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What should the objective of financial markets evolution beyond the Dodd-Frank Act be: making markets more robust, or democratizing
Download Audio as MP3 and humanizing finance? Former Federal Reserve governor Randall S. Kroszner of the University of Chicago and Robert J. Shiller of Yale University will present the contrasting perspectives and policy recommendations from their new book, Reforming US Financial Markets—Reflections Before and Beyond Dodd-Frank. Along with financial markets experts John H. Makin of AEI and Douglas J. Elliott of the Brookings Institution, the authors will examine the future of financial markets and take up several pressing questions: Can we understand the instabilities of a leveraged banking system and contracts that protect the individual party but destabilize markets in the aggregate? Can we address the procyclical elements of regulation and human behavior? Can there be countercyclical capital requirements? How can the institutional and legal structures of financial markets be improved? Can the principles of risk management be extended to include broader public participation?
RANDALL S. KROSZNER, University of Chicago
ROBERT J. SHILLER, Yale University
DOUGLAS J. ELLIOTT, The Brookings Institution
Question and Answer
American Enterprise Institute
WASHINGTON, MAY 18, 2011--The Dodd-Frank Act could have done more to create a sustainable market, financial market experts Randall S. Kroszner and Robert J. Shiller said Wednesday at AEI. Kroszner and Shiller, authors of the recently released book Reforming US Financial Markets--Reflections Before and Beyond Dodd-Frank, view the financial crisis from different perspectives but reach some common conclusions. Shiller said that every financial crisis presents an opportunity for reform, and that we are currently in the midst of an opportunity to design a financial market with the long term in mind. This can be accomplished by democratizing and humanizing finance, two principles discussed in the book. Kroszner agreed that keeping long-run objectives in mind will create more clarity and less uncertainty in financial regulation. The objective of financial regulation, he said, should be to support sustainable economic growth through the creation of robust markets. Both Kroszner and Shiller recognized that lawmakers realized they did not have all the answers and therefore mandated studies instead of regulations. Panelist Douglas J. Elliott of the Brookings Institution noted that "markets are a social construct" that "exist because we have laws and regulations" allowing them to work. He agreed with the authors that US policymakers now have the opportunity to make the market more effective and efficient. AEI's John H. Makin concluded that financial crises will continue to exist because we do not have the ability to regulate and foresee future innovations in the financial markets, to which Kroszner replied that robust markets will help mitigate the severity of future crises.
Randall S. Kroszner is the Norman R. Bobbins Professor of Economics at the University of Chicago Booth School of Business. Most recently, he served as a governor of the Federal Reserve System, where he chaired the Committee on Supervision and Regulation of Banking Institutions and the Committee on Consumer and Community Affairs. He represented the Federal Reserve Board on the Financial Stability Forum (now called the Financial Stability Board), the Basel Committee on Banking Supervision, and the Central Bank Governors of the American Continent. Before becoming a member of the board, Mr. Kroszner was a professor of economics at the University of Chicago Booth School of Business and director of the Stigler Center for the Study of the Economy and the State. He was also editor of the Journal of Law and Economics and associate editor of numerous other academic and policy journals. Mr. Kroszner served as a member of the President’s Council of Economic Advisers from 2001 to 2003, where he was heavily involved in formulating the policy response to corporate-governance scandals as well as in advising on domestic and international issues.
Robert J. Shiller is the Arthur M. Okun Professor of Economics in the Department of Economics and at the Cowles Foundation for Research in Economics at Yale University, and a professor of finance and fellow at the International Center for Finance at the Yale School of Management. He has written on financial markets, financial innovation, behavioral economics, macroeconomics, real estate, statistical methods, and public attitudes regarding markets. He served as vice president of the American Economic Association in 2005 and president of the Eastern Economic Association from 2006 to 2007. He has also been a research associate at the National Bureau of Economic Research since 1980. Mr. Shiller is the author of several books, including Animal Spirits: How Human Psychology Drives the Economy and Why It Matters for Global Capitalism (Princeton University Press, 2009, with Geroge A. Akerlof), Subprime Solution: How the Global Financial Crisis Happened and What to Do about It (Princeton University Press, 2008), The New Financial Order: Risk in the 21st Century (Princeton University Press, 2003), and Irrational Exuberance (Princeton University Press, 2000). He also developed a repeat-sales home price index with Karl E. Case and is now published at the Standard & Poor’s/Case Shiller Home Price Index. He writes the regular column “Finance in the 21st Century” for Project Syndicate, which publishes around the world, and “Economic View” for the New York Times.
Douglas J. Elliott is a fellow in economic studies at the Brookings Institution, where he is a member of the Initiative on Business and Public Policy. Mr. Elliott founded the Center on Federal Financial Institutions in 2003, to provide objective analyses of the federal government’s 100 percent–owned financial institutions. Much of his work there focused on the Pension Benefit Guaranty Corporation and the defined-benefit pension system it supports. Before that, Mr. Elliott spent twenty years as an investment banker focused on financial institutions, primarily at JPMorgan. He has testified before both houses of Congress and participated in numerous policy forums as an expert in pension funds.
John H. Makin is a resident scholar at AEI and a principal at Caxton Associates. Mr. Makin has been an adviser to numerous US government agencies, the Federal Reserve System, and the Bank of Japan. He is a member of the Council on Foreign Relations and the Economic Club of New York. Mr. Makin joined AEI in 1984 after a distinguished career in academic research. He is the author of numerous books and articles on financial, monetary, and fiscal policy, and he writes AEI’s monthly Economic Outlook.
Alex J. Pollock is a resident fellow at AEI, focusing on financial policy issues, including housing finance, government-sponsored enterprises, retirement finance, corporate governance, accounting standards, and the banking system. Previously, he spent thirty-five years in banking, including twelve years as president and CEO of the Federal Home Loan Bank of Chicago. He is the author of numerous articles on financial systems and the organizer of the “Deflating Bubble” series of AEI conferences. In 2007, he developed a one-page mortgage form to help borrowers understand their mortgage obligations. He is a director of the Chicago Mercantile Exchange, the Great Lakes Higher Education Corporation, and the International Union for Housing Finance, and the chairman of the board of the Great Books Foundation.