The Financial Regulation Conundrum: Why We Should Discriminate in Favor of Long-Term Finance

Presented by the Levy Economics Institute of Bard College and the Bard Economics Program

Levy Institute
November 4, 2016, at 11:00 a.m.

Anemic growth rates, rent-seeking financialization, the liquidity trap, and rising inequality are not unrelated phenomena. Financialization and excessive leverage due to uncontrolled liquidity have made markets less rather than more efficient. But the solution to market woes lies in devising incentives to foster investment for growth and innovation rather than the anticapitalist rhetoric of “occupy.” Modern financial regulation, in its perennial quest for the unattainable ideal of financial stability in an ecosystem that is inherently unstable and evolving, has achieved levels of unfathomable complexity—a systemic risk in itself. Further, financialization and short-termism have reduced the level of long-term funding for investment, thus hampering the allocative efficiency of markets. The speaker argues that, in addition to fiscal incentives and sanctions, the current regulatory system should be simplified, and should accept an increased financial instability risk in exchange for higher funding allocations to long-term investment projects, which would reheat growth and create jobs.

Emilios Avgouleas is the inaugural holder of the International Banking Law and Finance Chair at the University of Edinburgh, director of the Edinburgh LLM in International Banking Law and Finance, and a research associate at the Levy Institute. An expert on financial market regulation, banking law and finance, and global economic governance, he has advised governments, development organizations, and central banks on issues ranging from sovereign debt restructuring and financial stability to economic development and market integrity. He is the author of Governance of Global Financial Markets: The Law, the Economics, the Politics (Cambridge, 2012) and The Mechanics and Regulation of Market Abuse: A Legal and Economic Analysis (Oxford, 2005) and a coauthor of the forthcoming Principles of Banking Law (3rd ed.; Oxford).