‘We failed very, very badly’
Richard Cooper, Professor of International Economics at Harvard, on what went wrong, why it was necessary, and whether the much-touted bank tax could ever work.
June 24, 2010 4:46 by Jay Akasie
Is there still room in the industry for innovation?
Well, I think the appetite just at this moment – I think the financial community is licking its wounds on the one hand and wary of new innovations that would court public disfavor. So I think on both counts innovation is on the back burner at the moment, but in the longer run I suspect that we’ll discover that as new opportunities arise, we’ll discover innovation in the financial community. For my part, I think that’s a good thing. Speaking in very general terms I think that’s a good thing. The regulators have to be alert to innovations that carry systemic risks and try to limit them, and if they get big enough to be serious risks for the system as a whole. But if you just think, historically we would be much, much worse off today without innovations in the financial community than with them. Just to take one case that should be obvious but isn’t: the limited liability corporation. It made possible regime capital on a much, much bigger scale, [something] that hadn’t been possible before. So I don’t think we want to throttle innovation; we just want to be careful.
What is the single best thing to have happened to finance in the past 10 years?
I think the crisis itself, actually. I think the people in the financial community got extraordinarily cocky. They thought that nothing could go wrong, because nothing had gone wrong in recent times. And sadly, we human beings don’t learn very well from reading history. Each generation has to make its own mistakes. We made a really big one this time around and I think it will influence the behavior of people in the financial community for at least a decade. And then we’ll have to make some more mistakes, so the next generation has to make its own mistakes. I actually think the financial crisis in that peculiar sense was a necessary crisis. I think it’s too bad that it did as much damage as it did to national economies, to real economies, to real output and employment, and we need to figure out how to limit the damage. I’m of the view that crises are not avoidable, and I would even, in my perverse moments, I would argue that they are necessary for a healthy system. I think the challenge to the system as a whole is to limit the damage and, of course, in this current crisis that’s where we failed very, very badly.
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