Thursday, September 25, 2008

Some Damn Foolish Thing in the Balkans

That's what Bismark predicted would set off the war that seemed inevitable. The trigger turned out to be the assasination of Archduke Franz Ferdinand, heir to the Hapsburg throne. The assassins were seven young men. All were members of a secret Serbian nationalist movement. All had tuberculosis which was a death sentence in 1914. The rest, as they say, is history.

Two days ago, at a Brookings Institute conference on Turmoil in Housing and Financial Markets, former Treasury Secretary Lawrence Summers (now at Harvard's Kennedy School) observed that there is no single root cause of the current financial crisis and no simple single solution. The fix, he said, requires "multiple instruments targeted to multiple objectives." One response to the housing crisis currently getting most of the attention is to regulate institutions so they won't make mistakes again. People and businesses make mistakes and they always will, whether government regulates them or not. Summers offered another approach --reforming the financial system to make it safe for institutions to fail. The goal should be reduction of systemic, not individual risk of failure.

Summers noted that even without subprime mortgages, the US economy was still vulnerable to leverage bubbles and might still have found itself in crisis. Blaming the current financial crisis on submprime mortgages, he said, is like blaming World War I on the assassination at Sarajevo.

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