Spiegel presents the views of five winners of the Nobel Prize for Economics on what the future financial order should look like. This is what my brain registered:
Phelps: This is not the end of capitalism, there is more good than bad in the capitalist model, although some institutions (banks, rating agencies) have behaved wrongly recently, so wrongly that the whole world is paying for their sins. More and better non-suffocating regulation for banks, leaving rich-uncles (angel investors), hedge funds and venture capitalists the role of investors or lenders of new and/or small businesses.
Lucas: There are more than one concern about the current financial crisis. One of those is the regulation process, but this one is not of current concern although something that can be left for the near future. On the other hand, dealing with the current crisis via central bank intervention is something to put all efforts at this very moment and the fed is doing a good job now; Injecting proper amounts in reserves with the risk of having inflation, a problem that can be fixed relatively easy. If the FED continues with its aggressive lending policies the probabilities of avoiding a recession larger than that of the 1980’s are very good. The regulation problem can be solved having a competitive bank system with government-insured deposits; with an eye on those institutions trying to profit from this system (offering riskier investments with higher returns, which in turn would lead to the same problem).
Selen: The devil is in the details. In the last ten years, a revolution has happened in the bank system. This revolution brought new products, more sophisticated and hard to asses in terms of their risk. Evaluation of these new investment products should not have happened in the first place, they should not have been given risk-related labels. Agents do not behave rationally, as traditional economic theory predicts, if it were the case markets would not need any kind of regulation at all. Reality shows us something very different, agents do not behave rationally and thus regulation and more empirical and experimental research is needed. This does not apply only to banks, but also to other institutions such as hedge funds.
Stiglitz: Behind the macroeconomic crisis is the human toll. Families are losing what they have hardly earned, their homes, jobs, life savings, their dreams. This is not only true for American families, but also true for families in developing countries who are paying others people’s naughtiness. Lots of money is going to be needed for a safe survival of the current financial downturn, this need surpasses the IMF capacities but the resources needed can be found in Asia and the Middle East, the question is what incentives they have to put their hardly earned wealth on the table, with IMF’s awkward past performance. Regulation, one of the primary culprits of the current crisis, failed not only at domestic level but in the whole international scene “The new framework of bank regulation, was based on self-regulation, itself an oxymoron”. In addition, the lack of international coordination is making the crisis worse. Now the US and Europe are doing exactly the inverse the IMF has been asking (forcing) developing countries to do, this is like a bipolar policy scheme, supplanting pro-cyclical policies with the opposite. A new international financial system regulation needs to be in place very soon and it should include a new coordination design, with a new global reserve currency and a new regulation devise has to be developed worldwide for a stable and prosperous 21st century.
Samuelson: Rationality and experience move Samuelson to the dynamic moving center, and that is what he proposes for countries, rich and poor, to move to in order to regulate capitalism at all its levels, diminish the absurd inequalities that deteriorated the industrial progress. Freedman and Hayek where wrong and with them all the libertarians. Bush will figure in history books as the worst president in the 234 years of US history.
It seems to be all regulation and aggressive governmental intervention. We know that already, but it is always spectacular to read it from the Nobels in Economics isn't it?