Policy Seminar on What Financial System for the 21st Century?
Thursday, March 15, 2012
Annenberg Conference Room, Lou Henry Hoover Building
PARTICIPANTS
Andrew Crockett, Gary Becker, Jeremy Burlow, Charles Calomiris, Darrell Duffie, Joe Grundfest, Steve Haber, Nick Hope, Bob Joss, Stephen Krasner, Stephen Langlois, Ron McKinnon, Monika Piazzesi, Martin Schneider, Myron Scholes, Ken Scott, John Shoven, George Shultz, Tom Stephenson, Johannes Stroebel, John Taylor, Ian Wright
ISSUES DISCUSSED
Andrew Crockett discussed issues he presented in his 2011 Per Jacobsson Lecture, “What Financial System for the Twenty-First Century?” This included discussion of how and why markets fail, types of reform that are needed in the financial system, whether public policies hurt or help problems that occur, and how to appropriately incorporate regulation and market discipline into the financial system.
Crockett also broadly discussed the nature of the financial system, the contribution of the financial sector to the real economy, how to ensure prudent financial intermediation, how to both promote stability and maintain efficiency in the financial system, and the “appropriate” structure of the financial industry.
Crockett described the three components comprising the financial system: intermediaries, markets in which claims are exchanged, and infrastructure underpinning the interactions of intermediaries and markets and explained that these components are inextricably intertwined. He also discussed how the key contributions of the system resulting from these components are a payment system, the ability to insure financial risk, and the mitigation of asymmetric information problems.
Pertaining to reforms, Crockett argued the existence of institutions that are “too big to fail” should be eliminated, as their existence distorts incentives and becomes a charge on tax payers in the case of bail-outs. He also proposed capital and liquidity standards be raised, but argued that reforms not go so far as to inhibit a place for position taking in trading operations, explaining that the role institutions play by creating liquidity through proprietary trading is beneficial and important for market efficiency.
