Shanghai Participated in a Digital Video Conference on Global Financial Systems on 14 May, 2009

                                       

                                            

Two prominent American economists Allan Meltzer and Stuart Mackintosh debated the causes of the global financial crisis in a digital video conference on global financial systems which took place at the State Department in Washington.  More than 20 Shanghai journalists, academics, government officials and university students joined this discussion together with audiences from other three Chinese cities, including Beijing, Guangzhou and Hong Kong as well as viewers in Australia and New Zealand. 

Allan Meltzer, Professor of political economy at Carnegie Mellon University and a visiting scholar at the American Enterprise Institute, jousted intellectually with Stuart Mackintosh, Executive Director of the Group of 30, a consultative body on international economic and monetary affairs, on the pros and cons of regulation as a means to avert another financial crisis, which is the major focus of this debate.

Meltzer took a strong stand against regulation.  “It doesn’t work, it doesn’t work,” he said.  “The history of regulation shows that regulators protect banks.  They don’t protect the public.”  Meltzer has written a history of the Federal Reserve, the U.S. central bank, from 1913 to 1951 and is working on a second volume covering the second half of the 20th century and early years of the 21st century.  To illustrate his point, Meltzer said the Federal Reserve was ineffective in dealing with the savings and loan crisis and Latin American debt crisis in the 1980s and in responding to the “dot com” crisis caused by the collapse of the high-tech sector at the end of the 1990s.  He said the Fed’s failure to head off the current credit-market crisis fits the pattern.

The current crisis came about, according to Meltzer, not because of lack of regulation, but because banks and financial institutions learned to circumvent regulations.  “The first law of regulation is that bureaucrats and lawyers make regulations and bankers and markets learn to circumvent them,” he said.  He derided the current move in economic policy thinking toward a “super-regulator” that would strengthen public vigilance of financial markets.  “The record shows the Federal Reserve was never ahead of a crisis.  The SEC [Securities and Exchange Commission] was given pages, 20 pages, explaining what [indicted financier Bernard] Madoff was doing, and they could not figure it out.  To give them more power to regulate is a nonstarter,” he said.

Meltzer said the proper course of action is to eliminate taxpayer relief for financial institutions that have come to be called “too big to fail.”  “If we don’t get rid of ‘too big to fail,’ we’ll sooner or later have another crisis just as bad as this because ‘too big to fail’ encourages banks to believe that they make the profits and the taxpayers take the losses.”

Mackintosh compared the financial crisis to a “neighborhood in chaos” because laissez-faire parents abdicated control of their children, citing the financial institutions Lehman Brothers, Citigroup, Bear Stearns Companies and American International Group (AIG).  “They gambled up storms and maxed out their credit cards,” Macintosh said.  With the coming of the Obama administration, the task is to “establish new rules for the neighborhood” with stricter financial supervision, he said.

Mackintosh was in clear disagreement with Meltzer on the role of regulation.  He said the notion that markets are capable of regulating themselves is “an oxymoron.”  The economic issue of the day, he said, is to determine “the extent to which you re-regulate, how you regulate, what activities you regulate, which markets you oversee and so on.”
As executive director of the Group of 30, Mackintosh oversees the compilation of financial reform proposals that the Obama administration will consider sending to Congress for enactment into law.  “These banks took extremely large risks and put the entire financial system, indeed the real economy, at risk. We can’t allow this to happen again,” Mackintosh said. He did agree with Meltzer that a mechanism is needed to allow banks to fail in a managed way.

Cited from http://www.america.gov/st/business-english/2009/May/20090515120908cpataruk0.3763544.html