I’m just back in Houston from speaking at a conference at the Columbia Law School, titled “The Financial Crisis: Can We Prevent a Recurrence?” It was probably the best conference I have ever attended. It was a gathering of a truly talented group of academics (mainly legal scholars, but some economists), practicing lawyers, finance practitioners, central bankers (US and non-US), and government folks, all of whom offered excellent insights on various aspects of the crisis, and policy responses to it. The organizers, Jeff Gordon of Columbia and Howell Jackson of Harvard Law School, are to be congratulated for putting on a phenomenal event. It was a privilege to participate.
I spoke on clearing. (Go figure.) My remarks were well received, I think. Robert Pozen of MFS Financial Management said in his remarks that he didn’t agree with a lot of what I had to say, but that any supporter of mandated clearing (which he is) had to take my critique seriously, and address the concerns I’d raised. Which is quite fair. I don’t claim to have all the answers, but I think I have good questions, and hope that posing them will contribute to the formulation of better policy. (I started my talk with Hayek’s quote “The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.” I think that some in policymaking circles think they know far more than they do about the systemic implications of clearing, and all I aim to do is what Hayek says economists should do.)
The conference finished up with a session on “Radical Solutions.” Charlie Calomiris and Luigi Zingales gave very interesting talks that echoed two major SWP themes, namely that too big to fail is the result of governments’ inability to commit credibly not to bail out, and that the ultimate source of moral hazard and the excessive growth of financial institutions is that their creditors are convinced that they will be bailed out, and hence are willing to lend on terms that do not reflect risk. They offered interesting proposals to address these problems.
One thing that struck me throughout the event is the widespread belief that financial reform efforts are dead in the water. Some considered that unfortunate. Others, including yours truly, were not so negative; not that I/we don’t believe that some sort of reform is needed, just that the alternatives on offer are likely to be counterproductive.
Today’s luncheon speaker was Henry Hu, a University of Texas law prof now heading up the SEC’s new Division of Risk, Strategy, and Financial Innovation. I don’t always agree with Henry–I have criticized his analysis of the “empty creditor” problem, for instance–but he is obviously a thoughtful man who is bringing tremendous energy and enthusiasm to his DC job. In his talk, he asked the audience to let him know whether they observed any new product or trading strategy that threatened to destabilize the financial system. That’s fine, but I would also hope that he would be equally alert to regulations or legislation that could have deleterious effects; and be particularly alert to the creation of policies that could encourage the development of problematic strategies and products in direct response to such policies.
Friday’s dinner speaker was Simon Johnson. I have an extremely mixed reaction. I share his concern about too big to fail, and the potential for legislative and regulatory capture by the finance industry. But given that I consider much of the proposed legislation to be counterproductive, unlike Johnson I don’t believe that it is axiomatic that bank opposition to this legislation is an outrage. His is a very Manichean world view, with big finance as the epicenter of evil, and those who fight big finance as the avatars of goodness. Not quite that simple, IMHO.
It was weird, to say the least, to hear someone channeling Andrew Jackson in a Brit accent. He started out talking about TR taking on the trusts, and FDR taking on the banks, but I was thinking that his real hero should be Andy Jack. Sure enough, a few minutes later he said that the true first opponent of financial oligarchy was Jackson.
Again, I have some sympathies; much of Jackson’s critique was correct, as is some of Johnson’s. But much of Jackson’s criticism was misguided, and what’s more, the system that he advocated to replace the corrupt Second Bank of the US was plagued by chronic instability and crisis. Johnson was less than candid about Jackson’s banking legacy: he would only admit that the post-Jackson banking system was “complex.” But to admit that a previous populist response to concentrated financial power was hardly ideal would undermine Johnson’s populist jeremiad against today’s concentrated financial power. That failure to confront the possibility that a populist reaction can be destructive undercuts Johnson’s credibility in my eyes.
Johnson’s tone was also extremely off-putting. It was snide and arrogant. He came off as a populist provocateur poseur. Not particularly appealing. But worth hearing nonetheless.
At the conference, there was a lot of agreement about the underlying causes of the crisis. There was, however, less agreement about policy responses going forward. That’s not surprising, but given the caliber of the people at the conference, it does suggest that we are in for a long debate over policy going forward.
And while I was at the Columbia conference, SWP daughter Renee was at a conference at Texas A&M, sitting 10 feet from George H. W. Bush and Barbara Bush. And someone really important: Chuck Norris. And she lived! (He gave the death glare to one of her friends who was laughing too hard at something.) Nobody quite that famous at Columbia, but it was worth the trip nonetheless.