Saturday, December 27, 2008

Tales from the Meltdown 6

The High Priests of Finance at my beloved alma mater are divided over the correct response to the economic problems. Will increased government involvement improve the situation in some measurable way, or would it have been better to allow the banks to collapse? While the Chicago guys have a long institutional allergy to goverment intervention, the arguments for allowing a widespread liquidation are unconvincing. Austan Goolsbee, a U of C professor and one of Barack Obama's economic advisors represents the new school of thought:

“If the president-elect were not a ‘University of Chicago Democrat,’ then the natural response would be to just try to turn back the clock to what was there before,” he says.

“Because Obama comes out of a framework where the market is not the enemy, there’s a possibility we can create new institutions to guard against excess without going back to what was wrong in the old regime.”

Goolsbee supports bigger capital requirements for banks and other institutions that can borrow from the Federal Reserve, and wants expanded monitoring of hedge fund firms and ratings companies. Derivatives may need to be traded through clearinghouses, like those used in Chicago wheat pits, which act as counterparties for each trade and can suspend traders with insufficient collateral.

“Getting us out of the hole we’re in, promoting oversight and making investments so the economy can grow doesn’t make you anti- market,”

It's good to see so many of the brilliant people at the University quoted all together. The diversity of viewpoints and strong arguments is refreshing to see in print, but a matter of course for the institution.

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