G20 CRISIS MEETING
Great minds on the Great Crash


By Zhen Ming


YESTERDAY, the G20 - comprising leaders of 20 of the world's biggest industrialised and developing economies - huddled in Washington to discuss the global financial crisis.

There were calls for new controls, new monitoring mechanisms, and a 'supersized' International Monetary Fund (IMF) to cope with the crisis.

But will the G20's so-called Bretton Woods II effort save the world?

To find out, I brought together my own 'G5' dream team - a virtual think tank comprising five of the world's top economic gurus - all of them winners of the Nobel Prize in Economics.

Here's how they have weighed in publicly on what went wrong and what else should be done to fix the problem:

Blame the Republicans

Paul Samuelson (1970 Winner):

'Using markets is not the same thing as unregulated capitalism... Convincing proof... can be found in the deterioration in the US from 2001 to 2008.

'As CEO pay rose respective to median employee pay - from a more normal 40 to 1 ratio up to and beyond 400 to 1 - industrial progress deteriorated rather than accelerated...

'If America turns protectionist, blame past Republican deregulating - a fine instance of the Law of the Unintended Consequences.'

Fine tune

Reinhard Selten (1994 Winner):

'Apparently the market does not value new types of complex securities correctly. For this reason, it is necessary to establish rules for the registration of new types of securities.

'Securities, not unlike food, should be given risk-related labels ...

'We must take steps to ensure that proposed regulations are, on the one hand, as straightforward as possible and, on the other hand, cannot be circumvented.

'Of course, detailed institutional and legal knowledge is necessary to construct such rules - as is so often the case, the devil is in the details.'

Recession the more immediate problem

Robert Emerson Lucas Jr (1995 Winner):

'I think if the current Federal Reserve lending policies are continued aggressively our chances of avoiding a recession larger than that of 1982 are very good.

'At this point, I think this is the best that can be hoped for and it is a lot better than a replay of the 1930s ...

'The regulatory problem that needs to be solved is roughly this: The public needs a conveniently-provided medium of exchange that is free of default risk or 'bank runs'.

'The best way to achieve this would be to have a competitive banking system with government-insured deposits.'

IMF overstretched

Joseph E Stiglitz (2001 Winner):

'There is mounting evidence that the developing countries may require massive amounts of money, amounts beyond the capacity of the IMF.

'The sources of liquid funds are in Asia and the Middle East.

'But why should they turn their hard earned money over to an institution with a failed track record; one which pushed the deregulatory policies that have gotten the world into the mess we are in now; one which continues to advocate the asymmetric policies which contribute to global instability; and one whose governance structure is so flawed?

'Hopefully, at the summit in Washington, the leaders of Europe and Asia will lead the way, beginning the task of creating the global financial architecture that the world needs if we are to have a stable and prosperous 21st century.'

New regulatory mindset needed

Edmund S Phelps (2006 Winner):

'There is no question that the banking industry in the US has gone awry... 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 ...

'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.'


Source: The New Paper, Sun 16 Nov 2008