June 27, 2007
Risks and rewards of today’s unshackled global finance
Finance is the brain of the market economy. Alas, like the brains of individual human beings, it can shift in an instant from greed to fear. Sometimes, as now, the brain behaves as if indifferent to risks and uncertainties. At other times, it is consumed by anxiety. Today, moreover, as I argued last week, the brain has become active, global and self-confident. Is it also creating huge dangers for the world economy? Critics would levy three big charges against modern financial capitalism: it is unjust; it is inefficient; and it is unstable. This charge sheet is as old as capitalism itself. Two objections are made to the rewards gained by financiers. The large one is that making large sums out of speculation, rather than production, is distasteful. But this distinction is arbitrary. What matters far more is whether the activities are economically helpful. A narrower objection is to the fiscal regimes under which successful financiers operate. Yet this, again, raises general questions about fiscal policy, not ones limited to the financial sector. Thus, the charge that there are injustices associated only with financial capitalism is hard to justify. The remainder of Martin Wolf’s column can be read here (FT.com subscription required). Discussion from our guest economists is free.
Alex Cobham (guest): Martin’s column makes welcome reading for those who have long been concerned over the underappreciated risks of premature financial opening of poorer countries. In 2000, I surveyed the academic literature on capital account liberalisation and found that - despite a wealth of different approaches - there was no evidence at all of systematic growth benefits, except for the richest countries. I also highlighted the risks that liberalisation poses for poverty and inequality, not least through macroeconomic volatility.
In 2003, a paper by then IMF chief economist Ken Rogoff (with Fund economists Ayhan Kose, Eswar Prasad and Shang-Jin Wei) also found from a review of the evidence that ‘if financial integration has a positive effect on growth, it is probably not strong or robust’. They went further and also showed that there is a threshold above which financial integration reduces consumption volatility, but ‘Most developing economies… are unfortunately well below this threshold [… Financial integration] may be associated with higher volatility’. The same authors confirmed these findings last year, showing that ‘there is no systematic relationship between the average level of de facto financial openness and growth’.
This year, two new papers from IMF and ex-IMF researchers has taken this growing consensus further. A working paper by Pierre-Olivier Gourinchas of the University of California at Berkeley and Olivier Jeanné of the IMF identifies an “allocation puzzle” in capital flows to developing countries. The economist Robert Lucas suggested in 1990 that capital flows from poor to rich countries, rather than vice versa, but the authors find that in general “capital flows to countries that invest less and grow less”.
The second working paper, by Rogoff’s successor, Raghuram Rajan, with Eswar Prasad and Arvind Subramaniam, takes this position even further. What their findings strongly suggest, in effect, is that the fastest growing non-industrialised countries are those which (i) invest more, and (ii) rely least on foreign finance. Foreign finance may actually reduce growth.
The consensus is changing, and Martin’s column indicates the direction of movement. While there are undoubtedly eventual benefits to be had from international financial integration, we have been uncertain for some time over how poorer countries can share in these. This new research makes the case for greater caution compelling, and underlines the need for further research into the preconditions. One is a more effective domestic financial market – but it is far from certain what policy measures and market structures are included or excluded as “effective”. All that is certain is that the rush to capital account liberalisation in the late 1980s and 1990s was unsupported by evidence and foolhardy.
Those who were critical do not wish for the crisis that Martin mentions, but instead for improved regulation of the sort that he suggests that would allow poorer countries both greater policy space and more chance to benefit from financial integration. This new research, albeit that most of these authors are former rather than current Fund staff, suggests nonetheless a valuably increased openness from the IMF which may help it to act in the new stage of international financial regulation with greater credibility.
Alex Cobham is supernumerary fellow in economics, St Anne’s college, Oxford
Posted by: Alex Cobham | June 27th, 2007 at 9:22 pm | Report this commentStephen Cecchetti: As Martin rightly points out, while the constantly evolving financial system improves the efficient operation of the economy, it creates important risks. Here’s how I think about the problem: In the past, payment streams and risks tended to come bundled together. Bonds were sequences of coupons with principal payment at maturity, and the issuer could default on some fraction of these promises. Today, bonds are stripped so that coupons and principal can be purchased separately and the risk of default insured. More generally, you can purchase or sell virtually any payment stream with any risk characteristics that you want – that’s what financial engineering is all about.
This ability to separate finance into its most fundamental pieces – the financial analog to the particle physicist’s quarks – has had profound implications for the way in which risk is bought and sold. Today, risk really does go to those who are most able to bear it. Markets allocate the risk to those who are willing to take it on for the lowest price. The result is that we can insure virtually anything and engage in many activities we wouldn’t have undertaken in the past.
On the plus side, I am convinced that the development of the financial system is an important source of the Great Moderation – the reduced volatility of real growth in the developed world over the past 20 years. Faced with income volatility, individuals today can use the financial system to insure that their consumption remains smooth. Amazingly, this adds up to macroeconomic stability.
But with the ability to sell risk easily and cheaply comes along with the ability to accumulate risk in almost arbitrarily large amounts. Combined with compensation schemes in which money managers share the gains but not the losses of their investment strategies, this creates incentives to take on huge amounts of risk. Without risk, there is no reward; and without big risks there are never big rewards.
The result is that small numbers of individuals have the potential to jeopardize the stability of the entire financial system. They do this not because they fail – the right to succeed in the capitalist system is the right to fail – but because of the knock-on effects they will have when they fail. It is the interconnectedness of the system that is the biggest challenge. And the more complex the system becomes, the bigger this risk becomes.
So, what to do? I firmly believe that we will not stop the people who are doing this. There will always be managers who gain from taking big risks. But as I look at the evolution of the global financial system I see two places where I would focus my attention. They are the last item on Martin’s list of concerns, co-ordination; and the ability of regulator and supervisory agencies to attract bright young financial economists.
On the first, international co-ordination of supervisory and regulatory policy has been of paramount concern. The reach of the global financial system means that counterparty risk and the systemic concerns it creates are no longer a local matter. We are moving toward international harmonization of financial supervision – we need to go faster.
In order to keep track of what is going on in the world of money management, government financial supervisors need to understand what it is going on in the private sector. This means having people with the same level of knowledge as the money managers themselves. I guess we can rely on public spirit – that’s what we do in the United States when we pay the Governors of the Federal Reserve Board less than $200,000 per year – but that seems short-sighted. Some more systematic solution to this has to be found. We need supervisors who understand deeply and completely what it is that the supervised are doing.
Posted by: Stephen Cecchetti | June 28th, 2007 at 2:15 am | Report this commentWillem Buiter: The explosive financial developments of the past two decades not only create problems for emerging markets and developing countries, it also has created systemic vulnerabilities in the most developed financial markets, including the US, Europe and Japan.
Stephen Cecchetti concludes from the fact that today financial engineering permits contingent payment streams to be broken down into what he calls “their most fundamental pieces”, that risk now really goes to those most able to bear it. Nothing could be further from the truth. The same financial engineering techniques permit risk to be bunched and bundled in ever more convoluted ways. The risk still ends up with those most willing to bear it. Whether they are also most able to do so, only time will tell.
In addition, most financial innovation, whether it involves new instruments or new players, involves a lengthening of the intermediation chain. Every time the intermediation chain between the ultimate saver (households, say) and the ultimate investor (an enterprise engaged in real capital formation, say) is lengthened by the insertion of another layer of intermediation, we not only get the potential benefit of a larger pool of would-be risk traders, we inevitably add counterparty risk. Counterparty risk includes but is not limited to default risk.
The past couple of decades has witnessed developments that have exacerbated two long-standing sets of problems. The first is that the pace of product innovation in financial markets, both in exchange-traded instruments but especially in the over the counter (OTC) market where designer financial engineering is rife, has outstripped our capacity to understand, let alone price these products. Nor have regulators and supervisors kept up.
Some of these structured finance products are so complex that even their designers probably don’t know what risks are embedded in them. Financial institutions that hold these instruments cannot mark them to market because there is no liquid market for them (this holds even for many CDOs that are, in principle, exchange-traded instruments). Instead they are frequently ‘marked-to-model’, using models whose complex mathematical and computational features neither the institution’s risk managers nor the supervisor/regulator (if there is one) have mastered. Alternatively, they are valued on the basis of quotes from brokers that do not have to deal at the prices they are quoting; such cheap talk is completely meaningless, even when the parties making them have the proper arms-length relationship with the holder of the securities. At times, they are priced using some wet-finger-method based on the credit rating of the instrument, even through these ratings are performed by agencies that are too often conflicted and/or far too close to the designers and issuers of the instruments. For illiquid AAA-rated CDOs, it was until recently common practice to value them at par. Of course, even true AAA-rated instruments can be subject to considerable market risk.
Not only don’t we know how to price these instruments, we often don’t know who ends up holding them because of inadequate reporting obligations for many systemically important institutions.
The second problem, highlighted by both Martin and Stephen, is that increasing numbers of financial institutions operate across many different national jurisdictions. Supervision and regulation are organised at the national level. Cooperation and coordination attempts are forever chasing new institutions and new instruments. One can only hope that the development of EU-wide supervision and regulation of financial institutions and markets will permit a significant reduction in the number of ad-hoc arrangements that needs to be concluded.
The problem of global financial markets and global financial operators running circles around national supervision and regulation is aggravated by regulatory competition between nations, which often makes for a race to the bottom, with minimal regulatory and supervisory demands being made on systemically important financial institutions. Many, including most hedgefunds and private equity funds, have at most rudimentary reporting obligations.
When even self-regulation (which really means no regulation at best, and at worst no regulation plus cartelisation of the industry) is considered too onerous, and when voluntary codes of conduct are sniffily rejected, it is clear that we have created and informational black hole and an increasingly under-regulated financial system where no-one knows who owes what and to whom.
These developments will only end one way: with a serious financial conflagration - many orders of magnitude wider in scope and greater in severity than the modest and very selective normalisation of credit risk spreads we have seen for institutions and instruments close to the US sub-prime mortgage market. This will be followed by an if-it-moves-stop-it re-regulation and over-regulation (still mainly at the national level) of financial markets and institutions. After about ten years at most (financial market memory spans are about three years, by which time everyone has changed jobs again) another cycle will start.
Posted by: Willem H. Buiter | June 29th, 2007 at 9:55 am | Report this commentRobert Wade: I treat Martin’s arguments about the risks and rewards of unshackled global finance with particular respect. At the time of the East Asian/Brazilian/Russian crises a decade ago I noticed that he was one of very few commentators who did not join the herd-like rush to hold up “Asian cronyism” or “Asian state capitalism” as the main cause. Instead, he kept emphasising the herd-like inrush of finance and the herd-like outrush as the main proximate cause; and the underpricing of risk as the deeper cause. He even gave some support, as I recall, to the policy of restricting as well as regulating capital flows. I have often wondered what kinds of reactions he got from participants and analysts in financial markets, who normally like to deflect blame elsewhere. All this is the backstory to Martin’s third policy issue: “We must also realize that emerging and small markets have to manage their involvement with the global financial system cautiously”.
In his current column he fudges the argument about the effects of financial capitalism on income/wealth inequality, by collapsing it to “an objection against the rewards gained by financiers”. But financial capitalism is a system, one in which the financial sector has come to dominate the economy/society/polity through mechanisms of organizational and normative interlock (CEOs of manufacturing firms come increasingly from a finance background, company performance is measured primarily by returns to shareholders, macroeconomic stability is defined mainly in terms of inflation rather than stability of output and employment, and so on). It is always difficult to assess the impact of a system - in this case, financial capitalism - when there is no obvious set of different systems against which to compare. Yet the comparison between, say, the countries of liberal market capitalism (the countries of English-speaking settlement) and the countries of coordinated market capitalism, is suggestive. The former, where finance is relatively even more dominant than the latter (organizationally and normatively), have higher levels of after-tax income inequality, and wealth inequality; and most of them have experienced big increases in (90/10 and 99/median) inequality over the past 10 and 20 years. And it is not hard to think of plausible reasons why this has been the case, which relate closely to the organizational and normative dominance of finance.
Martin talks of uncertainties that could cause near-term uncertainties to become unstuck; and instances inflation, the housing bubble, payments imbalances, and capital flows dwarding “real” flows. But going beyond economics, there is also the feedback from the current high level of political/security uncertainty onto financial instability. Perhaps the single most important reason why the Great Depression became a Great Depression and not just a crisis with a fairly quick V-recovery was the feedback from the absence of political stability in European inter-state relations, to economics.
I write this from Auckland. New Zealand is in a bizarre situation thanks to its pure openness to global finance and global trade. From one perspective the economy is booming; unemployment is at its lowest level since the early 1980s. But the current account deficit is 8.5 per cent of GDP (having come down from 9.6 per cent in the March 2006 year, thanks to booming dairy exports). Virtually none of the associated capital inflow is going to greenfield investment (in contrast to, say, Ireland). The inflow goes to portfolio investment, to the purchase of NZ assets (the Harvard endowment fund bought up a big chunk of forest a few years ago, all four of the big trading banks have been sold to foreign companies, many NZ start-ups are snapped up as soon as they reach any significant size); and the capital inflow also goes to support a debt-led housing bubble and debt-led consumption. The value of the Kiwi dollar is hoist to record levels by the carry-trade, as Japanese housewives, among many others, buy NZ dollars to take advantage of the interest rate differential of 1 per cent in Japan and around 8 per cent in NZ. One result is the aforementioned gigantic current account deficit (with its domestic reflection in very low savings). The deficit on investment income goes up and up, due to foreign borrowing to meet galloping interest obligations to foreign lenders. Yet the central bank remains fixated on keeping interest rates high in order to keep inflation very low. The reason for the central bank’s behavior is that its mandate refers only to inflation - not to the exchange rate, growth rate, employment rate, or anything else. Talk about the triumph of finance! There is not even good evidence that an interest rate a few percentage points lower would produce a significant increase in inflation.
Meanwhile these trends go with soaring income and wealth inequality, from already high levels compared to other OECD countries. The interesting thing is that high and rising inequality has not become a hot political issue. Poverty has been ameliorated by strong demand for labour, though at relatively low wages. House rents have not increased faster than the CPI (which blunts the political force of increasingly unaffordable house ownership). Both main political parties agree that the problem is that average wages are not going up fast enough, because average productivity is not going up fast enough (relative to Australia, for example). By focusing on averages they demonstrate concern without touching the taboo word, distribution - which might spill over into anti-rich sentiment, something both political parties are very anxious to avoid. New Zealand has important lessons for those who wish to obtain acceptance of the dominance of finance and acceptance of a society in which a tiny fraction of super-rich detach themselves from the rest of the society, while enjoying its public services as they wish.
Posted by: Robert Wade | July 2nd, 2007 at 8:53 am | Report this commentJagdish Bhagwati: Martin Wolf is absolutely on the ball in endorsing financial flows while underlining that they represent the soft underbelly of globalisation.
That in fact was the burden of my 1998 Foreign Affairs article, titled melodramatically The Capital Myth, and is also what I have written more elaborately in my 2004 Oxford book, In Defense of Globalization. We have certainly made some progress since the Asian financial crisis on measures so as to avoid financial meltdowns. But, given the fact that we will never get fine tuning and perfect comprehension of when confidence may turn into panic, there is probably an even greater payoff from changing the rules on what to do when a financial panic does occur. Here, since I and Paul Krugman in particular, and many other economists such as Padma Desai in her monumental (Princeton 2003) book Financial Crisis, Contagion and Commitment and Robert Wade in The New Left Review (1998), wrote on the subject, there has been much greater willingness on the part of the IMF to allow the use of temporary capital account controls.
What has been retrograde, on the other hand, is the Bush administration’s repeated attempts to ignore that new consensus. In fact, it is surprising that the USTR played the heavy, under Robert Zoellick, on inserting restrictions on the use of capital controls in negotiating the FTAs with Singapore and Chile. This is why, aside from leftwing commentary such as in The Nation in the US which has been scathing on the appointment of Zoellick to the World Bank Presidency, I have expressed some doubts as to the appropriateness of this appointment to an
institution which requires keeping the interests of the developing countries, rather than the interests of the US and of the financial sector lobbies - what I have called the Wall Street-Treasury Complex - at the top of the agenda.
The same comment applies to Mr Zoellick’s wilful embrace of FTAs by the US, in disregard for the preponderant views by major trade scholars and hugely distinguished journalist commentators such as Martin Wolf himself, against the spread of PTAs as fragmenting and undermining the multilateral trading system to the advantage of big powers like the US which can impose their lobbies’ demands for all kinds of “trade-unrelated” demands on the developing countries, taken one by one.
Posted by: Jagdish Bhagwati | July 3rd, 2007 at 10:16 am | Report this commentMartin Wolf: This has been a rich discussion.
I have little to add to what Alex Cobham has written. He is correct that the evidence on the link between capital market integration and economic growth is weak. Of course, the rush to capital account liberalisation in the 1990s, which he mentions, was bound to be unsupported by evidence, since poor countries had been predominantly closed to capital flows for so long. Thus, it was certain to be a bit of an experiment. It is clearly not an experiment that worked very well. It is possible, however, that countries learn from crises and so put in place more robust and more effective financial sectors, which will serve them in good stead in the long run.
Stephen Cecchetti and Willem Buiter have provided a fascinating point and counterpoint on perhaps the most interesting single question about the “new financial capitalism”, namely, whether we now enjoy a better allocation of risk to those who can bear it than before. Stephen says “yes”. Willem says “no”. I am deeply agnostic (as I am on that other great question, the existence of God). But it seems to me that the disagreement between these two highly qualified macroeconomists and even my agnosticism is telling us something very important. We really do not know how well the financial system is allocating risk. I strongly suspect that, as Willem argues, nobody knows. We have to take it on trust. That makes me very nervous.
What can we do about this? There are broadly three possibilities: alignment of interests; regulation; and outright prohibition.
As I have pointed out and Stephen has underlined, there is a fundamental misalignment between incentives and risk in the worlds of hedge funds, private equity and, most important of all, banks.
The fee structures of the former two classes are insane. It is simple to show that if returns to hedge funds and private equity are, in fact, random, then the fee structures ensure a huge transfer of wealth from outside investors to merely lucky fund managers in return for nothing whatsoever. I do not understand why grown-up institutions accept these fee structures.
The systemic problem is that the people making the decisions in these institutions have very little incentive to be prudent, because they do not, beyond a certain point, share in the losses. No banker receives negative pay if he or she makes a mess. The worse they can get is fired. A hedge-fund manager paid a 2 per cent management fee and 20 per cent of the gain, above a certain threshold, has a massive incentive to take on risk if, as seems plausible, risk and expected return are correlated.
Is there any way to align risk and reward? I have only one idea: make it clear that the management of any publicly insured institution that needs to be rescued is going to prison. It sounds brutal. But it should, as Voltaire said of the hanging of an English admiral, serve as an excellent warning to all the others.
So we then turn to regulation. One person who responded to my column privately referred to my remarks on this topic as “pap”. Stephen, too, believes in better and better co-ordinated regulation. Willem is more sceptical. I suspect that my critic (and Willem) are right. There is no way that regulators, even if they are much better paid than today, will keep on top of the efforts of hundreds of thousands of brilliant people to game an inherently opaque world of computer models for their own benefit, particularly when the potential rewards are so huge, provided one can get out before the game collapses. In practice, regulators have to rely on self-regulation or, in other words, on the wisdom and probity of those who hope to become very rich by taking big risks. With luck, those managing the big banks care enough about their reputations for this to work. Time , as Willem says, will tell.
If not, there is the third possibility: outright prohibition. If the losses prove big enough, that is what is going to happen. That is certainly what is going to happen if the public sector is forced to bale out a number of big institutions. Finance will be re-regulated.
I do not have much to add in response to Robert Wade’s comments. It is, I think, perfectly reasonable to ask where a purely finance-led economy leads us. My honest answer is that I do not know. I, too, find the idea that vast fortunes can be gained by the simple expedient of loading up acquired companies with massive quantities of apparently cheap debt disturbing. Fundamental theory says, after all, that financial engineering cannot make a company more valuable (except at the expense of the fisc).
I think his discussion of New Zealand’s situation is important. I do not believe it would be possible to give an independent central bank another mandate. The whole point is to constrain bureaucratic discretion. What are the alternative policies? Open-ended intervention is one. That is likely to generate inflation in the long run. Massive fiscal tightening is another. That is hard to arrange and may well not work. A tax on inflows is another. I have to say that I would be rather tempted by the latter if I were running the New Zealand economy. Why not tax the stupidity of foreign investors? Anyway, the choices are not easy to make.
Finally, let me agree briefly with Jagdish Bhagwati. It is a pity that US FTAs have included abolition of exchange controls. It is a bigger pity that FTAs became the “game in town” in trade policy. Bob Zoellick will have to forget all this if he is to do a good job at the World Bank. The question is whether he can cease to see the world through the prism of US interests, in general, and Wall Street interests, in particular.
Posted by: Martin Wolf | July 3rd, 2007 at 2:03 pm | Report this commentMartin Lowy (guest): I look forward to reading Martin Wolf’s columns. His analysis is excellent. But for several columns he has followed his usual good analysis with pap. On June 27, for example, he made six recommendations. But he proposed no actors - no-one to implement those recommendations, however laudable they may be.
I suspect I know why Mr Wolf has proposed no actors -and if I am correct, he should say this: None of the world’s regulatory bodies have control over the forces that propel the world’s financial markets. I have studied (and at times been a part of) the US regulatory authorities. They have no control over what interest rates or terms the world’s capital demands in return for loans. Nor does the BIS or the IMF or any other such body. If an excess supply of cash chooses to invest in dollar denominated securities or chooses to invest in riskier debt instruments without the usual interest rate spreads, regulatory bodies can do nothing about that. It is all too diffused and too many of the investors are either not regulated or they even are the regulators themselves.
Probably this diffusion and the inability of the regulatory authorities to greatly influence the market is a good thing. But if it is, then we should say so, not mouth the pap that comes from the BIS after wringing its hands about imbalances. Yes, there are imbalances - and there always will be. Yes, there are animal spirits at work in the markets - and there always will be. Yes, there will be financial crises - and there always will be. The role of open-minded economists should be to explain to people -and even to regulators - that the real dangers lie in trying to cushion the crises. The IMF cost the Russian people dearly by recommending that the Russian government shore up the rouble ten years ago. The IMF bailed out the banks - to the cost of the borrowers - at the same time. If we let those who have taken the wrong risks suffer the consequences, future risk-takers will be warned. Mr Wolf must know that after each crisis the global markets will return to their normal uncertain selves unless politicians in major countries commit financial suicide on behalf of their local institutions. The world may lose some banks, some hedge funds, some other institutions, but individual institutions count for little so long as the market - this enormous market that has emerged during Mr Wolf’s and my professional lifetime - is allowed to continue to function. (In the early days, US regulators tried to manage the global market. Cf eurodollars, the OFDI etc. Before long, the market grew and got away from them anyway.) Nostalgia for Bretton Woods is unhealthy.
I know it is “prudent” to worry about systemic risk. But even systemic risk, given the diversity of the global markets, would be a short-term problem - and no-one could do anything about it if it occurred anyway. At a certain price, Citi or Morgan or Deutsche could borrow. There would be enough liquidity somewhere.
Anyway, we either should say who should act or say there are no capable actors. Thanks for paying attention. And I will still look forward to reading Mr Wolf’s columns.
Martin Lowy is Adjunct Fellow at Hudson Institute
Posted by: Martin Lowy | July 6th, 2007 at 3:07 pm | Report this commentMartin Wolf: Let me add a comment to what Martin Lowy says. In essence, he argues that there is nobody to deal with any of the problems I have addressed. This amounts to saying that there is no relevant regulation. So let the market regulate itself. Periodically, vast sums will be lost. So be it. Let everybody be told regularly and loudly that their money is not safe and they will learn to be more cautious.
I have two comments. Start by re-examing my list: “first, for essentially political reasons, we must re-examine the taxation of income and wealth; second, we should recognise that emerging and small economies have to manage their involvement with the global financial system cautiously; third, we must also realise that the mixture of floating exchange rates with a number of important pegged rates is creating huge distortions; fourth, we must look more closely at how monetary policy interacts with the financial sector and asset prices; fifth, we should also look once again at how well vast rewards are aligned with risk in financial markets; and, finally, we must encourage regulatory and fiscal authorities to achieve higher levels of co-ordination.”
In all these cases, there are actors. They are, in order, national fiscal authorities; second, emerging market governments; third, again emerging market governments; fourth, central banks; fifth, private investors; and, finally, groups of regulators and fiscal authorities. In most cases, all of these people can act. The question is how effectively they can do so. If Mr Lowy is right that regulators are ineffective, maybe they should all be closed down. That would clarify things for the average investor, would it not? But tax authorities are not ineffective, even now, nor are the Chinese government’s exchange rate policies.
The second question is whether markets should just be allowed to rip. My response is that they never will be: in financial markets gains are privatised and, once losses are big enough, they are socialised. That’s politics. There is no credible way to convince people this is not the case and so that is why regulation exists. My second concern is that the opportunities for malfeasance in financial markets are so great that some regulation is necessary. Maybe, as I suggested above, it should be through criminal penalties, though.
In any case, the balance to be struck between “caveat emptor”, on the one hand, and regulation, on the other, is tricky. I know that at least, even if I do not know exactly how to strike it.
Posted by: Martin Wolf | July 10th, 2007 at 9:08 am | Report this comment