George Soros who, by his own words, has been “having a very good crisis” is reportedly dishing out $50 million, with $150 million in matching funds to follow, to set up an institute (lining up four former Nobelists in economics), establish a journal and set aside money for research grants and conferences – all to foster a sea change in what he and many others consider a few decades worth of economic science dominated by “free-market fundamentalism”. While I don’t really doubt Soros’ motivations what makes this bit of news more than a little ironic is that his most famous and probably still the most profitable bet against the Bank of England was to effectively demonstrate that just as free markets work until they don’t, the same also applies to regulated ones. And, while it may be convenient to forget it, the billions that Bank of England lost in its titanic struggle against Quantum and other hedge funds in 1992 was “a taxpayers’ money” too, just like what was (and still is) thrown at 2009 crisis by governments and central banks all around the world.
Coming back to the initiative – the stated aim of the whole endeavor is currently a negative definition: it is apparently against the prevailing orthodoxy. It would be a lot more interesting instead to hear what will they all stand for. In the light of the recent events it has became very easy to cry wolf and denounce laissez-faire capitalism and free markets. It is a lot more difficult to come up with a serious alternative though. As the perceived center of problems seems to gravitate towards the past liberalization and de-regulation of financial markets, the obvious and understandable knee-jerk reaction has been to go in the opposite direction and call for more regulation. At a closer examination this will not look such a promising route, however.
In Stanford’s “Policy Review”, Arnold Kling makes a very convincing, if lengthy and a bit technical point that the failure to preempt the crisis was not due to not having a proper regulatory framework in place, or regulators not having enough power or proper tools in their hands to react to what they should have seen as pending problems. It was due to the lack of knowledge and understanding. And therefore the answer, the way to avoid the same thing happening in the future, is likely not to be found in having more regulation – for the regulation is going to fail the same way as markets did.