When the South Sea Bubble burst in 1720, one irate official recommended the company directors be “sewed into sacks, with a monkey and a snake, and drowned.”
Similar suggestions regarding Wall Street executives have been heard during the most recent financial meltdown.
Yet bubbles are not all bad, according to writer Michael Green and Matthew Bishop, U. S. editor of The Economist. In their latest book, “The Road from Ruin: How to Revive Capitalism and Put America Back on Top” (Crown Business), they say we need to stop the finger pointing and move beyond old ways of thinking about markets.
Bishop and I spoke at Bloomberg’s New York headquarters.
Lundborg: How do you rate Wall Street’s response to the financial crisis?
Bishop: I’d give them a C. In terms of the fundamental reforms that are needed, they haven’t grasped the nettle. There’s still been far too little real debate about what needs to be done.
The system is very vulnerable to going into crisis again.
Lundborg: What would drive that?
Bishop: A lot of money has been pumped in to the banking sector, but not a lot of it has gone out into the real economy. My colleagues take the view there are already some other bubbles out there in the commodities markets.
Lundborg: Why are you optimistic that business can be other than greedy and that values can be put back in capitalism?
Bishop: Wall Street had become very short-term orientated and no one was watching for longer-term consequences. There is nothing inherent in capitalism that would make it focus on the short-term.
Lundborg: How did the incentives get so misaligned?
Bishop: Partly it was the intellectual climate we were in starting in the 1980s, where a caricatured sense of markets took over: Government is bad, markets are good.
In fact, markets require effective government to work properly.
Lundborg: What regulation would you like to see?
Bishop: One element that makes a lot of sense is a consumer protection agency. It’s obvious that many consumers are financially ignorant, and banks and mortgage lenders have been willfully exploiting their ignorance in a way that in a civilized society shouldn’t be happening.
Lundborg: What else?
Bishop: The government should clarify what it means to have a fiduciary responsibility for other people’s money. Financial institutions shouldn’t be able to choose their own regulator. Hedge funds and other private sources of investment should have oversight so somebody in the system is keeping an eye on the aggregate levels of risk.
We also have way too many regulators in America, and we need get rid of them and create a much stronger consolidated regulator.
Lundborg: Why not make every single trade transparent?
Bishop: I’m generally pro-transparency, but the issue I have with forcing everything to go through an exchange is that it really cramps innovation and reduces the sophistication of the markets.
Lundborg: You say it’s “way too easy” to blame avarice for the crisis. Why aren’t you more angry?
Bishop: I am angry about certain reckless behavior before the crisis, but I’m more angry about how outrageously firms like Goldman Sachs have behaved after the crisis. They refuse to recognize that they’re making their money now because the government and the taxpayer have put a lot of money in.
Lundborg: So bubbles are not all bad?
Bishop: Most bubbles follow some financial or economic innovation taking place. We don’t all just go mad.
The dot-com bubble is a classic example: A lot of rubbish was being sold by the end, and prices got too high, but the emergence of the internet and some of the companies that were launched at that period have changed the world.
Lundborg: What’s your biggest fear at the moment?
Bishop: Now that the economy is showing mild signs of growth, people will say it’s too hard to reform capitalism and that maybe it wasn’t so bad after all.
(Zinta Lundborg is a writer for Bloomberg News. The opinions expressed are her own. This interview was adapted from a longer conversation. To buy this book in North America, click here.)