The Shadow Regulatory Committee has landed its first Nobel laureate. Economist Franco Modigliani of Massachusetts Institute of Technology has joined the independent watchdog organization as its 13th member.
"He's one of the great minds of the financial world," said Lawrence Connell, co-chairman of the independent advisory group.
An expert in monetary economics and financial markets, Mr. Modigliani received the Nobel Prize in economics in 1985 for his 1954 analysis of financial markets and his "life-cycle theory" of savings.
The theory holds that people generally consume more while young, save during their peak earning years, and then use up savings after retirement.
It Wasn't Always Obvious
The idea, which debunked the view that the rich saved and the poor didn't, seems painfully obvious now because of its wide-spread acceptance. But it was a revelation when first published.
The theory has its roots in an old bank slogan: "Save it when you need it least, and have it when you need it most."
Mr. Modigliani is now focusing on the regulation of interest rate risk in financial markets. In fact, he joined the committee in June after meeting with it earlier in the year to express his views on the issues, Mr. Connell said.
"His concern is that the regulatory structure essentially [provides incentives for] financial institutions to take on interest rate risk," Mr. Connell said.
For example, Mr. Modigliani feels that inadequate prepayment penalties for home mortgage holders leave lenders overly vulnerable to rate swings.
The committee supports actions by the agencies to curb bank exposure.
"The committee is concerned that current interest rate conditions are luring some banks and thrift institutions into gambling once again on the future course of interest rates," the group of experts said at its last quarterly meeting here.
Upon receiving of the Nobel Prize in 1985, Mr. Modigliani demonstrated his theory in action.
He said he would use the $225,000 award "in accordance with my own theories of how people behave - namely, distribute it over the rest of my life."