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.
At a press briefing earlier today at the Spring Meeting, Philippe Le Houérou, World Bank Vice President for Europe and Central Asia, spoke of how the region has faced the greatest fiscal pressures among all the world's regions during the global economic crisis.
20 out of 30 countries in Europe and Central Asia have experienced a decline in GDP in 2009, and Le Houérou remarked that the region will face a slow recovery in the year ahead:
"2010 is going to be a tough year for the Region with growth projected at around 3 percent. The prospects for 2011-2013 are only slightly better. Rising joblessness is pushing households into poverty and making things even harder for those already poor."
With the global economic crisis in the rearview mirror, Latin American economies are on a fast track to full recovery and will post a solid 4 percent growth for 2010.
This is no small feat, says the Bank’s chief regional economist Augusto de la Torre, in his new report on the region’s economic prospects ‘From Collapse to Recovery’ (pdf). The region’s rebound, he explains, is one of the world’s strongest, second only to Asia’s, which is the main engine pushing global economies towards a full-fledged recovery.
Editor's Note: John Nellis was a Senior Manager in the World Bank's Private Sector Development Department. He is now Principal of the consulting/research firm, International Analytics.
Haven't received your all-access pass to the World Bank Group's spring meetings? You can still get a taste of the action. Danny Leipziger, a former Vice President of the World Bank and now a professor at George Washington University, is leveraging off the meetings to organize an event taking place this Monday at the George Washington University.
Ivailo Izvorski, the Lead Economist for the East Asia & Pacific region of the World Bank (and our latest blogger, below this post), and Vikram Nehru, Chief Economist for the region, held a live online chat a couple of days ago where they answered a good number of questions about China's currency, GDP forecasts, free-trade agreements, and structural reforms, among others.
No, I'm not referring to Tiger Woods's recent return to golf. George Soros is trying to rebuild the economics profession from the ground up at the Institute for New Economic Thinking. The site has a ton of interesting videos, including the one below by Nobel laureate George Akerlof (of The Market for Lemons fame).