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The Wrong Person Wins The Great Economist.Com Finance Debate

Well, at least in my inexpert opinion. The final statements indicated a lot of agreement between Ross Levine and Joe Stiglitz. Yet you can distinguish between the two when each makes their most colorful or most forceful statements:

Ross Levine:

Again and again, the regulatory authorities (1) were acutely aware of problems, (2) had ample power to fix the problems, and (3) chose not to.

Joe Stiglitz:

If products like CDSs are sold as insurance products, then they should be subject to insurance regulation, ensuring that there is adequate capital to fulfill their promises; if they are gambling products, then they should be subject to gambling laws and regulated and taxed as such.

Although both agree on the need for financial regulation, their core instincts are very different.

Levine doesn’t think any one financial product is inherently good or bad; he thinks the challenge is to get the regulators to do the job that they previously punted on.

Stiglitz thinks the main danger is in the financial products created by the destructive financial wizardsand has a lot of faith in regulators to crack down on them. (“Gambling products”? makes you wonder if Indian reservations are going to take over from Wall Street.)

The Economist is going to announce the winner in a few hours, but we already know: Stiglitz is getting 57% of the votes to Levine’s 43%. I think the voters are getting it wrong.

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  1. ryan jones wrote:

    what is the difference between a product that pays a certain amount when a firm in which i have no financial stake has a credit event and a product that pays a certain amount when the jets cover the spread?

    Posted March 4, 2010 at 1:58 pm | Permalink
  2. David Zetland wrote:

    This (populism wins) happened with the water debate as well. Makes me wonder about this democracy thing.

    Posted March 4, 2010 at 3:44 pm | Permalink
  3. Sam Gardner wrote:

    Although I disagree with you on substance, I think the main problem is the populist debate format. It is yes or no, an absolute question. With a very political ring. There is no need to see shades of grey.
    What percentage of the voters even read half of the statements?

    Innovation is, like evolution, not good nor bad in itself: the selection weeds out the unsustainable, and promotes the good. Of course, without evolution you cannot get the good.

    Posted March 4, 2010 at 5:11 pm | Permalink
  4. Jeff wrote:

    Financial products may not be good or bad, but they certainly range from the somewhat risky to the extremely risky. The same approach to regulation for products at opposite ends of the spectrum will not necessarily work. Nuclear power plants are subject to a lot more regulation than coal burning plants for much the same reason.

    Posted March 5, 2010 at 12:39 am | Permalink
  5. George wrote:

    “Gambling products”

    They most certainly are.

    Levine seems to ignore political economy entirely in saying “the regulators didn’t seem to do their job.” So a highly complex, long-standing problem, involves large and ultra-powerful interest groups is nevertheless better left to the technocrats, if only they did their job properly?

    Prof, we rely on you to fight for the opposite stance when it comes to ID, why the difference here?

    Posted March 5, 2010 at 10:25 am | Permalink
  6. Pablo Kuri wrote:

    But the final tally was pretty close. And a reply to David Zetland: don´t see what the beef is. People should express their opinions, even if they are absurd to us.

    Finally, I follow Hayek´s statement that awarding a person a Nobel ¨honorary¨ prize in economics is a bad idea. Probably the most difficult position to hold as a scientist is the social science one. I can´t stand people like Stiglitz or Krugman being condescending, especially now with their awards.

    Posted March 5, 2010 at 1:08 pm | Permalink
  7. Speaking as a citizen of country which barely had a recession and certainly did not have a financial crisis, adequate prudential regulation of financial institutions means you do not have to directly regulate financial products. Which is a mug’s game anyway, since human ingenuity can create them faster than regulators can respond.

    Posted March 6, 2010 at 10:47 am | Permalink
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