Kitson (Cambridge): only State can solve the financial crisis
venerdì 3 ottobre 2008
Professor Kitson, what is your opinion on the present financial crisis in the United States: is it due to structural factors or is it to be considered as a conjunctural turmoil?
The present crisis is due to structural problems in finacial markets caused by excessive and over leveraged lending. Financial markets have become increasing deregulated over the past twenty years allowing many financial institutions to pursue excessive profits without taking due care to evaluate risk. Once borrowers started to default, such as in the USA subprime market, the financial markets could no longer undertake two of their primary tasks: to price financial assets and to provide liquidity to the market.
To face this lasting crisis several governments are taking actions that seem to increase the weight of the state in economy. Do you think that this kind of state intervention is the only possible solution or there are other ways to answer the problem in a possibly long-lasting way and not just as a sort of contingency plan?
State intervention is the only way of dealing with the crisis. The market has ceased up and cannot sort itself out. State intervention is required in two areas. First, in terms of crisis management such as the bank rescue plan in the USA. Second, and for the long-term, new forms of financial regulation need to be established to maintain financial stability and to prevent excessive and irresponsible lending in the future.
The present course of action entails many threats to competition and a substantial acceptance of moral hazard. Is it to be concluded that politics only can "protect" competition? Or may we keep thinking that this is primarily a task of the economy players and - if so - in which way should they act to this aim?
Moral hazard is a reality of financial markets. It is a problem, but not as big a problem as systemic risk whereby if one bank fails then many more will fail as depositors rush to get their money out. It should be the job of the regulators to carefully assess the activities of financial institutions to limit moral hazard and to put in place schemes whereby if a bank fails it is the financial market that picks up the cost and not the taxpayer.
In your opinion have regional bodies some role to play or can the crisis be faced and solved only on global level?
Financial markets are now global and the best response would be new forms of regulation organised at a global level.
You personally have a privilege in being involved in both UK and US Cambridge universities. Considering the present crisis, which are in your opinion the main differences between the United States, the United Kingdom and the continental Europe?
Although the crisis is global in dimension, its impact has been greater in the USA and the UK because banks and other financial institutions in these two countries have taken more risks with their approach to lending. Many banks in continental Europe have been more careful and have therefore not been exposed to the full extent of the panic.
Considering magnitude and depth of the present crisis many observers are arguing about the possible end of an economic system - at least as to the financial aspects - and the beginning of a new one. What is your opinion on this debate and - in case of a new system - which would these new features be?
History tells us that a global financial crisis will lead to significant changes in the economic system. The Great Depression in the 1930s led to a reassessment of the global economy and the creation of the Bretton Woods system which underpinned global prosperity in the 1950s and 1960s. The present crisis will lead to significant changes in the global economy including a much tighter regulation of financial markets and possibly a rebuilding of global financial architecture with changes to institutions such as the IMF and the World Bank.