The Squam Lake Report: Fixing the Financial System

A new book by 15 of the world’s leading financial economists, including Tuck professors Ken French and Matthew Slaughter, puts forward recommendations to help guide the evolving reform of capital markets.

The book, published by Princeton University Press, was created by 15 of the world’s leading financial economists whose political views span the spectrum from “Jeffersonian libertarianism” to unapologetic Clintonism. The authors’ urgent goal has been to help guide the evolving reform of capital markets by providing the world’s policymakers with specific recommendations backed by preeminent academic expertise.

Inspired by a suggestion from Tuck professor Andrew Bernard, the authors gathered at Dartmouth College’s Minary Conference Center on Squam Lake in the fall of 2008 as the global financial crisis was playing out. The men knew the financial collapse would lead to a regulatory overhaul that would affect the world’s economies for decades to come. Tuck professor Matthew Slaughter notes that the entire group was “united and motivated by a common concern: that policymakers often misunderstand or ignore the large body of academic knowledge that could guide sound regulatory reform, resulting in poorly designed policies with unintended consequences.”

During the months that followed, the group collaborated through emails, phone calls, and subsequent meetings. “There is a huge political variation across the group,” say Tuck professor Kenneth French, who served as the leader and coordinator of the effort. “But we have been staunchly nonpartisan. While we don’t all agree with every word in the book, we do all agree with every recommendation.”

Authors include eight of the nine most recent presidents of the American Finance Association (including French), a former member of the Federal Reserve Board of Governors, a former chief economist of the International Monetary Fund, and former members of the Council of Economic Advisers under Presidents Clinton and George W. Bush (including Slaughter).

In addition to making 37 specific recommendations, the authors emphasize two central principles underpinning their deliberations. First, government officials must consider the implications for the financial system as a whole because the current focus on individual firms ignores critical interactions between institutions. And second, regulators must minimize the likelihood of bailouts of financial firms by forcing them to internalize the costs of failure. The co-authors agree that, with appropriate new regulations, “financial firms can again resume their critical role of matching lenders with borrowers to help raise standards of living around the world.”

French K et al., The Squam Lake Report: Fixing the Financial System, Princeton University Press, July 2010