Interview
"A Systemic Crisis Calls for a Systemic Response"

Tommaso Padoa-Schioppa, the former Italian finance minister and European Central Bank executive board member, demands in an interview with the newspaper Handelsblatt a global beginning to fight the global financial crisis.

Mr. Padoa-Schioppa, are you surprised by the severity of the financial crisis?

Yes. The severity of this crisis goes far beyond what most people could imagine. I am no exception, although I have for long pointed out that the financial system was unsafe, that there was an inherent instability and that the structure of policies aiming at stability were not consistent with the evolution of finance. I certainly did not expect a situation like this one, where no institution is sheltered from the risk of a collapse in confidence.

Will it be possible to stop the crisis?

By definition a crisis is something that comes to an end, one way or another. The question we should ask is what policy can bring it to an end before all the possible damage has been done. Particularly in recent weeks this crisis has been compared with 1929 and the Great Depression. In a way that is appropriate because you do have to go back to that event to find anything comparable. The different financial crises which occurred much later in recent history - from the Latin American crisis to the Asian crisis and the crisis brought about by the bursting of the high-tech bubble at the beginning of this decade - these were all crises which occurred within the system. And they did not cause a catastrophe of it.

So how would you describe the situation today?

What we are experiencing now is not a crisis in the system, it is the crisis of a system. There is no other way to describe a situation that wipes out so many investment banks in such a short space of time, which forces the British government to nationalize two major banks or where the largest bank in the Benelux countries is taken over with public money. Germany and Ireland gave a blanket guarantee to their depositors, while the United Kingdom approved a huge crisis fund. This is not a modest episode. This is a landslide of the global financial system.

What should be done?

We must try to understand what is happening. It is not capitalism or the market economy that is collapsing. Nor is this situation in any way comparable to the end of the centrally planned economy at the end of the eighties. What comes to an end here is the illusion that the market can function without rules. It is the misconception that the financial markets are capable of regulating themselves. There is no respectable economic textbook that does not preach this absurd paradigm. And it is this wrong conception which now has disastrous consequences.

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