Regulating the Regulators

Falling asleep at the wheel, technical mistakes, ignorance, leverage, and greed are among the oft-mentioned causes of the financial crisis, according to the wisdom of various experts. They tend to be presented as competing explanations, with pundits typically arguing in favor of their own single hypothesis:

  • Government institutions, such as the US Treasury, the Fed, and the Securities and Exchange Commission, were ill-prepared and made major technical mistakes.
  • Ignorant prospective home owners expected housing prices to increase forever. CEOs and CFOs of large financial institutions -- euphoric about their prospects – did not understand the risk implications of the over-leveraged growth in complex financial derivatives.
  • Greed and corruption were rampant on Wall Street over the past decade; Madoff was a mere reflection of widespread excesses. And the large banks, through their financial might, had the U.S. Government and many politicians virtually in their ‘pocket’, rendering financial sector legislation and regulation ineffective. 

Some of these theories, like the ‘technical mistakes’, ‘ignorance’ and ‘greed’ hypotheses, are naïve, says Daniel Kaufmann, Senior Fellow at the Brookings Institution and former Director at the World Bank Institute. Others, such as leverage, are a proximate cause, in his view, begging the fundamental question of what led to such over-leveraging, and, ultimately, to the economic meltdown. 

Kaufmann refutes these claims and present a different perspective during a Webinar where he argues that, on their own, these competing explanations are unsatisfactory.

------------------------------------------------

Specifically, Kaufmann will emphasize a combination of often overlooked determinants of the crisis, namely global macro-economic imbalances, a perverse incentive structure, the ‘capture’ of some state institutions and the role of money in politics. This matters for looking ahead because understanding the fundamental causes of the crisis is crucial for drawing the appropriate policy implications. 

Among the questions Kaufmann addresses:

  • What were the fundamental vs. the proximate causes of the crisis?
  • What global macro-economic imbalances led to the crisis, and what are the implications for global coordination?
  • What is the evidence on the prevalence of ‘capture’ in the US, and was it associated with outright corruption or through ‘softer’ means?
  • What was the role played by ‘money in politics’? By perverse incentives?
  • What policy implications emerge from this view of the crisis?
  • Are lessons from international experience relevant for the US?
  • More broadly, does it follow that in the future there ought to be a much larger role of the government in finance?
  • What type of regulatory reforms are particularly ‘market-friendly’?

Following the presentation, Kaufman will answer audience questions. He will be joined in the discussion by David S. Evans, an economist and editor-in-chief of FinReg21’s Lombard Street.

===============================================

Presenters

Daniel Kaufmann is an international economist and governance expert, a Senior Fellow at the Brookings Institution and was Director at the World Bank Institute from 2001-2008, leading the work on Governance and Anti-Corruption.  Other areas of expertise include public sector and regulatory reform and development aid.


David S. Evans is the Executive Director of the Jevons Institute for Competition Law and Economics at the University College London, where he is also a visiting professor, and a lecturer at the University of Chicago Law School. He is the Founder of Market Platform Dynamics and is the editor-in-chief of Lombard Street.

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Posted : Thursday 21 May 2009 | Managing Editor

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