Tuesday, October 27, 2009

Calomiris on the Financial Crisis

Charles Calomiris of Columbia Business School talks with EconTalk host Russ Roberts about the financial crisis. Calomiris argues that it is important to put the crisis in historical perspective in the context of other bank crises. He argues that bank crises differ widely across time and place--some times and some places are placid, others are prone to regular crises. Calomiris argues that frequent episodes of failure are tied to government guarantees such as various forms of deposit insurance or similar incentives for risk-taking. Looking at the current crisis, Calomiris indicts "too big to fail," the government's reliance on ratings agencies as a measure of risk, and poor corporate governance as the key causes.

1 comment:

thinking said...

There's no doubt that the "too big to fail" companies need to be looked at, and in fact the Fed is aiming to do this.

As to govt's reliance on ratings agencies as a measure of risk, I would argue it was the investment community's oover-reliance on these ratings agencies as well that created the problem.

However, ultimately the problem was that the ratings agencies are paid by the same companies issuing the securities they are rating. There's tremendous incentive for them to give the companies what they want, which is a high rating. If we have truly independent rating agencies, we may not have this problem.

As to the criticism of FDIC, etc...I would only add that the bank failures of the Great Depression, as well as all others prior to that, occurred without deposit insurance and other govt safety nets.

Who in their right mind would want to do away with the FDIC, or thinks we would have been better off in this last crisis without it? Does anyone think the FDIC in any way caused the mortgage and credit crisis? This is rather absurd.

I think this is a case of preconceived ideology again dictating the conclusion, where some just want to find govt as the problem for everything. Calomiris has strong ties to the American Enterprise Institute (AEI), a very conservative think tank. As an example, AEI scholars are considered to be some of the leading architects of the second Bush administration's public policy.