The way Darwin would see it

1594.jpgOctober 2008 | By Antonio Rivela, Professor at IE Business School

One of the collateral effects of the crisis is a purge of the entire system as Darwinâ??s famous survival of the fittest kicks in. But should all species be left to fend for themselves?

What should the central banks do to combat the recession? That is the question asked constantly by investment banks, politicians, legislators and people on the street. Many players on the market will see a digital answer to the question.

Should they inject funds indiscriminately into the system from the public treasury to correct the upset caused by the investment banks? Or should they be allowed to fall in pure Darwinian survival-of-the-fittest style? On this particular occasion I happen to think that it depends on each case.

There are banks which, owing to their status, help the financial system on a structural scale. They can be compared with the age-old trees that form a basis for an ecosystem. Without them, no animal would be able to exist. The latest examples are the agencies that support the mortgage system in the United States, affectionately known as Freddie Mac and Fannie Mae, since their initials are unpronounceable, believe me. I think it is blatantly obvious that these institutions should be helped in order to avoid a potential collapse of the United States property market, which could have been comparable with the 1929 recession. In these two cases, the Fed was correct to inject $100 billion into each institution.