This is an interesting discussion of economics and regulation. It’s "from an institutional sales desk that must remain anonymous," and the full article is at The Big Picture.
Last Thursday I devoted my note to Gary Gorton’s talk (http://www.levyinstitute.org/news/?event=32) at the Hyman P. Minsky Conference and in all honesty it wasn’t my best effort. Since then, debate about the merit – or lack thereof – of the speech has picked up and I feel compelled to address it again because having listened to the speech again I feel as though it cuts to the very heart of the financial crisis. The problem is that Gorton’s arrogant tone and irreverent, possibly self-serving sidebars distract from his key observation.
His key observation is that what is gained by having the Fed and other policymakers guarantee bank liabilities – namely, financial stability – is lost through the ensuing complacency which tends to spawn longer, more damaging crises. It’s vintage Minsky as far as the theory aspect is concerned, but while Minsky was an optimist when it came to our ability to regulate our way out of this conundrum, Gorton is very much a pessimist…and I think that Gorton is totally on the mark in this regard. If I am an amateur devotee to the Austrian School of economics, it’s not because I don’t appreciate Minsky’s insights but rather that I do not share his optimism that greed will not pervade the regulatory sphere and render it useless.
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Sitting at the conference last week, while listening to another speech (not Gorton’s), I scribbled down the following rhetorical question in the margin of one of the handouts:
Isn’t it a simple question of whether or not the rules are going to be followed? Shouldn’t the primacy of “the rules” – of the law – be asserted unequivocally, unhesitatingly, and at all times, so that “the system” can adapt around this unyielding set of rules?
