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 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.

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