Before I get to the papers Andrew Sheng and John Williamson sent me, I'd like to quote from a conversation I had with Robert Triffin a long time ago.
Entering Triffin’s room at the University of Louvain-la-Neuve on that crisp, blue-sky morning of 30 January 1985, I saw papers piled up everywhere, making me feel at home immediately. Triffin asked, "Why don't you have anymore in the Netherlands people like Jan Tinbergen? Where are the new Tinbergens?"
I tried to answer his question, prompting Triffin to observe, “People tend to be too conformist. Economists, by trying to explain the policies that happen, tend to whitewash and justify them.”
“Why?” I asked.
“They want to be ready to move from academics to political jobs.”
I don’t think that is the only, or major reason for being conformist… Anyway, let’s turn to Andrew and John, and see if they are "whitewashing and justifying" the policies that led to the international credit crisis.
In his paper, John blames the supervisors. “The prime responsibility for the financial turbulence that is currently afflicting much of the world is to be found in inadequate supervision. The authorities welcomed the process of financial intermediation, rather than recognizing its dangers and imposing rules that would have provided a counterweight to the greed that drives the private financial sector.”
Andrew, on the other hand, himself a former financial regulator, recognises that regulators do share some of the blame, but thinks that their problem is that they lack understanding of what happened in the financial markets. And, he observes, they may have contributed to the emergence of crisis by providing a too stable financial environment. “Prolonged stability of values of risks, liquidity and prices may lull market participants into leverage behaviour that escalates until the system becomes more and more unstable.”
In a subsequent discussion by email, Andrew stressed he does not think it is fair that regulation is to bear the brunt of the blame. “Regulators do not create bubbles and individually, there is very little that they can do to stop them appearing. Central bankers, on the other hand (and I am a former central banker) have a lot of responsibility on that front, but the prevailing mood is that they can't predict them nor can they determine when they can peak, so they prefer to deal with the aftermath.”
I think Robert Triffin would have loved to participate in the debate. Would he have accused John or Andrew of whitewashing and justifying the policies that led to the international credit crisis?
(to be continued)