Business Case Studies, Executive Interviews, David Conklin on Government and Business

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Executive Interviews: Interview with David Conklin on Government and Business
January 2010 - By Dr. Nagendra V Chowdary

David Conklin
David Conklin, is a professor at the Richard Ivey School of Business

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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.

  • 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.

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