History repeats itself with financial crash

Keystone

Former Swiss stock exchange (SWX) chief executive Richard Meier tells swissinfo that once again irrational behaviour is behind the latest financial crisis.

He believes the recent turmoil will prove to be the worst crash since the global economic meltdown of the 1930s.

Meier is currently researching the history of the Swiss financial market for a book he plans to write on the same subject.

swissinfo: Is this the worst crash the Swiss financial market has suffered?

Richard Meier: Nothing that has happened since I began my career in the early 1970s equals what we are experiencing now. We can only compare current events to the 1930s.

But we should not say this is the worst crash in history. We should realise that in the 1930s people suffered in ways that cannot compare to now. Things would have to get very much worse to be as bad as the situation then. I would rather be an optimist and hope that we manage to get out before we reach those levels.

swissinfo: How is this crash different from others?

R.M.: When you look at history you see the same patterns again and again. The South Sea Bubble in the 1720s had a number of similarities with the situation now. But we have to realise that in the past 20 years we have witnessed a development of the securities market at a staggering level of sophistication and magnitude.

We had a situation where even many financial professionals in leading positions were not quite aware anymore what they were getting into.

swissinfo: And similarities?

R.M.: People behave in ways that are not particularly rational at times – that’s the way people are. They only hear bad news when they are in a bad mood and good news when they are in a good mood.

If you add up all the people involved in finance then that becomes a very powerful force that goes up and down all the time. I don’t think this will ever fundamentally change.

swissinfo: What are the consequences of the state taking a stake in banks?

R.M.: There were state assisted bailouts of Swiss banks in Switzerland in the 1930s and in the 1990s so this is not a unique situation. There have been waves of nationalisation throughout history in extreme situations.

But this must be a temporary measure because I don’t think we will have a better world if governments become bankers themselves. Governments should regulate and not also try to run the operation because that would create conflicts of interest.

Many of these discussions in the US, Germany and other countries sound more like taking revenge on these banks than helping them. But I am sure that the Swiss National Bank and others see this as a temporary measure and that they will get out as soon as possible.

swissinfo: What can we do to prevent history from repeating itself in future?

R.M.: Financial products were so complicated that government regulators did not know enough about them so they let the professionals get on with their business.

We do not need more regulation, we have too much already, but we need more appropriate regulations in the right areas. We have become more sophisticated in risk management but we now see that all these models are useless if we do not take extreme situations into account.

swissinfo: Has the safe reputation of Swiss banks been ruined?

R.M.: In the 1930s we were forced to devalue our currency and bail out big banks, but this did not harm our reputation as a safe haven.

We have had our share of problems this time around because we are part of a globalised system, but we have been comparatively unscathed. Even the safest harbours will receive a few waves if the whole ocean is in turmoil.

swissinfo-interview: Matthew Allen

Bank bailouts

At the start of the week the Swiss government said that it did not need to follow the example of many other countries, which had raised massive amounts of taxpayers’ money to bail out stricken banks.

But on Thursday the Swiss National Bank announced it would guarantee up to $54 billion of UBS bad debt and pumped $6 billion into the bank.

Following the United States’ $700 billion (SFr790 billion) rescue package earlier this month, Britain announced a £37 billion (SFr73 billion) cash injection while Germany was poised to prop up its ailing financial system with a €470 billion (SFr724 billion) hand out.

Spain said it would provide up to €100 billion of guarantees for new debt issued by commercial banks in 2008. Norway and Portugal have also followed suit with their own bailout cash packages. South Korea has also announced plans.

Germany, New Zealand, and the United Arab Emirates are the latest countries to guarantee all bank deposits.

Iceland is close to bankruptcy.