Thursday, February 4, 2010

Spence on Banking Reform

In an article on the American Recovery for Project Syndicate Michael Spence, 2001 Nobel Laureate in Economics, formulates a synthetic judgment on the financial reform possibilities :

« In fairness, the new rule proposed by former US Federal Reserve Chairman Paul Volcker to separate financial intermediation from proprietary trading is not a bad idea. Combined with elevated capital requirements for banks, it would reduce the chance of another simultaneous failure of all credit channels. But it is not sufficient. Hedge funds can also destabilize the system, as the collapse of Long Term Capital Management in 1998 demonstrated. So they also need clear, albeit different, limits on leverage. »


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