Scholars Are "Keynes' on Regulation: Economists Argue Financial Instruments Need More Scrutiny

Oct. 10--Before the financial meltdown, before the housing bubble, even before the dot.com crash, the weakness of the American economy had its roots in the collapse of its industrial base.

That was the argument of a Cornell University scholar, who said Friday that it was therefore appropriate that a conference of economists pondering the roots and the remedies of the Great Recession chose to meet in Buffalo.

"All progressive economists, wherever they live, are residents of Buffalo," said Charles J. Whalen, a Ph.D. economist and former Buffalo resident, in an echo of the speech President John F. Kennedy delivered in West Berlin. "And, therefore, as an economist, I take pride in the words "Ich bin ein Buffalonian.' "

Whalen was a presenter at the Cross-Border Post Keynesian Conference, a bi-annual gathering of like-minded scholars hosted this year at the Burchfield Penney Art Center by the Buffalo State College economics department. He was among those arguing that an economy that no longer invests in the manufacture of tangible goods finds itself inventing other, much more mysterious things in which to invest and, hopefully, make money.

But, they said, exotic instruments such as securitized mortgage certificates and credit default swaps not only don't provide the industrial infrastructure -- and the jobs -- that the old manufacturing economy built up, they also aren't fully understood by those who create them, those who buy them and those who regulate them. Or those who would regulate them if the law hadn't been changed to allow those financial processes to operate beyond the reach of government.

Eric Tymoigne, an economics professor from Lewis and Clark College in Portland, Ore., argued that new financial instruments should be regulated in the same manner as medicines, tested and approved before they are allowed on the market.

"If the side effects kill you," Tymoigne said, "it probably wasn't a good innovation."

Presenters in Friday morning's sessions condemned the deregulation of financial institutions that has been going on over the past 15 years, with the support of both Democrats and Republicans.

Robert W. Dimand, economics professor at Brock University in St. Catharines, Ont., said investment bankers convince themselves, and then convince government, that they can control their own creations and that they no longer need the kind of regulatory regime that was put in place in answer to the Great Depression.

"The mistakes in policy did not just happen," Dimand said. "They were mistakes that the banks lobbied for."

Participants said the deregulatory trend ignores the lessons of history as well as the precepts of noted economists such as the namesake of their conference, John Maynard Keynes, and the post-Keynes scholar that most of them cite in their work, Hyman Minsky.

Both taught that governments need to be more aggressive than they usually are in regulating financial markets and in stepping in with such things as public works spending during economic downturns. But, while Keynes is often cited (wrongly, these scholars contend) as arguing that government intervention is needed only rarely, Minsky was more explicit in claiming that markets are inherently unstable and run the risk of frequent global crashes without outside supervision and, as needed, intervention.

Whalen lamented that it is only in times of financial crisis that government leaders, and even most mainstream economists, heed Keynes or even hear tell of Minsky. The rest of the time, they said, both government and academia hew to the belief, which he called seriously mistaken, that markets are rational and self-regulating.

Buffalo State professor William T. Ganley quoted 19th century journalist Charles McKay to make his point: "Men think in herds and go mad in herds. They only recover their senses slowly, and one by one."

The conference continues today with sessions for scholars, students and, starting at 2 p.m., presentations that are open to the public at no charge. They include a lecture by Buffalo State history professor Mark Goldman on the Great Depression and Buffalo art culture, a panel discussion on the future of capitalism and, at 8 p.m. a presentation of songs, stories and images from the Great Depression entitled "... Whose Names Are Unknown."

gpyle@buffnews.com

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