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2010-02-08
Paperwork Hinders Airlifts Of Ill Haitian Children

Shame And Fear: Inside Germany's Catholic Church Abuse Scandal

'Million-Fold Violation Of The Private Sphere' - Germany Consumer Minister Takes On Google Street View

Interview With Palestinian President Mahmoud Abbas: 'I Will Not Back Down'

Greek Debt Crisis - How Goldman Sachs Helped Greece Mask Its True Debt

Dow Closes Below 10,000 For First Time Since Nov. 4

Climate Scientists Hit Out At Melting Glaciers Error

Commentary: The Case For Climate Change Must Be Remade From The Ground Upwards

U.S. Health And Human Services Secretary Sebelius 'Very Disturbed' By Anthem Blue Cross Rate Hikes

Ahead Of SWIFT Vote: U.S. Urges European Parliament To Back Bank Data Deal

Commentary: 'The West Must Impose Sanctions On Iran This Month'

Iran's Nuclear Plans Prompt New Calls For Sanctions

U.S. Rep. John P. Murtha Dies At 77

Ukraine Remains Divided After Runoff Election

2010-02-07
Global Market Turmoil Hints That U.S. Recovery May Founder

Editorial: The Truth About The U.S. Deficit

Why Are U.S., Allies Telling Taliban About Coming Offensive?

Testy Conflict With Goldman Helped Push A.I.G. To The Edge

Survey Of Retired N.Y. Police Dept. Officers Raises Questions On Crime Data

Iraqi Militants Post Video Of Kidnapped American

In Britain: Sharp Rise In Number Of Older People With Fatal Allergies

Ukraine Set For A Tilt To The East As Russia's Ally Leads In Polls

Mitch Landrieu Wins New Orleans Mayor's Election By Landslide

Top Canadian Banks Want Government To Cool Off Rise In Home Prices

6.6 Magnitude Hits Off Japan's Southern Coast

2010-02-05
Interview With John And Doris Naisbitt: 'China Is A Country Without An Ideology'

Interview With German Economic Adviser - Euro Zone 'Could Cope With Greek Bankruptcy'

Judge Overturns Boycott Barring Iranians from Dutch Nuclear Sites

Sen. Dodd: Talks With Republicans On Financial Bill At 'Impasse'

U.S. House To Vote On Stripping Health Insurers' Antitrust Protection


Nobel Economists Offer First Aid For Global Economy
2008-11-13 14:38:33 (65 weeks ago)
Posted By: Intellpuke
(Read 808 times || 1 comments)
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Five winners of the Nobel Price for Economics share their views on what the future global finance order should look like in exclusive essays for German news magazine Spiegel.

Later this week, the heads of state and government of more than 20 countries are to meet in Washington to discuss the consequences of the global financial crisis. While some countries are satisfied with strong government influence on incentives systems for managers, others are demanding more far-reaching action: nothing short of a radical shake-up of the global financial system complete with new controls and new monitoring mechanisms. Spiegel asked five previous winners of the Nobel Prize for economics to provide their own advice for what world leaders should do.

Edmund S. Phelps, 75: What Has Gone Wrong Up Until Now

It is preposterous to speak, as some Europeans have, of the "end of capitalism." A good life requires a rewarding workplace - one of change and challenge - and that requires some sort of well-functioning capitalism.

There is no question that the banking industry in the United States has gone awry. In buying mortgages for packaging in mortgage-backed securities, the banks exported to the rest of the world a profusion of assets that were overvalued by the financial companies that purchased them.

The ratings agencies, which made their calculations based only on rosy scenarios, and never on a worst-case basis, were complicit in this over-valuation.

In selling derivatives, such as default insurance and other collateralized debt obligations, the banks were selling assets that were too complex for a great many investors to understand.

Finally, the banks were their own worst enemies. The level of their loans and their borrowings to make those loans reached so high a level in relation to their capital, or equity, that any serious disturbance to asset prices - a default shock or a shock to liquidity premia - could have devastating effects on the equity of any bank and thus on its ability to function and to survive. At some banks, measured leverage was not extraordinarily high but the opacity of the assets and the resulting uncertainty over their future returns was very high.

That the banks chose to take on ever-greater levels of risk, with no end in sight until the collapse, was an effect of employee compensation: Fortunes could be made for each additional day that the bank could operate. There was no claw-back provision that would pay bonuses only for performance over the long term.

Is regulation required here? Undoubtedly some new regulations are required here and there.

Yet, many observers have argued the lack of restraints on the banking industry was more a failure of the regulatory authorities to exercise their powers than it was an absence of regulatory authority to act. A new mindset is required, above all.

A fundamental issue that regulatory discussions must confront, however, is what function society needs the banking industry to perform. Increasingly over the past two decades, the banks have tried to make money with mortgages, residential and commercial. As this has proved difficult, the banks will either have to shrink their supply of credit to the economy as a whole or else redirect some their credit to the business sector.

Unfortunately, the banks for the most part appear to have lost the expertise to make business loans and investments, which they once had in the fabulous years of investment banks such as Deutsche Bank and J.P. Morgan.

Wíll the big banks in the U.S. be able to regain such expertise?

(story continues below)




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Readers Comments
The legacy of 9/11
By: rob chapman
2008-11-14 20:31:02
It is interesting that the Nobel laureates seem to think that the complexity of the leveraging deals and lack of people capable capable of understanding them is a major factor in the current downturn.



One can only wonder if the people killed in the 9/11/01 attack are the talent pool who could have understood the financial webs and kept them functioning.




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