Monday, April 14, 2008

Explaining the crisis (4)

"With due respect to John and Andrew," says Zdenek Drábek in an email, "what their interesting exchange demonstrates is that it is time to clarify the role of regulators. There seems to me to be two separate issues under discussion - regulating for 'market stability' (monetary policy) and 'bank supervision' (against fraud, 'tunnelling' etc.). I know it is sometimes difficult to distinguish between both activities - viz. Bear Sterns, Northern Rock - but the distinction is important for the debate about the role of regulators."

Another thought I heard recently is a proposal to have two types of banks or investment institutions, one investing safely and the other speculatively. I don't know who has suggested this and if my reporting is correct, but it made me think about the viability of such proposal. Is it thinkable that we would have the first type as the dominant financial institution and the second type as the play game for speculators? Obviously, those engaged in the speculative business should not have their losses covered by the community. But where do you draw the line between safe and speculative investments? Is gold a safe investment? Isn’t its price as volatile as that of newly created financial instruments?

Don't get me wrong, in my view the "viability" argument should not be used to reject fruitful ideas. It should be used for refining and sharpening proposals. If there is anything we need now, it is creative proposals. Unfortunately, most policymakers tend to be very little creative and not willing to discuss the thinkable.

The "viability argument" is one obstacle that blocks solutions, vested interests and power is another.

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