Tuesday, September 15, 2009

Risk-Taking, Recovery and Finance (fg)

Yesterday, president Obama talked at Wall Street about the possibilities of financial regulation:
Unfortunately, there are some in the financial industry who are misreading this moment. Instead of learning the lessons of Lehman and the crisis from which we're still recovering, they're choosing to ignore those lessons. I'm convinced they do so not just at their own peril, but at our nation's. So I want everybody here to hear my words: We will not go back to the days of reckless behavior and unchecked excess that was at the heart of this crisis, where too many were motivated only by the appetite for quick kills and bloated bonuses. Those on Wall Street cannot resume taking risks without regard for consequences, and expect that next time, American taxpayers will be there to break their fall.
So what we're calling for is for the financial industry to join us in a constructive effort to update the rules and regulatory structure to meet the challenges of this new century.[...] And taken together, we're proposing the most ambitious overhaul of the financial regulatory system since the Great Depression.

The adminisitration's plan include
  • Customer protection via the new Consumer Financial Protection Agency
  • Closing loopholes wihtin the financial system
  • Installation of a resolution authority that deals with systemic risks
  • Coordination on an internatial level
Though, one might discuss the content of Obama's regulation efforts, I highly endorse how he tries to restore a willignes to take responsibility on part of Wall Street. Obama points out that risk-taking is essential, in particuar, in times of recovery.

Transpareny and accountability are the catchwords that popped up in his speech. This is exactly what the financial sector is seeking for in order to escape the need to participate in unssutainable loops in financial markets.

Notice, that many commentators claim these days that bankers again take hugh risks to generate returns. Well, firstly, higher risks do not automatically go hand in hand with higher returns (this is not a law or something like that); and secondly, taking higher risks is what banks are supposed to do for supporting economic recovery.

In particular, that strategy has been the plan of many governments when granting aids to the financial industry with the aim of expanding banking credit volumina that would have not been decicided to do so on parts of the financial sector without governmental support. Therefore, arguing for less risk must consequently differentiate between individual risk-taking and systemic risk stemming from unustainable devlopments across markets, not seldom triggerd by bad policies