The Wrong Person Wins The Great Economist.Com Finance Debate

Well, at least in my inexpert opinion. The final statements indicated a lot of agreement between Ross Levine and Joe Stiglitz. Yet you can distinguish between the two when each makes their most colorful or most forceful statements: Ross Levine:

Again and again, the regulatory authorities (1) were acutely aware of problems, (2) had ample power to fix the problems, and (3) chose not to.

Joe Stiglitz:

If products like CDSs are sold as insurance products, then they should be subject to insurance regulation, ensuring that there is adequate capital to fulfill their promises; if they are gambling products, then they should be subject to gambling laws and regulated and taxed as such.

Although both agree on the need for financial regulation, their core instincts are very different.

Levine doesn't think any one financial product is inherently good or bad; he thinks the challenge is to get the regulators to do the job that they previously punted on.

Stiglitz thinks the main danger is in the financial products created by the destructive financial wizardsand has a lot of faith in regulators to crack down on them. ("Gambling products"? makes you wonder if Indian reservations are going to take over from Wall Street.)

The Economist is going to announce the winner in a few hours, but we already know: Stiglitz is getting 57% of the votes to Levine's 43%. I think the voters are getting it wrong.

The Economist Debate on Finance for Good or Evil: Round 2 Turns Up Heat

The debate now going on at the Economist is providing one of the most exciting and insightful looks at What We Learned about Finance from the Crash. The debate is very relevant for the role of finance in development (which Levine has devoted his career to studying). Debate is now on round 2 and you can vote for your favorite. Stiglitz has a small lead at this point; my vote still goes to Levine. Joe Stiglitz:

while many of the recent innovations may well have contributed to the bonuses of those in the financial sector, or even the short-run profits of the industry, the link between these innovations and overall economic performance remains unproven....Naked credit default swaps (CDS), betting on the death of other firms, opened up new incentives for doing mischief, with a greater chance of not being caught and less certain punishment....The contrast between the surfeit of so-called innovations that are socially unproductive or worse, counterproductive, and the dearth of innovations in {more productive} areas is striking....

Ross Levine:

There is no reason to believe that the centuries-old synergistic connection between financial and economic development recently ended... Mr Stiglitz overemphasises the impact of financial innovations on the crisis and underemphasises the role of policymakers in triggering financial abuses....Repeatedly, and many years before the crisis, a prominent task force organised by Timothy Geithner (then president of the NY Federal Reserve) warned of the dangers {of Credit Default Swaps (CDSs)}. But senior officials did nothing. This was not a failure of information, nor of regulatory power; and, it does not reflect an inherent evil with CDSs. It was a failure of high-level policymakers to respond....In contrast to Mr Stiglitz, what has disturbed me the most is the resistance of some within the financial policy apparatus to recognise the malfunctioning of the regulatory regime during the decade before the crisis. The authorities failed miserably to fulfil their core responsibility...

Is Finance Evil? Vote Now at the Great Online Debate at Economist.com

UPDATE  2/24 9:45am: since the post below was written, Stiglitz has seen vote swing his way. Cast your own vote early and often! Paul Volcker said after the crisis: "I wish that somebody would give me some shred of neutral evidence about the relationship between financial innovation recently and the growth of the economy."

There is a longstanding historical tradition of suspicion and hostility towards finance. It goes all the way back to the medieval prohibition of "usury," if not further.  Many have long accused financiers of useless "speculation" that enriches themselves at the expense of everybody else.

Didn't The Crisis reinforce all of these doubts ten-fold? Shouldn't developing countries be even MORE wary of those financial tricksters? (Volcker  thinks the only useful finance innovation in our generation was the ATM).

And in a new online debate at the Economist, Joe Stiglitz backs up Volcker with all his Nobel-Prize-winning artillery.

On the other side against History and Hard Times and Heavyweights is one brave economist, Ross Levine, arguing that financial innovation is still GOOD. In fact, he says it's Indispensable to future Economic Growth both in rich and poor countries. And so far he's winning the argument! -- go to the web site and decide for yourselves -- and then cast YOUR vote.

(Full disclosure: Ross happens to be my friend  and frequent co-author. But he would have gotten my vote anyway.)