Signs of Increasing Risk Demonstrate Need for Additional Reforms

At the annual meeting of the American Economic Association here in Atlanta this past weekend, economists debated progress on reforms to prevent a repeat financial crisis.  The consensus seemed to be that much work remains to be done.  Here is what the Wall Street Journal reported about the meeting results.

Over the past few days, economists here highlighted the many ways in which the lessons of the crisis have yet to sink in. Few think the U.S. and other governments have made needed repairs to the financial regulatory system. And some suggest governments' response has increased the chances of a repeat, making the banking system more crisis-prone, putting new strains on institutions such as the Federal Reserve and stretching government finances closer to the breaking point (see charts below). "Our response has made us more vulnerable to a bigger crisis," said Tom Sargent, a New York University economist. "It's distressing."

The U.S. and world economies are walking a tight rope of recovery vs. reform.  While short-term recovery is desirable, it cannot be made at the expense of long-term economic growth and reform.