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Wednesday, March 4, 2009

Solutions to the Banking Crisis

Clay Lowery and Leonard Lapidus discussed the causes of and solutions to the world-wide banking crisis at the latest ICGFM DC Forum on March 4th. The topic, International Experience in Managing Banking Crises, generated interest from the ICGFM members who attended the learning event.

Clay Lowery charted the course of the crisis from the August 2007 liquidity problem to the current situation. Although optimistic about the ability for governments to turn around the financial situation, Mr. Lowery commented that the response in the current stimulus bill is not "targeted, timely and temporary". He suggested that the current response in the United States could have unintended consequences such as inflation, higher interest rates through higher government debt and crowding out of the financial sector from borrowing because the government is borrowing so much. Mr Lowery cautioned that governments often budget at the same level as the year before making the expenditures permanent.

Clay Lowery discusses the European context to the financial crisis

Leonard Lapidus described the financial crisis as one of liquidity, solvency and contagion. Mr. Lapidus described the network affect in the financial crisis that spread from one institution to another. Financial counterparts were not sure of their partner's solvency. 

Mr. Lapidus believes that the response among governments to the crisis has been vigorous and on the right track. The stimulus packages should be short term. 

There was discussion about whether improved governance and audit is necessary. Mr. Lapidus pointed out that many actors in the financial system are not good agents for their constituency. For example, many executives in firms have not been good agents of shareholders and have taken on the prerogative of owners through large pay packages.

Leonard Lapidus suggesting that major changes are needed in institutional arrangements to promote more effective governance. 

1 comment:

Isaac said...

The topic was of great importance, something that everyone is well aware of and in need of some desperate answers. I particularly agree with Mr. Lapidus regarding the need for an increase in incentive/punishment on the financial agents who acted with their own priorities on the front line, when they should have acted with the individual’s best interest. It is here the root of many problems, which need to be repaired as one of the first priorities on the agenda.