One of my favorite economists, Joe Stiglitz points his finger to the economics profession (along with political and financial institutions)for the current financial mess. Watch the full video here.
Another favorite economist, Michael Spence argues for better understanding and regulation of risk. He argues that the current financial crisis will ultimately lead to the demise of unregulated vehicles such as hedge funds.
“People will put a high premium on financial stability,” he says. “I think you can confidently predict that regulation won’t be fragmented so nobody can see the whole system.
Also, there won’t be big unregulated sectors – hedge funds, credit default swaps, you name it. They’ll be regulated and they’ll have capital requirements.”
“The problem here is that people simply did not understand how much risk there was in the system,” he says. “We simply didn’t have a measure of risk.”
Among Spence’s suggestions is the setting up of an international institution that not only diagnoses when certain economies or financial systems are looking vulnerable but also has the legitimacy to do something about it.
“An IMF with teeth – including domestically,” he suggests. “There’s no entity in the US where someone thinks the main job they have when they get up in the morning is to figure out and report to the various authorities and the financial sector that there’s a growing problem of risk. Nobody does that.”
The other favorite economist, Dani Rodrik argues
In view of what was about to happen, it might have been better for Paulson to hold his nose and do with Lehman what he had already done with Bear Stearns and would have had to do in a few days with AIG: save them with taxpayer money. Wall Street might have survived, and U.S. taxpayers might have been spared even larger bills.
Perhaps it is futile to look for the single cause without which the financial system would not have blown up in our faces. A comforting thought ― if you still want to believe in financial sanity _ is that this was a case of a ``perfect storm," a rare failure that required a large number of stars to be in alignment simultaneously.
So what will the post-mortem on Wall Street show? That it was a case of suicide? Murder? Accidental death? Or was it a rare instance of generalized organ failure? We will likely never know.
The regulations and precautions that lawmakers will enact to prevent its recurrence will therefore necessarily remain blunt and of uncertain effectiveness.