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A lot has been said in the past 12
months about financial sector
reforms. In his speech (September 14,
2009), President Obama called it, “the
most ambitious overhaul of financial
regulatory system since the Great
Depression.” What new financial
regulations have been put in place,
what has been accomplished so far
and what remains to be done as far as
financial reforms go?
A great deal has been done in terms of
rescue activities, for specific financial
institutions. However, little has been
done in most nations in terms of
reforms of the regulatory and financial
systems. In particular, little has been
done in creating global regulations, or
in regulating non-bank financial
institutions. Yet these are necessary if
repetitions of such a crisis are to be
prevented. Regulatory reforms in the
US are of importance to the entire
world, and so we shall all be waiting
to see what actually is implemented
in the US, and how the reforms may
change the system so as to reduce the
systemic risks to the US and the rest
of the world. It is important to note
that the financial institutions of some
nations have not been hurt as much
as those in the US. This may be the
result of differences in corporate
cultures as much as differences in
regulations and regulatory agencies.
Certainly this subject deserves a lot of
research attention on the part of
business school professors. This
reality also has implications for
differences in necessary regulatory
reforms among nations.
It’s hard to talk about reforms
without talking about the reformers.
Could you help us evaluate the
policies of Treasury Secretary Tim
Geithner and Federal Reserve
Chairman Ben Bernanke? Is there
anything that the regulators could
have done differently?
done differently?
Yes, of course the regulators should
have intervened sooner in the legal
fraud, and in the illegal frauds and
Ponzi schemes as well. However, a
central problem is that the regulators
are good and honest people, and so
are the vast majority of bankers and
other business people. As a result,
the regulators had difficulty in
detecting the bad guys. Consider that
long before Bernie Madoff was
apprehended, his Ponzi scheme was
brought to the attention of regulators
who were unable in their
investigations to detect anything
wrong. Further, the regulators are
modest people of modest incomes
and wealth who are trying to
investigate the ‘masters of the
universe’ who have enormous wealth
and power. I have little faith in
regulators being able to find
inappropriate behavior. US regulators
have to initiate new policies while at
the same time they do not damage the
creativity and risk-taking of the
financial institutions in regard to
supporting innovation and
entrepreneurial activities. I think the
US regulators have done a reasonable
job so far in their advocacy of certain
reforms, but to prevent a recurrence,
the ethics of management have to
change, and this may not be likely, at
least in the short term.
A year after the global economic
system collapsed, many companies
are finally finding ways to increase
profits under the new conditions.
However in a recent McKinsey
survey (September 2009) almost as
many expect profits to continue
falling and executives also indicate
that their broader financial hopes
remain fragile. Many expect
government involvement in
economies and industries over the
long term. Should that be the only
way out?
I disagree with the points in your
question. I am very optimistic about
the results of the vast expansion of results of the vast expansion of
the money supply and huge increase
in deficits throughout the world – at
least in the short run of the next two
years. I believe that profits will
rebound. Government involvement
in economies and industries need not
be expanded except for the financial
sector. It would be a grave error for
governments to alter their shift
towards free markets globally.
A powerful tension is at work today
in global economic sentiment. The
financial markets, pundits, and
policy makers think the global
economy is out of the woods, but
executives aren’t so sure. What
should be done in the short term and
in the long term to restore the
confidence and not get sucked up in
such hubris?
I think that the confidence of the vast
majority of the global populace is
rebounding, while unemployment
will persist as a problem and growth
will not hit recent high levels for
several years. The issue of hubris
and its consequent overextensions is
another matter. This volatility
accompanies a free market economy,
and means that business cycles are
going to happen again and again.
Governments have responded
vigorously with their bailout
packages and that meant in one sense
private losses being funded by public
money. Henrique Abreu cited a
lesson of the late Milton Friedman
that “it is a different thing spending
your money on someone else (Warren
Buffett) or spending someone else’s
money on someone else (government
intervention)”. What is the efficacy of
government bailouts, especially for
the scale of bailouts doled out?
I
I think that the fiscal deficits have
been a major success. The bailout
packages have been necessary to save
the financial system in many
countries and so save the economy
from further downward spirals. It is
important to remember that similar
situations occurred in many countries in the past. One might
think about the Asian financial crisis
of 1997 or the Mexican peso crisis of
1994-95 or verymany other situations
where a financial system was in
danger of collapse. The issue of giving
public money to the shareholders
and management of banks to cover
their mistakes has been a global
conundrum for decades. Generally,
analysts have always felt that the
nation could not do otherwise than
provide bailouts.
