Building the financial system of the 21st Century: A Q&A with Professor Hal Scott

Professor Hal Scott

Professor Hal Scott

The Harvard Law School Program on International Financial Systems fosters the exchange of ideas on capital markets, financial regulation, and international financial systems through its portfolio of Symposia on Building the Financial System of the 21st Century. The symposia, started in 1998, bring together senior financial leaders, high-ranking government officials, and distinguished academics from the U.S. and their counterparts from China, Europe, Japan, and Brazil each year for intensive dialogue on issues affecting international capital markets. The 15th annual Japan-U.S. symposium was held this year in Karuizawa, Japan from Oct. 24 to 26. In a Q&A, HLS Professor Hal Scott, PIFS director, talks about the symposium’s history and impact.

How did the symposium get started?

If we go back 15 years, this is a period of problems in Japan. They had, since 1990, entered into what is still called the Lost Age. It’s a period in which their fortunes went down; there was a crash of real estate and the stock market. And the Japanese were looking for a way to deal with this. This was a fall from fortunes because as late as 1988, 1989 it was, “Japan’s going to take over from the United States as the leading world economy.”

In the ’90s it went downhill and [Japan] really didn’t know how to get out of it. On the other hand, they were in some ways the closest ally of the United States. The Japanese copied us, they thought what we do is great, we were a big trading partner, a lot of Japanese investment had come into the United States, and there was a lot of U.S. investment in Japan. So there were very close ties.

I talked to people in the Japanese government—who, by the way, happen to be, in a few cases, ex-students—who thought there was a need for the U.S. and Japan to have a forum where we could gather together people from both sides, from a variety of backgrounds—government, private sector, academia—to talk about the issues. And so that is kind of how it started.

How have the goals or functions of the symposia changed over time, particularly in the wake of the financial crisis?

Originally, the U.S.-Japan symposium was focused on: How can the United States help Japan? Leaders from the Japanese financial industry and government attended this conference, and it was useful for them. We would write a report summarizing what happened and they could take this report back to their government and say, “This is what people think we should do to get support for what we want to do.” In a sense, the most progressive elements of the Japanese financial system were involved in this conference, and they could take our ideas and their ideas back to the government to try to get something done.

Starting in 2008, of course, the United States had a financial crisis. It’s interesting that for the first time a lot of issues were focused on what’s wrong in the United States and what the United States can do about it, but I would say that because of Japanese culture and the reluctance to ever tell the United States what to do, those suggestions have been quite muted. Compare that with what the Europeans say we should do and what the Chinese say we should do, which is kind of a noholds- barred situation.

Throughout this period, things were not getting that much better in Japan either. So the problems we started with in Japan are still there, and we’ve added to them all the problems of the United States! We’ve kind of doubled the problem. But it’s made the discussions much more balanced because it wasn’t just the U.S. talking about Japan; it’s kind of both sides talking about the U.S. and Japan.

Do you have a sense of what kind of concrete impact the symposia have had?

The Japan symposia had a major impact on Japanese policy because important people from the government have attended it and brought back messages of what should be done. It’s a way for the U.S. government to deliver messages that aren’t direct to the government but get back through the symposia. So I think it’s had real impact on Japanese policy.

I think in Europe what it’s provided is more of a dialogue between Europe and the United States over issues that affect both sides. There’s a formal government meeting on such issues, and in a sense the symposium has become the private sector add-on to government dialogue. It’s almost got a quasi official function.

With China, it’s harder to know what the impact is. Still, I think it’s very useful to the United States to see not only what government officials think of our policies, but what the private sector and academic people in China think of them.

I think all around for everybody who attends, there’s a networking benefit. People form relationships; a number of these people come back every year to these conferences.

Does the program have any plans to expand the symposia to other countries or other regions?

We’re doing one in December that will be the first time in Brazil. About three or four years ago we did one in Latin America, but it didn’t really seem like that was going to work on an annual basis. Latin America is so diverse—though you could say the same about Europe—but it’s just harder to do it in Latin America. But we have hopes that this Brazil conference in basically the leading economy in South America, will work and hopefully have a long history.

What are you working on right now aside from the symposium?

I publish every year a book on international finance and regulation, now in its 19th edition. And I published something about a month ago that’s basically the same book but adapted for a professional audience. I’ve got two articles: One has been submitted to the Journal of Law & Public Policy at Harvard, about why securities class action don’t make a lot of sense, with co-author Les Silverman. I’m also working on an article on the Euro zone crisis and what to do about it, which is being revised at the moment.

I’m also the director of the Committee on Capital Markets Regulation, which I’ve been doing since 2006. It’s got 33 members from private sector and academia devoted to getting better regulation of our capital markets. And as you can imagine, we’ve been pretty busy since the financial crisis.

(Professor Scott’s full bibliography is available here.)