Kirshner

The global financial crisis of 2007-08 was a watershed event in world politics, Jonathan Kirshner argues in his latest book, “American Power after the Financial Crisis” (Cornell University Press, 2014).

Economic effects of the crisis – and what the professor of government calls the “new heterogeneity of thinking” – have altered the international balance of power and will make cooperation over the management of international finance much more difficult.

Perhaps even more alarming, Kirshner holds that the problems that caused the financial crisis have not been adequately addressed. In an interview with the Cornell Chronicle, Kirshner tells us what keeps him up at night.

Kirshner: Our continued vulnerability to another financial crisis is a huge concern. Untended financial systems have a tendency toward crisis. The longer you allow financial systems to be unsupervised and deregulated, the more you encourage risk-taking behavior that creates underappreciated risks to the system as a whole – that is, systemic risk.

Chronicle: Then feds will just give another bailout, another stimulus package?

Kirshner: The problem is that we used all our political will to bail out the financial system from its most recent crisis caused by these practices. I am quite concerned about what would follow if there was indeed another financial crisis generated by the American system. Because of the spending choices made over the past 15 years, and the government response to the most recent financial crisis, we lack both the fiscal flexibility and the political will to take the measures that would be necessary to deal with a new economic crisis. As it is we can barely mobilize the resources needed to address the current economic downturn. And the American financial system remains riddled with systemic risk.

Chronicle: Have we learned nothing?

Kirshner: Our economy has a financial services sector that remains enormous, concentrated, enmeshed and politically powerful. Because the emergency measures taken by the government, fortunately, stopped the financial crisis from causing a second Great Depression, the political momentum for basic reforms to the system stalled. We did not have a national conversation that asked basic questions such as “What does a healthy financial services sector look like?” “Can we imagine a financial sector that is too big, or too concentrated, or too enmeshed?” Instead, we chose something very close to “business as usual.”

Chronicle: Who disagrees with you?

Kirshner: There is a point of view that says only the market can answer these questions, and that the answers generated by the market must be the right ones. From this perspective, it is impossible to argue that any one firm is “too big” or that the financial services sector is “too large.” Market forces, from this perspective, will determine what is best.  But although most markets work well most of the time, finance is different. As the historical record shows, the financial sector, especially when left to its own devices, tends toward crisis. The risk of serious crisis is always there, and is often very high. How to manage that risk is an important question for public policy.

Chronicle: You liken regulation of the financial sector to public oversight of nuclear power. How so?

Kirshner: The two are actually quite similar with regard to the role of government. The generation of nuclear power inherently produces toxic waste. As a society, we don’t say, “Well, the market will decide how that toxic waste will be disposed of.” Instead, the government makes rules to determine how this terribly dangerous material will be handled. Similarly the financial system, as a natural side effect of its operations, generates dangerous systemic risks. Once again, the role of government is to establish and enforce rules to protect the public from the toxic side effects produced by the industry.