting and rather international take, having chaired a panel with a typically long UN name: the Commission of Experts of the President of the General Assembly on Reforms of the International Monetary and Financial System. And Eisinger seems to be getting increasingly curmudgeonly — a very good thing too, in this world of ultra-short memory spans and massive releveraging.

Stiglitz is a fan of the Polish framework. Poland, he says, has one overall regulator, which then has separate commissions with solid institutional knowledge for each of the areas, like insurance and banking, which need to be regulated. He also like the way that the Poles index the salary of the regulator to salaries in the financial sector. Financial-sector salaries are taxed at a set percentage to fund the regulator’s salary, ensuring that the regulator’s salary keeps up with financial-sector wage inflation.

He’s not a fan of the Fed, however, and had a good one-liner:

The Fed had more powers than it used before the crisis. Saying that we’re going to give them even more powers not to use doesn’t seem to me to solve the problem.

Eisinger, too, had his share of one-liners:

It’s a question of regulatory will to regulate. We had a problem not of deregulation but unregulation: we had somebody like Harvey Pitt, who had an attitude of being against regulation; we had Chris Cox who, as far as I can tell, had an attitude of pro sleep. All the structure in the world can’t really remedy these problems.

Stiglitz agreed. “The problem of regulatory capture is persistent and real,” he said, adding that one way to address the problem is to move to a rules-based rather than a principles-based system, hardwiring the regulatory system and giving the regulator less leeway.

Stiglitz’s most contentious view is probably the idea that the entire financial bailout was unnecessary:

We’ve really extended the safety net beyond to big to fail, and my view is that there’s been no convincing argument that any of this was ever needed. It was based on the notion of fear — that if you didn’t do it, the whole financial set of markets would fail. Economics would have suggested that if you did a debt to equity conversion, converting long-term debt into equity, the financial institution would be well capitalized, there would be no reason to panic, and there would be more confidence in the market. But those who saw an opportunity to use scare tactics to get what they wanted did use those scare tactics, and it worked.

Eisinger largely agreed:

There’s a crystallizing conventional wisdom, certainly out of Washington, that it worked. It was ad hoc, it was messy, it was poorly planned, but in the end all this fumbling from Bernanke and Geithner and Paulson ended up working. The evidence for this is that the stock market is up: people have this idea that the stock market represents the economy. That’s a very dangerous consensus forming, because the regulatory reforms do really nothing to address too big to fail. If everybody’s thinking that these gifts to Wall Street banks really got us out of the crisis, then it’s not really hopeful that they’ll address this in any serious way.

Jesse asked Joe whether he thought there was more systemic risk now than there was a year ago. “Yes,” said Joe, “very much so. Things are much worse now than they were a year ago. Structurally things are worse.”

If there was a problem with the panel, it was that the lefty pessimism of Stiglitz and Eisinger wasn’t really counterbalanced at all by anybody more constructive about what had happened. But that’s fine by me: my feeling is that we need all the lefty pessimism we can get right now. It’s our only hope at substantive regulatory reform


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Thanks for the write-up, Felix. On the last point about the “lefty view,” I think that, in fact, there’s remarkable agreement between the left and the right on the bailouts. Both see a big problem with the creation of moral hazard and the creation of even larger banks and more concentrated risk. Both are troubled by generous taxpayer expenditures for the banks without adequate compensation. I’m tempted to say that there is more agreement on this issue btn the right and the left than any other issue in all of American politics. It’s sort of like how the ends of a straight line end up converging if it’s long enough.

“There’s a crystallizing conventional wisdom, certainly out of Washington, that it worked. It was ad hoc, it was messy, it was poorly planned, but in the end all this fumbling from Bernanke and Geithner and Paulson ended up working.”

That’s how the real world works. There are any number of other things before and during this crisis that could have been done better. But they could also have been done worse. After reading Fisher and Simons on Debt-Deflation, and being convinced by their arguments, I find the idea that we wouldn’t have used an approach like the Chicago Plan of 1933, which used QE and a Stimulus, and anything else that made sense, hard to understand. We adopted the Chicago Plan because it made the most real world sense, as it did in 1933 as well.

I think that this talk is a better view, which I found on Greg Mankiw’s blog:

“Back from the Brink
Christina D. Romer
Chair, Council of Economic Advisers
Federal Reserve Bank of Chicago
Chicago, Illinois, September 24, 2009″

“The policy response in the current episode, in contrast, has been swift and bold. The Federal Reserve’s creative and aggressive actions last fall to maintain lending will go down as a high point in central bank history. As credit market after credit market froze or evaporated, the Federal Reserve created many new programs to fill the gap and maintain the flow of credit.
Congress’s approval of the not-always-popular TARP legislation was another bold move. Creating a fund that could be used to shore up the capital position of banks and take troubled assets off banks’ balance sheets has proven both necessary and valuable. I firmly believe that the capital infusions last fall, many of which are now being paid back with interest, were a key part
of the thin green line between stability and continued crisis.”

I’m all for change, but that entails following the rest of the Chicago Plan of 1933. It’s still the best place to begin considering change. Since Fisher, Knight, Simons, Viner, Friedman, Minsky, Kay, and Buiter all favor/ed a version of this idea, surely it’s worth looking into. Try this post as well:

“In Praise of More Primitive Finance
Amar Bhidé”

Why do you have to classify them as lefties? Don’t you think this black/white-think has done enough harm to this country?

What if I’m a righty reading this? I can just stop thinking. Oh! These are lefties. That’s just crazy talk.

Posted by EmilianoZ | Report as abusive

Don, you sound a lot more like a Democrat (genus l.summers) than you do a libertarian. What about free markets?

Posted by maynardGkeynes | Report as abusive


There was a time when Fisher, Knight, Simons, Viner, and Milton Friedman, were all considered Free Market Advocates, believe it or not. The Chicago Plan of 1933 was a Free Market Plan as well. I think that the others I mentioned would all consider themselves Free Market Advocates too.

I also advocate:
1) A Negative Income Tax ( M. Friedman, Charles Murray )
2) Milton Friedman’s Universal Health Plan. ( Also Hayek )
3) Milton Friedman’s Plan in the essay “A Monetary and Fiscal Framework for Economic Stability”.
4) The Legalization of Drugs

I could go on. Following Adam Smith, I believe that there is a role for govt. Believe it or not, he favored the govt intervening in banking and monetary matters. I also follow Edmund Burke, who was a Whig. Add Bagehot and Keynes, and you’ve pretty much got one person who advocates every position I advocate.

It seems that libertarian is now thought by some to mean only Mises and Rothbard, and the people who follow them. That’s fine with me. My first choice for a posting name was Don the Burkean Whig, but I thought that that was even more problematic than Don the libertarian Democrat. I do like paradoxes, as did Schumpeter, so it could be that I’m drawn to the idea that only the Democratic Party would give my views a real hearing.

I’m sorry that I gave such a long and detailed answer, but I’ve just finished the second draft of a novel of 359 pages and 190,000 words, so I’m still up tonight in a very good mood.

Take care,