Harvard PhD Economist Proposes Lessons for Financial Sector

WASHINGTON, DC--(Marketwire - Jun 30, 2011) - As the world closes in on the three-year mark of the beginning of the global financial crisis, one expert believes that it's not enough to rely on new regulations to prevent future disasters -- a fundamental change in mindset is required.

"The global financial crisis, marked by the bankruptcy of Lehman Brothers in September 2008, has taken an enormous economic, financial, and social toll," said Rex Ghosh, who also authored "Nineteenth Street, N.W." (www.nineteenthstreetnw.com), a novel about a fictional act of terrorism that causes a global financial crash. "Both in the United States and abroad, regulations, laws, and practices are being changed to help ensure that such crises do not recur. But these regulations -- running to the thousands of pages -- are enormously complex. The real prevention rests in the notion that leaders need to rely on more fundamental and basic practices based in prudence and responsibility."

Ghosh would like to see the financial sector learn the following lessons:

• For the Federal Reserve - Central banks such as the Fed should not only look at goods price inflation, but also at important asset prices, such as the stock market and housing sectors. It also needs to be more mindful of lending and credit booms. Traditional monetary policy tools (like the Fed's interest rate) may need to be bolstered by counter-cyclical capital requirements (requiring banks to hold more capital in "boom" times).

• For Banks - Boring is good. Banks should get used to being a much smaller proportion of the economy, like it was before the 1990s. Bankers should also be aware of credit and counterparty risks. They need to know who they're doing business with, know to whom they are lending and not rely solely on credit ratings.

• For Regulators - They should not count on banks to manage their risks prudently. They should think seriously about "tail risks" -- just because something has not happened before, such as a nation-wide decline in house prices, doesn't mean it cannot happen in the future.

About Rex Ghosh

Rex Ghosh received his A.B. in Economics from Harvard University, MSc. in Development Economics from Oxford University, and his M.A. and Ph.D. in Economics from Harvard University. He has taught at Princeton University and Georgetown University, and lectured at various universities throughout the world.