The debate now going on at the Economist is providing one of the most exciting and insightful looks at What We Learned about Finance from the Crash. The debate is very relevant for the role of finance in development (which Levine has devoted his career to studying). Debate is now on round 2 and you can vote for your favorite. Stiglitz has a small lead at this point; my vote still goes to Levine.
Joe Stiglitz:
while many of the recent innovations may well have contributed to the bonuses of those in the financial sector, or even the short-run profits of the industry, the link between these innovations and overall economic performance remains unproven….Naked credit default swaps (CDS), betting on the death of other firms, opened up new incentives for doing mischief, with a greater chance of not being caught and less certain punishment….The contrast between the surfeit of so-called innovations that are socially unproductive or worse, counterproductive, and the dearth of innovations in {more productive} areas is striking….
Ross Levine:
There is no reason to believe that the centuries-old synergistic connection between financial and economic development recently ended… Mr Stiglitz overemphasises the impact of financial innovations on the crisis and underemphasises the role of policymakers in triggering financial abuses….Repeatedly, and many years before the crisis, a prominent task force organised by Timothy Geithner (then president of the NY Federal Reserve) warned of the dangers {of Credit Default Swaps (CDSs)}. But senior officials did nothing. This was not a failure of information, nor of regulatory power; and, it does not reflect an inherent evil with CDSs. It was a failure of high-level policymakers to respond….In contrast to Mr Stiglitz, what has disturbed me the most is the resistance of some within the financial policy apparatus to recognise the malfunctioning of the regulatory regime during the decade before the crisis. The authorities failed miserably to fulfil their core responsibility…
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As I read Levine’s reply, his major point argument seems to be that everything would have been fine if the regulators had just done their jobs. But then what do we do? Find better people to be regulators?
Or have then concentrate on strong prudential rules and not bother with the rest, as is suggested “>here.
That link should be:
http://www.voxeu.org/index.php?q=node/4659
Are they not saying the same thing? Both asking for more regulation! Where is the difference?
Stiglitz says CDOs and such unchecked financial innovation was harmful. Levine saying that good regulation would have made innovation less harmful!
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