Our financial system will get through the present crisis, although there will be some further bumps ahead and Bear Stearns may not be the only company to go under or find a merger partner. But it is not too early to ask: what went wrong and how can we avoid such crises in the future?

Attention now focuses on changes in the legal and regulatory structure. We can no longer afford fragmented oversight. The Federal Reserve and the Securities and Exchange Commission must work together more closely. If investment banks are to have access to the discount window, the Fed should be able to dictate more stringent capital requirements and monitor risk management.

Investment banks made the same mistakes and incurred enormous losses under very different regulatory re­gimes. Banks in England, France and Switzerland have suffered as much as those in the US. The lessons of the crisis, therefore, have less to do with regulation than with the need for better leadership, strategy and management. It is up to the managers of financial services companies to learn, or perhaps relearn, some time-honoured lessons.

First, profits matter more than revenues. This was well understood on Wall Street back when investment banks were partnerships. Profits were critical for a return on the partners’ capital. But when banks became owned by shareholders, this discipline faded. Instead, the emphasis shifted to the pursuit of short-term revenues, eventually in the form of proprietary bets on the market. As Henry Kaufman has written: “Not surprisingly the rain­makers within those firms garnered greater and greater prestige, influence and monetary rewards.”

Second, compensation should be based on profits, margins and return on equity over time, not current year revenues. As the “rainmakers”, or bankers and traders, have gained power, current year revenues have driven compensation. As a result, the rainmakers have pushed for control of more assets and more leverage, and have been willing to undertake greater risk to generate greater current year revenues (and larger pay cheques). It is not surprising that, as investment banks increased leverage and took on outsized risks, compensation for bankers and traders increased dramatically.

But when reckless risk-taking led to big losses, it was the shareholders, not bankers and traders, who suffered the consequences. There is a straightforward way to remedy this. Pay traders based only on returns and establish a vesting period of several years to make sure that the profits are not illusory.

Third, leverage works not just on the upside but on the downside as well. Excessive debt can turbo-charge profits during a boom, but can result in crippling losses when the bubbles burst. Because of excessive leverage in the recent cycle, investment banks found they did not have enough capital to sustain themselves in the downdraft. They have had to raise new capital, diluting the investments of existing shareholders, or sell valuable assets. Leverage must be reduced.

Fourth, diversified and recurring revenue streams not based on trading or principal investing have immense value in a down cycle. The banks most jeopardised in the recent crisis, Bear Stearns and Lehman, had revenue streams less diversified and recurring than their competitors. Even firms that are better on this score are now being forced to sell their most stable and highest-return businesses in order to make up for the massive capital losses from their highly leveraged fixed income businesses. Morgan Stanley has sold MSCI, Merrill Lynch has announced the sale of Bloomberg, and other valuable businesses will be sold.

Finally, risk management should become a board-level responsibility, with appropriate committees meeting regularly with management. In the old partnerships, the partners paid close attention to their firm’s risk for a simple reason: it was their money. Today, the capital provider (shareholders) is separated from the risk-takers, who are rewarded by compensation and not strictly by shareholder returns. Since boards are elected to represent shareholders, directors must become more informed, sophisticated and involved in the risk-taking, capital allocation and risk-management function.

Wall Street will be casting a wary eye on Washington as proposals come forth on how to deal with the financial crisis. But we must also look closer to home. The most effective remedies are in our own hands.

The writer, former chief executive of Morgan Stanley, now heads Continental Investors

Innovation is the crucial element to our competitiveness and prosperity. Countries and cities that generate new ideas and new ways of doing things are most likely to thrive in a global economy where knowledge is at a premium. This is why policymakers around the world are continuously rolling out new strategies in which they embrace “innovation” and declare their allegiance to it.

But despite all the goodwill there is not a uniform idea about how one fosters innovation. There will be the American examples of the Silicon Valley and Boston, where garage geniuses and seed capital helped create Yahoo, Google, Facebook, and other high-growth gazelles; or the European examples of Helsinki, Stockholm and Munich where old large industrial companies with a strong steer from government teamed up with local engineering schools and successfully revitalised and regenerated existing industries. Britain has hardly been short of models, with centres of innovation such as Cambridge, Oxford and London, which all proved to be difficult to replicate elsewhere.

To make things more complicated only a minority of places in the world stand behind a majority of innovations. By the count of the Organisation for Economic Co-operation and Development, 38 per cent of total OECD gross domestic product was generated by only 10 per cent of regions and 57 per cent of all patents were recorded by just 10 per cent of regions. Where does this leave the rest?

Cities, regions and countries can innovate and prosper in a variety of ways, not least by learning from and absorbing innovations from elsewhere. So, the fact that great university cities of Boston, Oxford or Cambridge are constantly developing new ideas of their own does not mean that every city can do the same.

The city state of Dubai provides a good example in this respect. The city was recently ranked 14th in the Insead global innovation index, run by a French business school, coming above many European countries including Austria, Belgium, and Italy, but also ahead of Brazil, China, India, and Russia (the Brics). Yet, unlike most of these countries, Dubai is not particularly known for its scientific achievements or for its technological prowess. It does not function as a seat for any major world class university or as an important source for internationally filed patents. How did Dubai do it?

According to the Insead index, the city state derives much of its innovative capacity from its capacity to access and attract knowledge from elsewhere, which it has achieved through a mixture of financial incentives, investor-friendly legislation, active “brain gain” policies and advanced infrastructure.

In the 1980s (when oil prices were very low) the Dubai rulers embarked on a rapid policy of global economic integration based on the principle of “build it and they will come”. Their plans began with the building of the Jebel Ali free zone, making Dubai one of the biggest trading hubs in the world. The success of that was followed by the construction of several similar free trading zones such as the Dubai internet city and the Dubai media city. Unlike the Jebel Ali free zone, the Dubai media city and the Dubai internet city zones were created to trade in ideas, not goods. These free “trading” zones (medical and educational cities were added later) were built for people, ideas and money to come and mix. Today, Dubai has quickly risen into the league of leading world cities. It is no surprise that a recent study by the London Chamber of Commerce identified Dubai as London’s main potential competitor in the next decade.

But London remains in a stronger position than Dubai. Not only can it learn from the rest of the world, but it is also a strong source for indigenous creative ideas and innovation. In that sense, London is different from Cambridge, just as New York is different from Boston: London and New York process knowledge, whereas the science centres surrounding the ancient seats of learning in Boston and Cambridge (England) help create it. Yet it is proximity to London and New York that gives these cities access to the wider world. In this respect, London helps Cambridge to innovate, while Cambridge helps London to compete with other world cities.

There are many routes to innovation-driven prosperity. Sometimes strong research universities matter most; in other cases, it may be ease and strength of access to overseas networks through an international airport or a global company. With Cambridge and Oxford, it is the product of a strong science and technology base, while for New York or London it is having the right overall mix of talent and infrastructure.

Policymakers and innovation leaders around the world should recognise that there are many different routes for innovation-driven economic prosperity. The way forward often depends on which route one is taking and where they are on that route in relation to competitors. As things are now, most economic and innovation strategies produced for cities and countries are aimed at producing closed circuits of local networks confined largely to administrative and political boundaries. Instead, what are needed are policies aimed at fostering economic integration with the rest of the world, creating and drawing on complementary capacities between cities, regions and nations. This will make for more winners and fewer market failures.

The writer is research director, regional and international innovation, at the UK’s National Endowment for Science, Technology and the Arts (Nesta). He is the lead author of Innovation by Absorption: How UK Nations and Regions Innovate, a Nesta research report to be published this autumn