Focus on the problem today, not preventing the problems of tomorrow…
2009/04/02 in credit crisis
If I had one request for our leaders to consider during the G20 conference underway in London, it would be to concentrate on fixing the crisis of today, and spend less time talking about potential regulations intended to help us avoid doing the same crisis again in the future.
On one hand, its good to reflect back and try to assess what went wrong, and to figure out how we got into this mess. But, enacting regulation to avert the same disaster in the future runs the risk of erecting barriers to recovery today.
For example, I agree that it may be a good idea to increase capital reserve ratios at banks to avoid underfunded banks in the future, but by increasing reserve requirements today we risk reducing lending today (as we hope to avoid instability in the future). Also, it may be a good idea to regulate the “shadow banking” sector of hedge funds, private equity and so on…but what we need today is for secutitization markets to come back faster rather than later.
The problems facing the global economy are enormous. But our leaders need to be careful not to make todays crisis worse by attempting to restructure the system to correct yesterdays mistakes. Yes, I think reflection and remedy are required. But, now is not the time. Rather than trying to prevent tomorrows crisis, I think they should focus solely on fixing todays.
It could be argued that “leveraging” got out of hand, and that the bubble popped because of “too much credit”. But, Ive long argued in this blog that “deleveraging” is the most harmful and most powerful trend that has been building since 2007,and that most of the pain we feel today (with lost jobs, lost production, lost income) is a direct result of the forceful deleveraging that was forced upon us. For our leaders at the G20….if we want to ease the pain of this recession, we shouldn’t expect solutions to be found in regulations to avoid future leveraging. That action might solve yesterdays problem, and might avoid tomorrows….but it does nothing to solve todays.
A general theme that I see arising from the G20 leaders is a desire to “restructure and regulate”. Great. But, first, please do what you can to stop the current crisis, even if those actions are not the best long-term solutions, and even if those solutions dont fit with the new “structure or regulation”.
Brad Setser recently commented that “the lessons the effort to reform the international financial architecture in the 1990s holds for today’s effort to reform the global financial system. Then, as now, there was a real desire to create a system that was less prone to major crises — though the financial crises of the late 1990s were concentrated in the emerging economies, not the US and Europe.”
mmmm…. I find it alarming when todays top analysts from our most independent think tanks are flat-out assuming that “restructuring and regulation” are what our leaders should be focused on today. While I agree with most of Mr. Setser’s analysis, I take objection with the undelying assumptions that now is the time to focus on preventing potential crises of tomorrow…