Stop the bubble – avoid the crisis, conference told

Governments must develop policies that prevent "bubbles" in housing markets if they want to stop further financial crises, a major international finance conference hosted by the University heard last week.

The keynote speaker, Professor Franklin Allen of Wharton University of Pennsylvania, told 120 finance specialists gathered for the FMA Asian conference in Queenstown that real estate was the “real culprit” in the latest global meltdown.

“We tend to have a financial crisis when the bubble bursts in the real estate market,” he said. “Real estate markets are very different to stock markets. Stock markets are efficient and the prices adjust quickly. That is not true of real estate markets.”

Professor Allen, an international expert on global financial crises, says lowering interest rates at a time when property prices were rising could lead to a bubble. “Governments and central banks did a wonderful job of saying the problem is these greedy people in Wall Street. My own view is that much of the blame lies in the public sector ignoring property bubbles.”

In a speech entitled What is systemic risk? he also questioned whether saving institutions through bailouts was the right course of action saying it was a “misconception” that to stop contagion you had to save the institution.

“Too big to fail is not too big to liquidate,” he said, adding that the best course of action was bankruptcy and liquidation – but done over time, not during a crisis.

Twelve College of Business staff are involved in the conference as presenters, panellists or session chairs. It is the second time the University has hosted the conference, which is sponsored by Westpac Bank, CPA Australia and financial data company Sirca.

It features experts from 17 countries in Europe, Asia and Australasia who are gathered to discuss the latest important academic and practical issues in finance. It was also a rare opportunity for 14 finance PhD students – including four from Massey – to discuss their research with senior scholars at a doctoral consortium.

During the conference, members of the Asian and Australia/New Zealand shadow financial regulatory committees met to consider the potential benefits of stock exchange consolidation in the Asia/Pacific region. They will publish a statement next week.

The committees include four Massey University staff members – College of Business head Professor Lawrence Rose, School of Finance and Economics head Professor Martin Young, Associate Professor Ben Marshall and Professor David Ding.

Tomorrow the conference will hear from an international expert on privatisation of state assets, Professor William Megginson from the University of Oklahoma.

Read Professor Franklin Allen’s presentation to the FMA Asian conference 2011 here