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Reforming U.S. Financial Markets

Reforming U.S. Financial Markets: Reflections Before and Beyond Dodd-Frank

Randall S. Kroszner
Robert J. Shiller
edited and with an introduction by Benjamin M. Friedman
Copyright Date: 2011
Published by: MIT Press
Pages: 176
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  • Book Info
    Reforming U.S. Financial Markets
    Book Description:

    Over the last few years, the financial sector has experienced its worst crisis since the 1930s. The collapse of major firms, the decline in asset values, the interruption of credit flows, the loss of confidence in firms and credit market instruments, the intervention by governments and central banks: all were extraordinary in scale and scope. In this book, leading economists Randall Kroszner and Robert Shiller discuss what the United States should do to prevent another such financial meltdown. Their discussion goes beyond the nuts and bolts of legislative and regulatory fixes to consider fundamental changes in our financial arrangements. Kroszner and Shiller offer two distinctive approaches to financial reform, with Kroszner providing a systematic analysis of regulatory gaps and Shiller addressing the broader concerns of democratizing and humanizing finance. After brief discussions by four commentators Benjamin M. Friedman, George G. Kaufman, Robert C. Pozen, and Hal S. Scott), Kroszner and Shiller each offer a response to the other's proposals, creating a fruitful dialogue between two major figures in the field.

    eISBN: 978-0-262-29595-6
    Subjects: Economics, Finance

Table of Contents

  1. Front Matter
    (pp. i-vi)
  2. Table of Contents
    (pp. vii-viii)
  3. Introduction
    (pp. ix-xviii)
    Benjamin M. Friedman

    The financial crisis that began in 2007 and the economic downturn that it triggered together constitute one of the most significant economic events since World War II. In many countries the real economic costs—costs in terms of reduced production, lost jobs, shrunken investment, and foregone incomes and profits—exceeded those of any prior post-war decline. In the United States the peak-to-trough decline in real output was 3.8 percent, slightly greater than the previous post-war record set in 1957–1958; unemployment did not reach the level that followed the 1981–1982 recession, but as of the time of writing it...

  4. 1 Democratizing and Humanizing Finance
    (pp. 1-50)
    Robert J. Shiller

    The world financial crisis that began with the subprime crisis in 2007 and continues today will be a historic occasion for regulatory reform. Serious instabilities and inconsistencies have been discovered in our financial system. We need to invent new rules of the game, so that the system will work better in the future and allow us to pursue our goals and inspirations with more satisfactory outcomes.

    The U.S. government has been taking a large number of unusual steps to rescue the financial system and the economy from this the worst financial crisis since the Great Depression of the 1930s. These...

  5. 2 Making Markets More Robust
    (pp. 51-84)
    Randall S. Kroszner

    We have experienced the most severe global financial crisis since the Great Depression. The sharp, synchronized falloff of real economic activity that occurred in the fall of 2008 is unprecedented. Reform of regulatory policies and of market practices are necessary to reduce the likelihood of such events. While we are still learning lessons from this crisis, I will suggest some paths for reform that can help to make markets more robust going forward.

    The goal of such reforms would be to support sustainable long run economic growth, consistent with solid and sensible protection of consumers. Reforms should focus on reducing...

  6. 3 Comments
    (pp. 85-118)

    The papers by Robert Shiller and Randall Kroszner present two interesting contrasts. Shiller takes a more fundamental approach, envisioning an Internet-style open-source, or bottom-up, structure of how the financial markets ought to work, while Kroszner takes a much more pragmatic (as he labels it) objectives-based, market-oriented approach. And while Kroszner’s paper reflects an underlying confidence in the ability of market competition to perform its presumed economic role of generating outcomes that we would not only identify as equilibria but characterize as economically optimal—in many cases, he argues, our recent problems were due to anabsenceof competition—Shiller, in...

  7. 4 Responses
    (pp. 119-130)

    I am very pleased to see the range of ideas raised here by Randall Kroszner and the four discussants, who are some of our greatest thinkers on financial reform.

    Two of the discussants—Benjamin Friedman and George Kaufman—note a fundamental difference between my piece here and that of Kroszner. In Friedman’s words, while Kroszner takes a “pragmatic . . . objectives-based, market-oriented approach,” I take a “fundamental approach” aimed at describing how things “ought to work” (p. 85). Kaufman says Kroszner takes “a more cold-blooded, analytical (Chicago School) approach” while I take a “warmer and fuzzier approach” (p. 92)....

  8. 5 Rejoinder
    (pp. 131-132)

    Randall Kroszner says that I seem to “to attribute part of the crisis to deregulation relaxing some of the 1933 Glass-Steagall Act separations between commercial banking and investment banking” (p. 125). He infers that I would support a reinstatement of the Glass-Steagall Act. Robert Pozen, in his comments, makes a similar inference. However, I do not favor reinstating the Glass-Steagall Act. This impression is especially important now that Dodd-Frank has implemented aspects of the “Volcker Rule.”¹ Paul Volcker, former Chairman of the Federal Reserve Board, had proposed that banks should be prohibited from investing in or sponsoring a hedge fund...

  9. Contributors
    (pp. 133-134)
  10. Index
    (pp. 135-152)