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Boris Tsang / Staff Photographer

November 28, 2017

Prof Advises ‘Resilience’ to Brace for Inevitable Financial Crisis

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“We have to start thinking about the next financial crisis, or we will have one soon and harshly.”

Michael Barr, dean of Public Policy in the University of Michigan’s Gerald R. Ford School of Public Policy, addressed foreseeable failures of the financial system and potential methods of reform at a lecture on Tuesday.

“What will it look like?” Barr asked, regarding the qualities of the next financial crisis. The answer, he said, is uncertain.

The Trump administration ushered in a different view on financial regulation through a series of executive orders and statements that express skepticism toward the value of global cooperation, Barr said.

Thus, to build an understanding of the present political and economic sphere, Barr is a proponent of first identifying what “we once knew but have now forgotten.”

Overcoming political amnesia — a challenge that Barr defines as neglecting the knowledge of risks posed by long-standing economic practices — is central to predicting financial crises.

“Sometimes political amnesia is the natural cycle of things,” Barr said, “and sometimes it’s bought and paid for in the Congress and elsewhere.”

As a key developer of the Dodd-Frank Wall Street Reform and Consumer Protection Act, Barr’s history as a policymaker has brought him to the conclusion that policy choices are rarely obvious.

“You are required to make policy decisions based on incomplete information and incomplete models,” Barr said of his past experiences in policymaking. “And that is still true today.”

Another chief component in tackling issues in the financial sector, Barr said, includes uncovering hidden information when examining transactions between firms, firms and regulators, and between regulators.

New analytical techniques brought about by technological innovations are critical to economic growth but are still largely “in their infancy,” Barr said.

This complicates comprehension of existing information and expands uncertainty when furthering knowledge about emerging trends.

“We think we understand a problem but we are not seeing all of it,” Barr said.

The question is now left as to how to conquer economic risks and political malpractice, he said.

Barr suggested constructing a more resilient system by understanding how the financial system works through the use of analytical tools.

He also said he favors implementing checks and balances on the financial system to prevent government agencies from “becoming lax over time.”

“It is going to be a more dangerous time, I think, in the years ahead” Barr said. “But it can be somewhat less dangerous if all of us remain vigilant and push hard to see if we can continue to maintain what is working in regulatory structures.”