AEI Event: "Addressing Systemic Risk" June 3, 2009 http://www.aei.org/event/100061
"Forecasters as a group will almost certainly miss the onset of the next financial crisis, as they have in the past, as will any newly designated systemic regulator.
"This inherent forecasting incapacity is critical to how we handle systemic risk. It is not possible to identify which financial organization, big or small, has, say, a .999 probability of disabling the whole financial system, should it fail. But short of so high a bar, large numbers of failing institutions will invariably be bailed out. It is one thing to identify firms whose collapse might severely impair financial intermediation; it is quite another to identify institutions whose failure will lead to systemic breakdown. Systemic risk is readily identifiable. Potential systemic failure is not.
"Those tasked with reforming our current regulatory structure confront an additional policy dilemma. On the one hand, the United States has embraced global free trade. President Obama and his G-20 colleagues recently reaffirmed the principles of the global trading system that gradually evolved during the post World War II years in rejection of the Smoot-Hawley and beggar thy neighbor policies of the 1930s. But to compete successfully in the global marketplace requires that the domestic market itself be highly competitive. Heavy regulation and a thwarting of creative destruction undermine that capability. In short, there is a limit to the degree domestic regulation can go without severely impairing the global competitive economic advantages that the U.S. has enjoyed for so many decades."
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