Regulatory reform vital for financial stability, panelists say

There is no single villain in the story of the recent global financial crisis, and no quick or easy path to recovery.

And while the U.S. government and the international community have taken some actions to contain the damage, the crisis may become what Jonathan Kirshner, professor of government and director of the Peace Studies Program, called "a victim of its own success ... just bad enough not to allow for the truly fundamental reforms that we might have seen."

Kirshner advanced that idea, along with a host of others, as moderator of the Lund Critical Debate in Kennedy Hall's Call Auditorium Sept. 15.

Panelists Barry Eichengreen, economist and political scientist at the University of California-Berkeley, journalist and author Robert Kuttner, and Eswar Prasad, Cornell's Tolani Senior Professor of Trade Policy, spoke on the causes and possible outcomes of the financial crisis in the annual debate, which is part of Cornell's Foreign Policy Initiative led by the Mario Einaudi Center for International Studies.

The crisis was a predictable result of too little regulation, too much speculation, a glut of foreign lending, and run-of-the-mill corruption, said Kuttner. But speaking out about these dangers came with serious consequences.

"Economists who questioned whether financial markets really priced assets and risk accurately were few in number, and they were scorned," he said.

The causes of the crisis include a combination of factors that worked together to throw the market's normal equilibrating forces out of balance, said Prasad.

"There have to be systems in place that prevent this from getting out of hand," Prasad said. "Even if people want to do crazy things, there has to be something in the system that prevents it from becoming a systemic event that hurts innocents. And clearly a lot of innocents have gotten hurt in this bloodbath."

Eichengreen cautioned that recovery will be a long and difficult process. "We are not going to recover and grow our way out of this morass quickly," he said. "We dug ourselves a deep hole, regrettably, in the course of this financial crisis; and now it will take awhile to climb back out of it."

Meanwhile, he said, the failure among the majority of economists to predict the catastrophe may be a powerful lesson in behavioral economics.

"I lost sleep in the winter and spring wondering why I, as a student of the Great Depression, hadn't seen it all before it happened," Eichengreen admitted. "In fact, we, academic economists, had in our intellectual portfolio ... all the tools needed to understand and anticipate this crisis."

Kuttner argued that bailing out the major financial firms may have done more harm than good.

"The rescue was, for the most part, bad policy," he said. "Because instead of reforming the system in a fundamental way, in a moment when the system was in a rare state of political vulnerability, the 'reform' propped up the system."

Recovery is possible, the panelists agreed; but meaningful regulatory changes are crucial. And as time passes and the crisis recedes, the chances for garnering the political will, nationally and globally, for such changes are diminishing.

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Sabina Lee