Friday, March 21, 2008

Krugman on banking panics

Paul Krugman is a fabulous macroeconomist and a halfway decent political columnist, and it really shows in his columns in the New York Times. Today he writes about the credit crunch currently underway, and his perspectives are spot-on.

The challenge facing policymakers and markets is to design a regulatory framework that encourages innovation and risk-taking while ensuring transparency. In the case of subprime mortgages, it seems pretty clear that regulators did not do a very good job of the latter. A speech by the Fed's Ed Gramlich in 2004 discusses some of the issues the Fed was grappling with prior to the meltdown.