Forever blowing bubbles?

There’s no end in sight, it seems, to the financial crisis that started last summer. But how bad is it and what can we do to prevent another one? Prospect assembled a panel of top financial experts, including renowned investor George Soros, economic pundits Anatole Kaletsky and Martin Wolf, and Bank of England deputy governor John Gieve to discuss these questions. It considered who was to blame for the crisis, how much worse it may get, and how we can avoid asset bubbles blowing up in future.

The shock phase of the crisis may now be past, but the panel were sceptical about an early recovery, fearing that the conjunction of a banking crisis and a commodity boom may lead to stagflation (where growth slows while inflation rises) and this could cause a serious shock in the real economy. The financial authorities came in for some stick about the way the crisis was handled, and for being too slow to spot the dangers. Gieve, who was in charge of financial stability at the Bank of England (he has since announced he’s going to leave the post early), admitted the authorities would in future have to be far more intrusive in the way they regulated the financial system. Even poking around in banker’s pay packets (how much, and are they being paid in the right way?) is now something the watchdogs are thinking about.

Other panel members suggested more severe penalties for bankers who cause big losses by taking reckless bets. Soros even suggested they should be shot. There was general agreement that banks should be made to pay—perhaps through higher taxes—for the implicit guarantees they receive through the financial system that the authorities will bail them out if things go wrong. And there was a general feeling that it would be a good thing if the financial system shrank, although most doubted that it would do so. Lastly, looking to the future, the panel expressed some foreboding that this shock may prove to be insufficient to change behaviour. If that’s true, we may be on course for a mega-bubble that will, in Kaletsky’s words, “totally blow up the financial system.”