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The Political Economy of Monetary Policy and Financial Regulation: A Conference in Honor of Jane D'Arista

On May 2 and 3rd, 2008, PERI hosted a conference on "The Political Economy of Monetary Policy and Financial Regulation" in honor of Jane D'Arista, Director of Programs for the Financial Markets Center and the author of the masterful study of U.S. financial regulation, The Evolution of U.S. Finance. For more than thirty years, Jane D'Arista has been one of the country's most insightful analysts of financial markets and regulation. The conference was co-sponsored by the Financial Markets Center and the Economics Department of the  University of Utah.

The D'Arista conference brought together more than a dozen economists from across the United States and around the world to present historical, analytical and empirical analysis, much of which bears on the enormous financial problems the U.S. now faces. This conference on financial regulation and monetary policy could not have been more timely: the ‘sub-prime’ market meltdown has once again raised profound questions about the nature of our financial markets, their contributions to our economy for good and ill, and the reasons why financial regulations have been incapable once again of preventing such a catastrophic failure of financial institutions. Not surprisingly, the conference discussions were well-attended by students, researchers and people from the general community.

The first morning sessions focused on the nature of liquidity provision in financial markets. This has become a crucial issue in today's financial crisis as it has become clear that the drying up of liquidity has greatly exacerbated the depth and length of the crisis. The late morning session examined macroeconomic issues, pensions and retirement, and exchange rates and monetary union under NAFTA.

The next sessions dealt directly with issues of the current financial crisis. In analyzing the etiology of the current crisis, all of the papers pointed to a regulatory system that had increasingly been managed to enhance the profitability of a wealthy elite of financial operators, but had generated enormous social risks for the rest of us. The big question before the group was how to change this political dynamic so that regulation would steer financial institutions to provide the services to enhance the welfare of the broader population, rather than extract enormous wealth for a few while generating worldwide instability. The conference closed with a series of papers on monetary policy and financial regulation from a contemporary and historical perspective.

Conference participants agreed that more serious regulation of risk-taking by the financial sector would be required to stave off future episodes of significant financial instability, even if this came at the cost of significant reductions in financial innovations. The important point was made that financial innovations often lead to negative externalities, such as financial instability. Indeed, there might be an excessive amount of such innovative activity inherent in the current system of financial markets and financial regulation, so reducing such activity could have significant benefits in terms of restoring a healthy financial system.

Revised papers from the conference will be edited and published in a volume by E. Elgar Press in 2009.