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A large section of people believe
that the crisis was allowed to become
bigger because of policymakers’ (both
at the companies and the
government) indecision. And the full
blown crisis is just a price for
indecisive governments and
indifferent companies, the argument
goes. Do you see any merit in this
argument?
Some analysts and politicians saw
danger in the build-up of subprime
mortgages and the vulnerability of
portfolios in institutions like Freddie
Mac and Fannie Mae. The hesitancy
in intervening can be criticized. One
might wonder about the relationship
between this hesitancy and
contributions to the political
campaigns of Members of Congress.
On a different level, throughout the
world, policy makers created
enormous fiscal deficits and
expanded the money supply
substantially. Without these wise
actions, the world would have
descended into a far more severe
depression.
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While the Wall Street thought its
firms to be ‘too big to fail’, for themain
street ‘too big to fail’meant a financial
institution cannot be allowed to fail.
What is likely to happen in terms of
government intervention in this
regard?
The question of whether an
institution is too big to fail is a major
element in regard to regulatory reform
going forward. Government decisions
to compel certain institutions to
divest certain portions of their certain portions of their
business will be debated over the
coming years. I support such actions
on a case-by-case basis. It is not
possible to create rules that can cover
all financial activities. The key point
here has to do with the impact that a
certain firm can have on other firms,
and so on the system as a whole if it
fails. Hence this question calls for
ongoing regulation focused on
systemic risk. Unfortunately,
individual countries by themselves
cannot solve this problem. If such a
firm can locate in a country with lax
rules, then that firm can severely
damage the global system. Global
regulation is needed, but will not
likely develop in the near term.
What did US Financial Crisis
mean to the global economy and
business? How do you think the
governments and the businesses have
responded?
As I have said, I feel that the US
financial crisis was the proximate
cause of the ensuing global recession.
I think that governments around the
world have responded in the correct
ways to minimize the negative
impacts. I believe that we are now in
the process of a global recovery and
that business profits will quickly
climb toward their previous levels.
Unfortunately, national growth rates
will remain subdued for several
years, and unemployment rates will
remain high. I suspect that wemay be
headed into a ‘stagflation’ era as a
result, with high unemployment and
high inflation. Nevertheless, the
ethical issues that underlay the
financial crisis will continue, and the
traditional business cycle forces will
continue. Whether governments can
reduce the opportunities for ‘legal
fraud’ and the systemic risks from‘too
big to fail’ is a subject that lies ahead
of us. Whether national cultures and
corporate cultures can pay more
respect to ethics and concerns for
others in their decisions is
questionable. Certainly business schools are now concerned to a far
greater degree than in the past in
emphasizing the subject of ethics in
their curriculum.
What can be the lessons from this
crisis for – governments and
businesses – especially from the
point of view of public policy,
globalization, financial coordination
and information sharing? And also
from the view point of developing
countries – especially for the
emerging and BRIC economies – and
developed countries?
A key lesson is the need for global
regulations of financial institutions,
both banks and non-banks. I do not
expect that this lesson has been
learned, and so additional global
crises will have to happen before
political leaders respond. For
developing countries, a central lesson
has to do with restrictions on foreign
ownership in the financial sector. In
particular, does a nation want to have
its financial system dominated by
firms that rest on a corporate culture
and corporate practices that violate
domestic ethical objectives and bring
risks of economic collapse. At the
same time, it is important to recognize
the enormous benefits that high-risk
financial institutions have brought in
terms of financing innovations and
entrepreneurship. Consequently,
each countrymustmake a trade-off in
regard to the risks and benefits of
such institutions and practices. To a
major degree, the amazing US
productivity growth has rested on the
US financial system. Reforms that
restrict financial institutions bring a
risk that these benefits may be
reduced.
How has Wall Street changed
during the past year, and what will
these changes mean for the stock
markets and the investors?
I think that Wall Street has not
changedmuch. I think this is good for
the US productivity growth and
future US international competitiveness. At the same time,
this means that the risks of a repeated
financial crisis are high.
