Finance research in Luxembourg is on the map
The Luxembourg School of Finance hosted the European Conference of the Financial Management Association (FMA) on June 12-14, gathering more than 250 of the world’s leading financial experts. Professor Franklin Allen from Wharton School of the University of Pennsylvania gave the keynote speech. LFF was able to meet one of the world’s highest ranked economists.
Is finance a force for progress?
We will get there but it is taking a lot of time. We’re in this awkward phase where finance focuses too much on trying to outguess central banks and governments’ interventions. We need to get back to integrity – funding firms and providing jobs for people who are unemployed. We are the actual industry that decides that; it is not the governments but the people in financial institutions of various kinds that make those decisions. That is why a university has a great role to play in providing an educated world, which can understand how to do that and maximise the benefits we get from finance.
What are the benefits and the dark sides of the current crisis?
My view on the crisis is that it was a boom-bust cycle that started in real estate. We have to be very careful about these boom-bust cycles. If we look back at history, this is something that happens in various parts of the world every few years. We don’t really understand them well at the moment.
It is important to have regulation that protects consumers and makes sure we don’t have boom-bust cycles, but it is similarly important to let the financial services industry do its job, which is to allocate the resources to the firms that need them.
Was it a problem that all the players were relying too much on central banks?
That is a real problem. It is fine to intervene in the short run at the height of the crisis, but that was five years ago. They are still involved too much and I think we have to get back to them not being so involved. People come to rely on low interest rates but look at what has happened in Japan: they have had them for many years but that hasn’t solved the problem.
What is your opinion on governments as stakeholders in firms when there is a crisis?
There are cases when this can be helpful at the height of the crisis because the markets stop working normally and the government can sometimes stop bad things from happening, but it should be something that is very short lived. There was a bit too much intervention; governments tried too hard to prevent things from going down but what they have effectively done is just slow things down. The problem is that we are not rebounding; we would have been much better off going down deeper but rebounding more quickly. The real problems come when people are unemployed for a long time because then they find it very difficult to get back into the labour force.
Has a whole generation of young people been sacrificed?
That is a big problem particularly in Spain, Greece and it is becoming an issue in Italy too. This is the aftermath of that crisis. Spain is a very interesting country because of the boom in real estate. Lot of people left school early instead of staying and going on to university because they could get high-paying jobs in construction. Now those jobs are no longer there and people don’t have the skills they would have had they gone to university instead.
Who can help get the economy and companies going again?
Venture capital has a crucial role to play. The fact that these small companies can see these very influential global firms is extremely important. It is mostly major US companies like Apple, Microsoft, Google and Cisco; they all had venture capital backing and have gone on to change the world. Unfortunately you don’t see that as much in Europe. This is where the University of Luxembourg has a huge role to play because the professors here can bring these ideas and techniques into the classroom and that can help build an industry here, which at the moment is much more banking based and capital market based. As I said, although very small, these alternative asset classes have very important long-term effects and can change the way things are done.
How important are ethics and integrity in finance?
Integrity is at the core of our industry; it is what underpins financial services. One of the reasons that we are able to earn so much money is that it is part of the guarantee: if we cheat we lose that stream. Particularly in a place like Luxembourg, where the finance industry is such an important part of the economy, it is really important to maintain that integrity and to do everything possible to ensure it continues. CW