*Reforming U.S. Financial Markets*

The authors are Randall S. Kroszner and Bob Shiller, the subtitle is Reflections Before and Beyond Dodd-Frank, and the volume consists of a paper by Shiller (let’s democratize and humanize finance) and a paper by Kroszner (“don’t throw out the baby with the bathwater“) and lots of transcribed discussion.  Here is one excerpt from George Kaufman:

Why do we study the past?  An optimist would say to avoid repeating the same errors.  As the late Spanish-American philosopher George Santayana (1863-1952) noted: “those who cannot remember the past are condemned to repeat it.”  But I find this observation not to be very interesting as most policymakers I have met remember at least some of the past.  Unfortunately, this leads me to conclude more generally that “those who can remember the past are condemned to agonize first and then to repeat it.”

Kroszner’s policy suggestions include greater competition for the ratings agencies, fewer and deeper tranches for MBS, and more standardization in servicing agreements, among other ideas.  His is the best extant statement of a “marginal adjustment and fill in the regulatory gaps approach,” and the reader will notice that most economics bloggers tend to be more pessimistic about the efficacy of marginal reform and to favor blunter restrictions, such as might be applied to leverage.  Kroszner also offers a good discussion of how implicit governmental guarantees undermine the development of market infrastructure, for instance the systematic development of data bases to better inform market participants.  Kroszner of course was on the Board of Governors during the financial crisis.

I came away from this book thinking: “There aren’t enough safe assets out there.  But how can we solve that problem?”

I would have enjoyed hearing Interfluidity at this session.