Saturday 21 Jul 2018 | 08:29 | SYDNEY
Saturday 21 Jul 2018 | 08:29 | SYDNEY

Finance: Experts still don\'t get it


Stephen Grenville

22 March 2011 11:22

In a praise-worthy effort to learn something from the Global Financial Crisis, the International Monetary Fund (IMF) has just held a conference, 'Macro and Growth Policies in the Wake of the Crisis', which brought together top policy-makers and academics.

The IMF's Economic Counselor presented an open agenda, with a clear message that things had not gone well and a fundamental rethink was in order.

As would be expected from his earlier writing, the head of the UK Financial Services Authority, Adair Turner, backed him up with a surgical job in identifying what went wrong in the financial sector and what might be done.

But the academics still don't get it. The failure of the financial sector was comprehensive and the 'efficient markets' model is in disarray. Nevertheless, even the young academics, with less to lose from admitting that the basic model needs a total rebuild, want to make a few minor tweaks and carry on as before.

Ricardo Caballero, Harvard's 'best and brightest', identifies the problems of capital flows as:

...the extreme bias of these flows toward AAA fixed-income assets, which interacted very poorly with incentives in the domestic financial  system to create and hold assets that may have been AAA from the point of view of microeconomic shocks but not for macroeconomic ones...In order to justify policy intervention, these concerns must be about externalities.

We still have the same efficient markets view of financial markets, where people operating under conditions of uncertainty don't make foolish decisions which cause the financial sector to seize up. There were just some factors that they didn't take into account. There is no case for further regulatory action.

These professors should go to see the Oscar-winning documentary 'Inside Job' (trailer above), where a number of their colleagues were skewered by the interlocutor. They might ask themselves whether they would have done much better in answering why the model they teach to today's top students has been changed so little by the traumatic events of the GFC.