Economists Need To Learn How The World Works
Louise Blouin Foundation - The Metropolitan Club
Since the ‘financial crisis’ of 2007-08, the future sovereign debt crisis in the European Union, and numerous financial scandals over the past two years – such as the mis-representation of Libor by banks such as Barclays, and major trading losses by J.P. Morgan’s London trading desk – significant questions of confidence have been raised concerning the viability of the system. The most substantive response to the credit crisis, as well as the sovereign debt crisis has been to strategize new, effective policy measures to restrict the proprietary trading activities of retail banks as well as to ensure adequate capital ratios in the case of future systemic shocks as part of Basel III. Despite the stress and lack of confidence in the system, global financial markets still remain the most important method of allocating capital in order to receive a return on investment and raise capital for projects and ventures. How, then, can the practice of finance be conducted in such a way that causes the minimum amount of systemic risk – risk to taxpayers, individuals and sovereigns – while continuing to provide liquidity where needed? In order to achieve this, how should the ‘banks be broken up’, that is to restrict certain corporate structures or risky activities in order to ensure solvency? Should further regulation be applied to the ‘shadow’ banking sector that, according to the New York Federal Reserve Bank, had over $15 trillion in liabilities in 2011? Is current regulation, in fact, suitable for the complexity of financial markets? Lastly, what is the role of financial innovation in this changed landscape?