February 20, 2009, 10:45 am — Updated: 10:45 am -->
Roubini: ‘The Anglo-Saxon Model Has Failed’
By Eric Etheridge
Writing at Forbes.com yesterday, Nouriel Roubini says that “It is clear that the Anglo-Saxon model of supervision and regulation of the financial system has failed.”
[W]hile this crisis does not imply the end of market economy capitalism it has shown the failure of a particular model of capitalism: the laissez faire unregulated (or aggressively deregulated) wild-west model of free market capitalism with lack of prudential regulation and supervision of financial markets and with the lack of proper provision of public goods by governments.
It is the failures of ideas such as the “efficient market hypothesis” that deluded itself about the absence of market failures such as asset bubbles; the “rational expectations” paradigm that clashes with the insights of behavioral economics and finance; the “self-regulation of markets and institutions” that clashes with the classical agency problems in corporate governance that are themselves exacerbated in financial companies by the greater degree of asymmetric information -how can a chief executive or a board monitor the risk-taking of thousands of separate profit-and-loss accounts? Then there are the distortions of compensation paid to bankers and traders. . .
[W]e now need more binding rules on liquidity, capital, leverage, transparency, compensation and so on.
But the design of the new system should be robust enough to counter three types of problems with rules: A tendency toward ‘regulatory arbitrage’ should be borne in mind, as bankers can find creative ways to bypass rules faster than regulators can improve them. Then there is ‘jurisdictional arbitrage’ as financial activity may move to more lax jurisdictions. And finally, ‘regulatory capture’ as regulators and supervisors are often captured - via revolving doors and other mechanisms - by the financial industry. So the new rules will have to be incentive compatible, i.e. robust enough to overcome to these regulatory failures.
Roubini: ‘The Anglo-Saxon Model Has Failed’
By Eric Etheridge
Writing at Forbes.com yesterday, Nouriel Roubini says that “It is clear that the Anglo-Saxon model of supervision and regulation of the financial system has failed.”
[W]hile this crisis does not imply the end of market economy capitalism it has shown the failure of a particular model of capitalism: the laissez faire unregulated (or aggressively deregulated) wild-west model of free market capitalism with lack of prudential regulation and supervision of financial markets and with the lack of proper provision of public goods by governments.
It is the failures of ideas such as the “efficient market hypothesis” that deluded itself about the absence of market failures such as asset bubbles; the “rational expectations” paradigm that clashes with the insights of behavioral economics and finance; the “self-regulation of markets and institutions” that clashes with the classical agency problems in corporate governance that are themselves exacerbated in financial companies by the greater degree of asymmetric information -how can a chief executive or a board monitor the risk-taking of thousands of separate profit-and-loss accounts? Then there are the distortions of compensation paid to bankers and traders. . .
[W]e now need more binding rules on liquidity, capital, leverage, transparency, compensation and so on.
But the design of the new system should be robust enough to counter three types of problems with rules: A tendency toward ‘regulatory arbitrage’ should be borne in mind, as bankers can find creative ways to bypass rules faster than regulators can improve them. Then there is ‘jurisdictional arbitrage’ as financial activity may move to more lax jurisdictions. And finally, ‘regulatory capture’ as regulators and supervisors are often captured - via revolving doors and other mechanisms - by the financial industry. So the new rules will have to be incentive compatible, i.e. robust enough to overcome to these regulatory failures.