What is to be Done? The Financial Edition

Edge is an interesting group of "digital literati" who use the web to discuss big ideas. I enjoy their stuff. But the latest posting is a bit much. A group of them has put together this latest issue of Edge entitled "CAN SCIENCE HELP SOLVE THE ECONOMIC CRISIS?" By Mike Brown, Stuart Kauffman, Zoe-Vonna Palmrose and Lee Smolin. There is a lot of lively discussion pro and con. I do enjoy the attack by complexity theorists on traditional economics. But in the end, I come down with the naysayers. There are number of these with very perceptive comments. Among them is an economist, Paul Romer of Stanford, who makes what I believe is a very constructive suggestion. Actually he is only fronting for a fellow economist from MIT:

Andrew Lo from MIT, someone who actually studies financial markets as his day job, suggested in testimony before Congress that we create a system that would do for each financial crisis what the National Transportation Safety Board (NTSB) does for each plane crash: collect evidence on what actually happened.

To be successful, a Capital Markets Safety Board (CMSB) would require both funding and careful attention to incentives. Like the NTSB, a CMSB should be truly independent from the government agencies that are responsible for crisis prevention and crisis management. It should also be protected from influence by firms in the financial sector. In its data collection efforts, it should not rely on university researchers who are themselves susceptible to influence by the interested government agencies or the private sector players. Nor should it use academics who have a personal or professional stake in any particular view about what caused a crisis. It's the soft corruption of lobbying and regulatory capture that should worry us, not ideology. Institutionalized transparency is the best antidote.

A CMSB could have its own staff of talented, neutral researchers. It could have the power to compel testimony and to inspect and summarize (but not reveal) confidential data from private and public sources. It might even be able to mandate data collection systems analogous to the black boxes required in commercial aircraft. To the extent possible, its evidence about individual actions should not be accessible to the authorities responsible for regulatory, criminal or civil proceedings, or God help us, members of Congress looking for headlines. A CMSB should have no responsibility for proposing laws, regulations, or institutional reforms. Like the NTSB, its only job should be to establish a reliable body of evidence about what happened during each crisis and make it available for others to use.

Read the whole of the web posting. Lots of interesting intellectuals with lots of interesting points of view. It's well worth your time!