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Maybe This Financial System Can’t Be Fixed
September 14, 2018
Hey my newest Bloomberg Opinion column is out:
Maybe This Financial System Can’t Be Fixed
Better risk management isn’t enough. We need a different paradigm.
For my other columns, go here.
Categories: Uncategorized
mathbabe 
If you want accurate risk management, ensure they are not to big to fall and make sure they know they can fail. It won’t fix the problems about the unknowns, but it will help a lot.
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That would definitely help.
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In many ways, the financial system has not grown up since California proclaimed “Thar’s gold in them there hills!” It is just a legal version of endless “get rich quick” schemes and Ponzzi schemes. The financial industry contains more than its fair share of adrenalin junkies, gambling addicts, money worshipers and the just plain greedy.
I believe you are correct that the financial system must be replaced, but I am skeptical that it will happen. After the Depression hit, they tried this and it worked for a while, until the greedy found a way around the restrictions. Within a few years, the rules that led to the prosperity of the 1950s failed. This led us inextricably to the Great Recession. The rules to fix that failure are already being discarded. Can you say: here we go again??
(BTW, how about an update on the long term outcome of your surgery?)
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The problem of framing a social contract for regulating finance is a very difficult problem. Tom Sorell has a good article on this at https://doi.org/10.1111/misp.12081
The gist of Sorell’s proposal is that in Rawls’s social contract theory, there is a distinguished set of institutions Rawls calls the “basic structure.” Sorell argues that financial institutions are among these. The basic structure consists of the institutions needed to regulate the “primary goods”: civil rights, property rights, political capacities, educational and healthcare goods, all of which any member of society requires, whatever might be her other projects, values, and sense of what makes her life meaningful.
Then running such “basic structure” institutions carries public obligations beyond those of ordinary private citizens. In effect, if a bank is big enough, its bosses should be treated as if they worked for the public. Sorell proceeds to argue that some individuals are blameworthy in the financial crisis. Since this goes beyond where the legal system has been able to go, a moral argument needs to be made. (This is hardly ever done.)
But Sorell doesn’t produce an account of what kind of financial regulations a social contract might require. That’s a much more difficult project. Risk management has to be part of this, so don’t give up on it.
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