Robert J. Barbera, Ph.D., is executive vice president and chief economist at Investment Technology Group.
The booms and busts in the last 25 years have caused huge redistributions of wealth. Market discipline didn’t occur. Is a new economic paradigm (i.e. democratizing of the financial markets) possible? If yes, in which time frame?
Financial market excesses, as you note and I emphasize in the book, drove the boom and bust cycle of the past 25 years. And for many countries the disparity between rich and poor widened. But we should not forget, that from a global perspective, the 1985-2005 period witnessed record breaking improvement in living standards for the poorest of the poor. Over 1 billion Asians, mostly in China and India, left abject poverty and joined the ranks of the modern day workforce. In 1985, infant mortality rates, morbidity levels, and educational levels in China were comparable to a poor African nation. The 1985-2005 expansion was the driver in their emergence as middle class participants.
That does not justify the wild income disparities in the developed world, but it should remind those who are in charge of reconfiguring the world of finance, that they don’t want to throw out the baby with the bath water. “Democratization of financial markets”, in strict terms, means financial markets are an instrument of the many. In the U.S., in fact, that was the reality over the 1985-2005 period. Participation in financial markets soared, as money kept in bank savings deposits all but disappeared. The problem was not that only a few participated, it was that the machinery was biased toward ever increasing risk taking. As I point out in my book that was true at banks, at other financial institutions, and in neighborhoods where man “informed” people bought more house than they should have.
In your book you blame the abject failure in economic forecasting (mainstream theorist). Do we need urging improvements for the education of the economist? Which role are the universities supposed to play in this field?
Keynes wrote that “good or even competent economists are the rarest of birds…He must be mathematician, historian, statesman, and philosopher — in some degree.” Much too much or academic economic thinking, over the past several decades, was carried on in impenetrable mathematical space, with little or no connection to history, economic philosophy, and pragmatic economic policy. Keynes concluded that the good economist “must combine talents not often found together”. A system based exclusively on mathematical prowess as its calling card will very very rarely find those with wide ranging talents.
Financial Markets remain under stress. What was in the last weeks happening in the Eastern Europe looks like a financial market meltdown. Are there other potential new “shocks”? Can you identify additional threats?
The widespread borrowing in swiss franc and euros by home buyers in eastern Europe looks to be a trillion euro problem for western European banks. As was the case in Mexico and Korea, borrowing in foreign currency sets up an adverse feedback loop when things go awry. Many economists, me included, remain frustrated with the ECB. Activity is plunging in Europe. Prices are falling in Spain, and flat in other countries. But the ECB continues to suggest that wage and price inflation is the big risk, and as such they have been slow to lower overnight rates, and remain way behind in terms of delivering extra-normal monetary policy ease.
Thank you very much.
Robert J. Barbera, Ph.D., is executive vice president and chief economist at ITG and an Economics Department Fellow at Johns Hopkins University. He has been a noted Wall Street economist for over 25 years. Barbera worked as an economist for the Congressional Budget Office. He is the best-selling author of “The Cost of Capitalism”.