☆☆四星级☆☆Economist Debates阅读写作分析--Finacial Crisis（4）

PassonChenUID: 2614331

The moderator's closing remarks

There is a steely edge to both closing statements that gives a hint of how much heat this topic will generate in society at large after the crisis.
Myron Scholes, speaking for the motion, probably has the harder task. That is because, with so much taxpayers’ money shovelled towards saving banks from the follies of their bosses, it is predictable that demands for retribution are high. He concedes that some regulation is necessary, but passionately defends—and details—some of the financial innovations that deregulation has helped produce. He also makes a suggestion which he should have made earlier: that bad regulation may bear as much responsibility for the crisis as deregulation; he backs this up with several examples of how state intervention helped worsen America’s housing crisis.
Joseph Stiglitz, speaking against the motion, professes to share a lot of common ground with Professor Scholes, but I suspect it is not as much as he thinks. They both want better regulation, but Professor Stiglitz also wants more of it. Some of the differences are semantic (are Professor Stiglitz’s “speedbumps” any different from Professor Scholes’s “dynamic capital requirements”?), but some are profound. Professor Stiglitz appears to make his strongest call yet for a big re-regulation of the financial system, focusing on “core” institutions such as deposit-taking banks and pension funds. “The financial system has repeatedly shown that, without regulation, it simply cannot be trusted to manage other people’s money in a prudent way, without putting the entire economy at risk.”
Readers must decide which course of action they prefer, a light touch or a strong hand—and vote accordingly. They know that banks have gamed the regulatory system recently; but is that an argument for more regulation, or less? Would more safeguards help, or should we simply improve enforcement of existing ones? Remember that regulations tend to grow like weeds. Remember, too, that deregulation can leave holes in the ground big enough for money to pour away through.
When the earth stops shaking after this crisis, this is a debate that is likely to exercise governments around the world, shaping the future of finance. It is worth remembering that today’s advocates of wholesale re-regulation will not speak so loudly if the measures governments have taken to end the crisis bear fruit, limiting taxpayers’ losses. That, however, is still a big if.

The proposer's closing remarks


Joseph Stiglitz gives the false impression that I am against regulation. We have laws and we need to enforce them. He asks that I enumerate financial innovations and he argues that innovations that did occur were of little economic value. Banks have implemented myriad innovations that improved efficiencies and created value: (1) transacting in markets—eg, competitive markets, electronic trading, portfolios and individual stocks, derivative portfolios; (2) financing large-scale projects—eg, infrastructure projects, global investments, mergers and acquisitions; (3) saving for the future within one’s own country—eg, facilitating the movement of retirement savings from defined-benefit to defined-contribution plans; (4) risk transfer and risk sharing—eg, financial futures and over-the-counter hedging mechanisms: (5) development of market price signals—eg, multiple signals in many new markets; (6) and the reduction of market asymmetries, the dead-weight costs of transacting or interacting with others.
Before we impose “heavy regulations” such as undefined “speed bumps or limits”, we should review what did go wrong and why. After an aeroplane crash, engineers not politicians examine, in detail, the causes of the crash before making recommendations. We need the same here. For example, Mr Stiglitz suggests that we eliminate “predatory lending”. Although not a legal concept, if it makes sense to do so, we certainly should stop it, if legally feasible. As I said previously, transparency is a political catch-all and without a stated purpose for the information supplied is non-operative.
He argues that the venture capital industry in Silicon Valley has added value by innovating to supply capital to high-tech companies, a good innovation. Yet he also argues snidely that these firms are far from Wall Street, the heart of the financial crisis. He forgets, however, that Countrywide Financial (acquired near bankruptcy by Bank of America), Golden West Financial (acquired by Wachovia which was acquired near bankruptcy by Wells Fargo Bank) and Washington Mutual (in bankruptcy) surround Silicon Valley. And these banks sold their subprime-mortgage portfolios to Fannie Mae and Freddie Mac, Washington stalwarts. And Silicon Valley uses Wall Street to raise capital for their successful firms.
Mr Stiglitz argues for a flexible regulatory system. Regulation and flexibility are incompatible. And this leads me to fundamental questions that have judicially been avoided. What responsibility do the regulatory system and governments play in causing this and predecessor financial crises? If we agree that the shovel-full of sand that made this sandcastle collapse was the housing-price declines leading to subprime defaults, let us not in the full-scale review of this crisis allow government to escape from the light of inquiry. Why were Fannie Mae and Freddie Mac formed in the first place? Why was a quasi-government agency encouraged to issue large amounts of debt (not part of the federal deficit) to foreign countries and entities with an implicit guarantee, which subsequently became an explicit guarantee, to finance a mortgage boom? Why was legislation put into place to mandate the growth of subprime lending? Did government have a role in changing housing finance from that of the “milk cow” model, that is, an ability to pay down a mortgage from income after a substantial down payment, to that of a “beef cow” model, that is, no down payment and an ability to pay conditional on housing prices continuing to appreciate? Did the Federal Reserve Bank err by trying to save necessary adjustments to the economy after the “dot com and telecom” bust by keeping the real rate of interest low and, as a result, encourage asset-price bubbles, capped off by the Greenspan statement in mid-2003 that any “rate increases would be measured?” Why did Congress ignore the warnings that restrictions should be placed on the growth of subprime lending?
Governments mandated that the Bank for International Settlements develop risk-management systems, so-called value at risk, that was so flawed that risk management became impregnable to many in the banks, in addition to senior managements and their boards. Accounting systems became a Rube Goldberg invention. The Treasury and the Federal Reserve Bank did not have a battle plan in place to tackle this crisis or any crisis. For example, letting Lehman Brothers fail quickly led to tremendous unintended consequences (eg, loss of faith in money markets and banks, a stock-market crash and the subsequent “failure” of the entire global financial system). Forget moral hazard. The issue here was not whether to let Lehman Brothers fail, but to do so in an orderly manner. Interconnected financial markets need time to disentangle themselves.
For each bank anticipates that it will be able to liquidate financial instruments given anticipated flows in the market. The problem arises, however, when many banks attempt to liquidate assets at the same time to reduce risk and leverage. The information set is so vast that no intermediary knows what the simultaneous demands for liquidity might be among other banks in the system and what sequences will unfold. With losses, entities sell securities that are liquid and have not fallen in value. These sales, in turn, reduce prices and liquidity there as well, causing further sales and an increase in liquidity prices. Potential buyers do not know how much inventory still needs to be sold and if prices change whether other banks will be forced to sell as well. In addition, buyers do not know whether price declines result from liquidity or valuation issues and resist buying until they sort that out.
A new accounting/risk management system can be developed that not only benefits the financial system but also is regulatory "light". Capital requirements will become more dynamic. Charging banks for insurance in advance of future crises, which will still occur, will mitigate costs and will influence risk taking. Since every crisis is different, instead of moving forward with a micro-engineered approach that fights the last war with heavy regulations that will not protect against the next crisis, let us take this opportunity to establish a new framework that mitigates the costs of future crises and still fosters innovation.

The opposition's closing remarks

Myron Scholes and I have now agreed on many points concerning regulating the financial system, most importantly that at least part of the problems we are now facing is a result of inadequate regulation.  We even agree on many of the components of the regulatory system: restrictions on leverage, better accounting frameworks and compensation schemes that “[align] interests with all stakeholders including taxpayers.”  Professor Scholes and I agree strongly on the dangers of some of the prevalent forms of compensation:  “the interactions of pay systems that are geared to a standard-form accounting system based on reported earnings are susceptible to gaming at the expense of shareholders and other claim holders.” The problem is what was at stake was not just a zero sum game, in which the executives of the firms gained and others lost.  It was a negative sum game.  Our society as a whole has lost as a result of misallocated capital and excessive risk taking.  Rewarding executives on the basis of stock options provided incentives for providing distorted information—putting so much activity “off balance sheet”.  It was easier to boost executive pay by increasing stock price through augmenting “reported income” than by doing anything real.  But distorted information leads to bad decisions, as we have seen.
Indeed, successful reform cannot be limited to the financial system alone.  Flaws in systems of corporate governance contributed to the creation of these flawed compensation schemes, which resulted in excessive risk taking and distorted information.  Stronger and more effectively enforced anti-trust laws might have reduced the number of institutions that were too big to fail—some of which are now so big that they are almost too big to bail out.  Regrettably, as we rush to save the economy today, we are creating even bigger institutions—setting ourselves up for even greater problems in the future unless we adopt adequate regulatory structures.
Professor Scholes and I also agree that part of the problem is the failure to adequately enforce existing rules. The Fed had regulatory authority that it failed to exercise—until after it was too late, closing the barn door after the horses were out. We need a reform of our regulatory structures.  Again, part of the problem is incentives.  Self-regulation does not work.  Those in financial markets had an incentive to believe in their models—they seemed to be doing very well.  There was a party going on, and no one wanted to be a party-pooper.  That’s why it’s absolutely necessary that those who are likely to lose from failed regulation—retirees who lose their pensions, homeowners who lose their homes, ordinary investors who lose their life savings, workers who lose their jobs—have a far larger voice in regulation.  Fortunately, there are very competent experts who are committed to representing those interests.
Professor Scholes and I continue to disagree on two points.  He continues to worry that regulation will stifle innovation. No one is disputing that America has benefited from innovation over the past quarter-century or that there were regulatory excesses that need to be corrected.  I’ve argued that appropriately structured regulation will encourage the right kind of innovation.  With less scope for innovation directed at regulatory, accounting and tax arbitrage, effort will be directed at innovations that actually lower transaction costs and help households and firms manage the real risks which they face.  
Within the financial sector, there have been important innovations, like venture capital firms.  But today, even this sector may be facing difficulties, another part of the collateral damage from the misdeeds of the rest of the financial sector.
The financial sector accounted for more than 30% of corporate profits in recent years—and yet, from a longer-term perspective, has contributed nothing—as the losses since mid-2007 have more than obliterated the profits of the boom years.  The misalignment of private returns and social returns is obvious—while many of the industry’s executives are far poorer than they thought just a few months ago, most have done, by the standards of ordinary citizens, very well indeed.  
Professor Scholes also takes exception to one of the several suggestions for regulatory reform.  I hope that means that he is in agreement on most of the other regulatory reforms—such as restrictions on incentive structures, conflicts of interest, predatory lending and other such abusive practices, anti-competitive behaviour, and the imposition of “speed limits” (designed to restrict the excessively rapid expansion of, say, mortgage lending).  He worries about the suggestion for a financial-product safety commission.  Echoing a famous line, he seems to be arguing simultaneously that it can’t be done—there are too many products—and that it is already done—it would be duplicative of what is being done by, say, the rating agencies.  To be sure, it can’t be done perfectly, but it can be done far better than it has been.  The rating agencies have done an admittedly miserable job, but that is perhaps partly, again, because of flawed incentives—they were being paid by those that they were rating.  Competition among the rating agencies led to a race to the bottom.   Fewer products, with greater standardisation, would themselves have further benefits, greater transparency and greater competition.  It is absolutely essential that the risks associated with the financial products bought and sold by our “core financial system”, commercial banks and pension funds—be fully understood.
I believe that great latitude should be given to consenting adults in dealing with each other, as long as they do no harm to others.  But these core financial institutions are entrusted with others’ money.  When they fail, our economic system fails, and there are large numbers of innocent victims.  That is why the government has come to the rescue—not just this time but repeatedly.  The financial sector has repeatedly shown that, without regulation, it simply cannot be trusted to manage others’ money in a prudent way, without putting the entire economy at risk.  And ordinary depositors, small investors and those saving for their retirement simply cannot, by themselves, exercise adequate oversight.  This is a quintessential public good.  We all benefit from well-regulated innovative financial institutions.  Our financial institutions have failed us—but in part they were simply doing what private-sector firms do, maximising the well-being of their executives.  We need a 21st-century regulatory system to make sure that, in the future, they take into account the broader consequences of their actions.  
Good financial institutions are essential to a well-performing economy.  Our financial institutions have failed us, with the predictable and predicted consequences.  Part of the reason is inadequate regulations and regulatory structures.  We can do better.