Are Things So Bad That Financial Reform Can Wait?

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Should world leaders try to fix financial regulation before stabilizing the world economy? It is a question that divided some of the most influential people in economics late last week at an invitation-only conference at Columbia University’s Center on Capitalism and Society. The participants included three Nobel Prize winners, hedge fund legend George Soros, Christine Lagarde, the finance minister of France and Paul Volcker, the former Federal Reserve chief now chairing President Obama’s Economic Recovery Advisory Board.

Lagarde called for “speedy” reforms “because time is of the essence.” Soros said not-so-fast. Volcker said he is inclined to side with Soros on the point. It is probably better to wait “until we have a better sense of where we want to go and a better sense of how this crisis is going to work its way out,” said Volcker.

Why not move quickly? Because the financial order is changing so dramatically that the subjects of regulation are a moving target, said Malcolm Knight, a vice-chairman of Deutsche Bank and former general manager of the Bureau of International Settlements, the Basel-based central bank of government central banks. “In these circumstances it is very hard to determine how the regulatory environment should be reformed,” Knight said. Soros said “it is a matter of priorities,” that regulatory reform should not take away from work to end the crisis.

Lagarde argued that it is better to act now and get the new regulatory regime 80% right rather than deliver a 100% perfect plan that is so late it is wrong. She wants to quickly “send out very strong signals” to the public and bankers that finance will be “regulated better, regulated deeper…and actually discipline players.” On Sunday, European leaders meeting ahead of the April 2 summit of the Group of 20 nations agreed to press for limits on executive bonuses, a stronger role for the International Monetary Fund, and other reforms.

Joseph Stiglitz, a Nobel laureate and professor at Columbia, said changing financial market regulation is an important step toward rebuilding confidence the world economy needs. Willem Buiter, professor at the London School of Economics, said governments should act to set regulation right while the financial industry is on its knees. “If we wait, they will have regained their lobbying and political power,” Buiter said. Indeed, momentum for regulatory reform during the Asian financial crisis of 1997 dissipated after that situation stabilized, noted Stiglitz.

Volcker doubts there will be a problem with a lost urgency for reform this time around. “I don’t think this crisis will be forgotten very quickly,” Volcker said. “We’re going to hear reverberations from this for a long time.”

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