Current U.S. reform efforts won't fix global financial system, economists say
David Wyss, of Standard & Poor's, and Simon Johnson, of MIT, tell a crowd in Philadelphia that global accounting standards and regulatory measures aren't being discussed. Without them, another crash is coming.
Current U.S. reform efforts won't fix global financial system, economists say
Mike Armstrong, Inquirer Columnist
After the trillions of dollars committed to financial bailouts and hundreds of billions promised for economic stimulus programs, the nation's state legislators may have hoped to hear two noted economists tell them when things will start to get better.
Instead David Wyss, of Standard & Poor's, and Simon Johnson, of MIT, gave them reasons why all of us should worry that we haven't fixed anything yet.
All of the hearings in Washington regarding financial reform are aimed at fixing a system built in the 1930s. However, today's world is one of global financial giants, Wyss said. Leaders of the developed and developing countries need to move toward adopting global accounting standards and regulatory mechanisms.
But, Wyss said, "it's not even being discussed."
Wyss and Johnson were part of a panel discussion about the economy at the National Conference of State Legislatures at the Convention Center in Philadelphia this morning. (Comcast Corp. executive vice president David L. Cohen also took part.) Here's a link to a synopsis of the discussion on the NCSL Web site.
Both economists envision the U.S. economy bottoming within a few months and beginning a slow recovery. While the panel spend a lot of time discussing the $787 billion economic stimulus program, it was reform of the financial sector that produced the most spirited discussion.
Moderator Kathleen Hall Jamieson, of the University of Pennsylvania, asked what states can do to address financial sector reform. "States are doing their best to make it worse," Wyss said.
How? Insurance regulation is still done at the state, not federal, level. AIG, rescued by the federal government with a $180 billion bailout, is an insurance company that had something like 200 regulators, Wyss said. "When anything has 200 regulators, you have no regulator," he said.
In effect, the states are giving companies "the ability to do regulatory arbitrage," Wyss said.
Johnson was quick to agree. "Big companies are gaming you," he told the state legislators and staffers in the crowd. Under the current system, states are pushing "risks down the road."
Most of the reform efforts will not work and will be fought every step of the way by the financial industry, Johnson said.
He also emphasized that the United States must make its largest financial institutions smaller. "You can't prevent failures or bubbles. But when they occur you must make sure the damage is less than" what the world has experienced through this crisis, he said.
Mike Armstrong blogs about Philadelphia corporations and business-related topics. Contact him at 215-854-2980.
Reach Mike at marmstrong@phillynews.com.
