On May 25 we invited Professor Charles Calomiris of Columbia University to come speak at the World Bank as part of our FPD Chief Economist Talk series. Professor Calomiris discussed the on-going process of regulatory reform, particularly in the U.S., and was, to put it mildly, less than sanguine about the legislation that is currently making its way through the U.S. Congress. Watch a video of his talk (below the jump). The talk itself runs about 46 minutes, and a Q&A session follows.
That's my main takeaway from just-released data based on surveys of over 1,800 firms in eastern Europe. In mid-July 2009, firms in six countries were asked whether they had seen an increase, decrease, or no change in sales from the previous year. The numbers then were not pretty—75% of firms reported a decrease in sales (based on an average of country-level data).
On May 2 this year, Lloyd Blankfein, the CEO of Goldman Sachs, the gigantic Wall Street bank, was interviewed on CNN by Fareed Zakaria (his show is Global Public Square). Towards the end of the interview, Blankfein set up a striking distinction between the two publics of Goldman Sachs, as he saw them, and the ethical standards relevant to each public. The exchange is worth quoting in full:
ZAKARIA: We're back with the CEO of Goldman Sachs, Lloyd Blankfein. And finally, when George W. Bush tried to persuade Hank Paulson to become secretary of Treasury, as you know, he tried a couple of times and finally, he got Paulson to agree. It was a great coup to have gotten the chairman of Goldman Sachs, the most storied name in finance, to come to his administration and now, here you are with a very different reputation, particularly in the public's eyes. Do you think you can right, do you think that a few years from now, this will all have passed and Goldman Sachs will still be regarded with the same kind of awe and admiration it was or is that world over?
Greeks and Greek-Americans in the U.S. Diaspora, like myself, have been watching the strikes, demonstrations and tragic deaths that have brought our country to a standstill with mixed emotions. The images of Athens burning, tear gas rising and riot police clashing with citizens sharply contrast with images of white sandy beaches, beautiful islands, historic landmarks and mouthwatering cuisine that usually come to mind. Despite feelings of shock, sadness and even anger, to those who know Greek public political culture in its entirety, it is not surprising to most that this day would eventually come. Greek citizens, immigrants and those with strong ties to the country, admit the role that societal norms, mainly tax evasion, nepotism, clientelism and bribery (all very persistent in Greek public political culture) are in part responsible for bringing the country to the brink of collapse. For the past decade, Greek citizens did not heed warning their culture of corruption and the shadow economy could not sustain the system.
As promised, here is the video of Professor Ross Levine's presentation at the World Bank on April 28 on the theme of An Autopsy of the Financial System: Suicide, Accident, or Negligent Homicide. For background information on the event, please see Professor Levine's earlier post.
The relationship between market structure, competition and stability in banking has been a policy-relevant but controversial one (see Beck, 2008 for a pre-crisis survey). The current crisis has put the topic back on the front-burner, and particularly so in Europe, where competition concerns about the effect of national bail-out packages on competition across Europe rank high. Together with four other European economists, I have tackled this question in a recent CEPR report: Bailing out the Banks: Reconciling Stability and Competition.
The crisis has provoked two common but quite different reactions concerning the role of competition policy in the banking sector. One reaction has been to jump to the conclusion that financial stability should take priority over all other concerns and that therefore the "business as usual" preoccupations of competition regulators should be put on hold. Another reaction has been to fear that intervention to restore financial stability will lead to massive distortions of competition in the banking sector, and therefore to conclude that competition rules should be applied even more vigorously than usual, with the receipt of State aid being considered presumptive grounds for suspecting the bank in question of anti-competitive behavior. We endorse neither of these points of view.
Editor’s Note: The following post was contributed by Ross Levine, the James and Merryl Tisch Professor of Economics at Brown University. This post summarizes a presentation Professor Levine gave at the World Bank on April 28 entitled An Autopsy of the Financial System: Suicide, Accident, or Negligent Homicide? The presentation from the event is available here and video of the event will be made available soon on the All About Finance blog.
In this blog entry, I address three issues: (1) The causes of the cause of the financial crisis, (2) Core approaches to financial regulation, and (3) Systemic improvements. I also direct readers to longer treatments of each of these issues.
In a recent paper, An Autopsy of the U.S. Financial System: Accident, Suicide, or Negligent Homicide, I show that the design, implementation, and maintenance of financial policies by U.S. policymakers and regulators during the period from 1996 through 2006 were the primary causes of the financial system’s collapse. I study five important policies (1) Securities and Exchange Commission (SEC) policies toward credit rating agencies, (2) Federal Reserve policies that allowed banks to reduce their capital cushions through the use of credit default swaps, (3) SEC and Federal Reserve policies concerning over-the-counter derivatives, (4) SEC policies toward the consolidated supervision of major investment banks, and (5) government policies toward the housing-finance giants, Fannie Mae and Freddie Mac.
Let me be blunt—time and again, U.S. regulatory authorities and policymakers (1) were acutely aware of the growing fragility of the financial system caused by their policies during the decade before the crisis, (2) had ample power to fix the problems, and (3) chose not to. This crisis did not just fall from the sky on the heads of policymakers; policymakers helped cause this crisis. While Alan Greenspan (former Chairman of the U.S. Federal Reserve) depicts the financial crisis as a once in a “hundred years flood” and a “classic euphoric bubble,” the evidence is inconsistent with these overly simple characterizations. More importantly, this focus on “irrational exuberance” self-servingly deflects attention from the policy determinants of the crisis.
Regulators were not simply victims of limited information or a lack of regulatory power. Rather, the role of regulators in the five policies I mention above demonstrates that the crisis represents the selection—and most importantly the maintenance—of policies that increased financial fragility. The financial regulatory system failed systemically. To fix it, we need more than tinkering, we need systemic change.