Klaus Schmidt-Hebbel, chief economist of the OECD said that the world has been saved from another “great depression” by massive state intervention although the governments need to be wary of the “trap” of excessive regulation. Excessive regulation, he said, can do damage by inhibiting future financial innovations, market integration and growth. The economic times quotes him as saying the the world requires better regulation and not just more regulation. Schmidth-Hebbel’s interview the OECD’s keenly-awaited Economic Outlook Report which is due next month. The report will examine the impact of the financial crisis on the real economy and ask what lessons can be drawn from it. In that light then, the article raises two interesting questions:
- Should the unprecedented state intervention of the last two weeks to save banks in Europe and the US be seen as a temporary move by governments as lenders of last resort in line with the lessons of the 1930s Depression?
- Or should it be the start of a reversal of the opening up and deregulation of global markets since the 1980s?
I am interested in seeing what everyone else thinks and what your views are on the same. I personally think it is the first option over the second...may be...?
5 comments:
I think that it should be somewhere in between the two options. I think more regulation is needed than we had before the financial crisis happened, but we need to be careful not to regulate the markets so much that we loose the principles of our market economy.
As we all know, the economy would be worse off if there were no government regulations. However, I feel that the government should not make all of new regulations completely permanent. They must forecast change in the market as we will not always be in a depression. Also, the government must be careful how much they intervene in the market..."Excessive regulation can do damage too, by inhibiting future financial innovations, market integration and growth," said the top economist at the Organisation for Economic Co-operation and Development, one of the main forums for
international policy-making.
I think it will be more like the first because although in times of extraordinary fear extreme measures will be taken, presumably the market is going to start flattening out soon if it hasn't already. Once the initial fright is over I think Americans, especially policy makers, will vehemently reject any sort of heavy regulation because of the inherent (in my opinion somewhat over dramatized) fear that we have as a people of anything that smells faintly of socialism. However, after the fright this gave everyone, its impossible to really forecast what the American public will accept in promise of safety.
I think Jake is right. It's very hard to draw the line of whether there is "enough" regulation. I wouldn't be so sure as to which direction the government will choose for the next few years. Public started to blame Greenspan for too much deregulation. However, if we stop and think, is it somewhat saying the elements of capitalism are not working? Thus, I also think it might be the first option.
I agree that it is somewhere in between. I don't think excessive regulation will be or should be a permanent move on the government's part. At the same time, the deregulatory policies of the 80s allowed banks to take risks, both with stocks that were too risky and with money they shouldn't have invested. I read an interesting article in the NYT about how Greenspan's unwavering faith in the market system and resistance to government intervention helped lead to the crisis. He said something along the lines of 'the market works perfectly, only Wall Street was too greedy and dishonorable and screwed it up.' Considering that we live in an imperfect world (and considering the assumption in economics that we are rational beings) I think regulation would help people (and banks) reconsider their invesments and allow them to act more rationally.
I also agree that better regulation, and not more regulation, is needed. Also, better enforcement of those regulations, since there are some regulations in place that financial institutions have ignored (a required amount of capital, for instance) and that regulators have overlooked. When the crisis abates, I think the government will loosen some of its hold, but I hope in the future they will include in the law (and not just warnings) that banks should not expect this sort of bailout to be permanent. I don't think moderate regulation will hinder financial innovation. And even if it does, is such innovation and uncontrolled growth worth the consequences if the market's major players start to fail?
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