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expert's podium

Joseph Stiglitz On Rethinking Economic Theory

First up was Columbia professor and Nobel prize winner Joseph Stiglitz.

Mr. Stiglitz has been a critic of traditional economic thinking for some time - but in his talk, he made pointed comments about the failure of the economic profession to anticipate some of the problems that had accumulated before the fact.

He went on to challenge the audience to rethink some of the basic precepts of economic theory that are being taught today. In his view, it is impossible to reconcile the events that led to the economic crisis with the absolute faith in a fully rational, self-correcting market economy.

He talked about how the economic crisis exposed fundamental flaws in long-held economic theory. "The core problem," he said "was irrational behaviour by homeowners, investors and financial institutions that was clearly not efficient and not self-correcting in a relevant time frame."

"For the first time since the Great Depression," he went on to say, "we're dealing with irrationalities and social costs that cannot be ignored. Often, the reason that Adam Smith's invisible hand seems invisible is that it's not there."

Mr. Stiglitz called for a fundamental re-examination of the role of the financial sector - with higher standards of regulation and oversight. "As a society, it's not sustainable to have 40 per cent of corporate profits in the finance sector," he said, "and then to have half of these profits redistributed in bonuses to a relatively small group of people."

Ben Bernanke on interest rates

Next was Time "Man of the Year" Ben Bernanke, chairman of the U.S. Federal Reserve Board, with an analysis of the role of low interest rates in the real estate bubble.

Just two years ago, Alan Greenspan was broadly viewed as a key architect of a long period of good economic times in the United States, someone who had figured out how to navigate competing pressures to help achieve solid economic growth while keeping inflation in check, with a particular focus on the role of technology in increasing productivity.

Even when the prices of technology stocks imploded, he cut interest rates to minimize the negative effects of the recession that followed, creating what was referred to as a "soft landing."

Today, Mr. Greenspan's reputation is in tatters - and his decision to keep interest rates too low too long is viewed as a key contributor to the massive U.S. housing bubble and the deep economic damage to the global economy that followed.

Mr. Bernanke started by saying that the recent economic crisis was the worst in modern history, even worse than the Great Depression when its global impact is taken into account.

He made the case that while low interest rates were a contributor to the U.S. real estate bubble, poor regulatory and risk management policies were the chief culprits for today's woes.

In his conclusion, he also talked about the role of innovation in lending and mortgage practices - and commented that the past few years have demonstrated that innovation is not always positive, unless it takes place within an appropriate policy framework.

"We need strengthened commitment to regulatory reform," he said, "and supervision must be executed in a better and smarter way."

James Heckman on the challenges ahead

I also had the opportunity to chat with James Heckman of the University of Chicago, winner of the 2000 Nobel prize for his work in analyzing the effects of public policy. We talked about his research demonstrating the compelling societal returns on investments in the very early years of children from lower incomes.

Even though his research makes him sympathetic to government spending on social programs, he expressed concern about the sustainability of the U.S. budget and trade deficit. Mr. Heckman also discussed the need for America's leaders to take a longer-term view, even if those views are not popular in the short term.

The crisis of the past 1½ years has caused huge pain around the world. One of the few positive outcomes is the extent to which there is openness to new thinking and new approaches to reduce the likelihood of a recurrence.

Dan Richards is president of Strategic Imperatives. He is a faculty member in the MBA program at the Rotman School at the University of Toronto. richards@getkeepclients.com

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