global finance crisis
Syndicate 1– Lessons will repeat until we learn them – Stiglitz, AFR 2010
Stiglitz outlines five lessons to be learned from the GFC. Discuss each one with reference to whether you agree or not.
Rank them in of your perceived importance and discuss how well the lessons have been learnt given the turmoil in financial markets.
The thoughtfulness and originality of your answers will be assessed and challenged in class.
In brief, the five lessons are deregulation, reasons of market failure, Keynesian policies, the methods to against inflation and risk of innovation. The rating and discussion are given below.
From personal view, the most important lesson is understanding way market often do not work the way they are meant to work. According to the Efficient Market Hypothesis, governments should leave financial markets to work their magic without interference. But it seems not very accurate. This lesson was followed with undiminished faith until the GFC. This is most evident in the attention paid to rating agencies and bond markets, and the speculative bubble they helped to generate, that created the crisis in the first place.
The second lesson is deregulatory. The regulatory framework did not keep going with financial innovation, such like derivatives and securitisations. Also many laws made bankers more greed and not lead to society’s wellbeing. Thus, adequate regulations should be performed to regulate the market in order to develop peaceful.
The third lesson should be financial innovation. As mentioned above, more financial product are created without strong regulating. Although these products may bring huge benefits to investors, they have great potential risks, such like hedge funds and securitisations.
The forth lesson is monetary policy to fighting inflation. Rapid increases in a number of commodity prices followed the collapse in the housing bubble. Most central bank use monetary policy as a main method to against