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Griffiths: Crisis Emboldens Free-Market Foes

By    |   Tuesday, 09 Dec 2008 12:49 PM

In 2005, British peer Lord Brian Griffiths of Fforestfach correctly predicted the current financial crisis with remarkable accuracy when he chaired a commission on the issue of personal debt. As vice chairman of the banking group Goldman Sachs, he has also witnessed first-hand the turmoil that has stricken the world economy. He spoke to Newsmax recently about the reasons for the crisis, its likely effects, and what can be done to prevent it happening again in the future.

Some opponents of the bailout criticise it for being unjust, while others say it is merely putting off an inevitable collapse of the financial system. Would you agree with that?

No, I totally disagree with that. I think that decisive intervention was necessary to kill the panic. Before reconstruction, it was essential to first put the fire out. On the other hand, the way that is now being done, with nationalization, or part nationalization, of banks and so on, creates tremendous challenges for the future. I think there really is a conflict between the interests of government in putting money into banks, and the interests of bank shareholders or bank management who want to build up capital because they’re being told by the politicians and the regulators that they’re undercapitalized. But if they’re undercapitalized, the one thing they don’t want to do is to lend. If banks are to increase their lending, they will need more capital. So there’s an inherent conflict at present between the politicians and the executive in banks.

Would you agree that there was too much government interference from the beginning, that lowering interest rates too much unleashed these trends of banks lending irresponsibly?

Professor Hindsight is wonderful — he’s always right! With hindsight, clearly interest rates were too low for some time, and in addition to that, the Clinton administration encouraged Fannie Mae and Freddie Mac and lenders in America to increase lending in the subprime market. I’m not a great believer in government intervention. I don’t want to see the government owning banks. I’m totally opposed to it. But frankly, at this time, it was absolutely necessary — it was action that needed to be taken to stop a big ship from sinking.

Is more regulation necessary in the future to stop this from happening again?

I’m not a great fan of more regulation. I think there will be more regulation, but I think what we probably need is more transparency. More transparency is the key.

Some have said this crisis marks the end of Reaganism and Thatcherism. You were a special economics advisor to Margaret Thatcher in the 1980s and played a part in Thatcherism.

I certainly played a part in Thatcherism. I think at present there’s a great danger that the crisis will be used by people who are opposed to the market economy, arguing for more state ownership, larger subsidies, and greater state direction of economic life. In the medium term that is bad for us.

Because it plays into the hands of opponents of the market economy?

It plays into their hands because you already have government ownership of banks. You now have in Britain talk about industrial policy and regional policy in way we haven’t seen for a long time, and one fears that the whole basis of the market economy has been called into question not only technically but also morally and the prospect of globalization is much less robust than it was. There’s a real question mark over the future of globalization as a result of what’s happened, and it’s going to get much more difficult to communicate the fact that globalization in China has resulted in a huge reduction in poverty.

Why was this crisis not predicted? It seems strange that with all the public and private debt that no one saw this coming.

I don’t want to blow my own trumpet, but I chaired a commission which reported to the Shadow Chancellor and which was published in March 2005 [“The Griffiths Commission on Personal Debt”]. We said that as the debt ratio increased, “it is a time bomb which could be triggered by any number of shocks to the economy at any time.” We said the Bank of England’s view was very sanguine, and concluded that it was too sanguine. We later said: “Someday the explosion will occur: a collapse in house prices, higher interest rates, a recession in the economy, growing unemployment, debtors unable to pay off their loans, repossessions, and increasing insolvencies.” That was what we said in 2005.

Why weren’t your recommendations listened to?

A good question. Don’t ask me that but those to whom it was addressed. This was actually to the Shadow Chancellor, originally commissioned by Oliver Letwin, and presented to George Osborne [the former and current Shadow Chancellors].

Some say nothing’s being done to stop this crisis from happening again. Would you agree with that?

We haven’t really seen what reform of regulation governments are really proposing and I am sure that in Europe, the European Union will have a major voice in it. Between Britain and the U.S. there will be closer cooperation and so on. At the moment, we’ve killed the panic but we’re still in a period of crisis and in a sense the priority is to deal with this before we come to figuring out what kind of structural regulation there should be to prevent it from happening again in the future.

What positive aspects have you seen to come out of this crisis?

The crisis throws up the whole issue of how it should manage risk the role of governance within the bank, and the tremendous importance of culture for the organization. If you think of Societe Generale or Barings, individuals can cause a lot of havoc in this situation. So I think the need for executives in banks creating an appropriate and responsible culture is paramount.

More accountability?

More accountability, absolutely. For the international economy as a whole, possibly the most important positive aspect of the crisis is the way central banks around the world have worked together, the way Treasuries and ministries of finance have coordinated fiscal stimulus (except Germany) and the way countries are not pursuing beggar-my-neighbour policies such as in the Great Depression.

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In 2005, British peer Lord Brian Griffiths of Fforestfach correctly predicted the current financial crisis with remarkable accuracy when he chaired a commission on the issue of personal debt. As vice chairman of the banking group Goldman Sachs, he has also witnessed...
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Tuesday, 09 Dec 2008 12:49 PM
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