RE-REGULATING FINANCE IN THE LIGHT OF THE GLOBAL CRISIS
Tsinghua UniversityBeijing, China.
9-11,2009
Leonardo Burlamaqui
““Public institutions need to be the vehicles by which leaders take public responsibility for
the public interest. Otherwise, markets
determine the public interest, which manifestly
does not work, especially in finance”
A SUGGESTED DEPARTURE POINT
“In finance, everything that is agreeable is unsound, and everything that is sound is
disagreeable”(W. Churchill, 1926)
“When the capital development of a country becomes a
byproduct of the activities of a casino, the job is likely to be ill
done” ( J.M.Keynes, 1936)
SOME OLD ADVICE
“I made a mistake in presuming that the self-
interests of organizations, specifically banks and others,
were such as that they were best capable of protecting
their own shareholders and their equity in the firms.”
(A. Greenspan – Congressional testimony, October 2008)
SOME SCARY NEWS
I’ve never seen financial insiders this spooked — not even during the
Asian crisis of 1997-98, when economic dominoes seemed to be falling all around the world. This
time, market players seem truly horrified — because they’ve
suddenly realized that they don’t understand the complex financial
system they created.”( Krugman: December 2007)
EVEN MORE SCARY ….
“To a remarkable extent we have got into the current economic and
financial crisis because of a wrong economic theory – an economic
theory that itself denied the role of the animal spirits in getting us into
manias and panics.”( R. Shiller: March 2009)
A WINDOW OF OPPORTUNITY FOR GETTING ECONOMICS RIGHT ?( AND, THEREFORE, A BETTER ROADMAP TO FIX THE ECONOMY)
Pressing Questions on the Crisis: First, despite some agreement on the proximate determinants
of the crisis, there is substantial divergence of opinion on “root” causes, in particular the role of post-liberalization changes in regulatory structures in creating the environment that led up to the crisis
Second, there is disagreement on the appropriate set of policies — injecting liquidity, recapitalizing or nationalizing banks, the size and shape of the fiscal stimulus packages (for example) — that would prevent the transition from a recession to depression and trigger a recovery .
Third, while there is a consensus that changes in the regulatory structure that governs finance are needed nationally and globally, with the concomitant creation of a new global financial architecture, the specific nature of these changes are hotly contested issues.
Pressing Questions on the Crisis:
Fourth, while the gap between the global nature of financial markets and the national character of regulation is acknowledged everywhere, the institutional framework needed to fill that gap is mostly terra incognita.
Fifth, although there is huge consensus on the urgent necessity for a radical change in the incentive system inbuilt in financial compensation packages, there is very little discussion on what incentives should be in place on the regulator’s side of the equation (e.g. What are the essential measures to enable effective regulators once we have effective regulation ?).
Taking a Step Back:
What’s wrong with the Global Governance System ?
It’s undemocratic:
Global Governance organizations lack the political legitimacy that is produced by the participation of all
interested political and economic actors.
Their decisions not only reflect the preferences of a few rich nation states, but a highly skewed subset of the interests within those states. This further erodes
their legitimacy and efficacy.
What’s wrong with the Global Financial Governance System ?
It’s ineffective:
It evolved from a productive orientation towards an exclusively speculative configuration.
More concretely: now we have….
An extremely opaque, unregulated and unaccountable system that is completely unfit for the task of bringing financial stability for both North and South .
A financial system that has lost, almost completely, the basic objective of financing productive investments.
Maps and Facts:
Fiscal Shelters
BIS (G7 Central
Banks)
Credit Rating Agencies
Burlamaqui
IMF
WBChang
MaiInit
WTO
BankingSystem
SouthBank
RegDev
Banks
Multilateral and Public
Asia, Russia, Middle East and Latin America
The Global Financial System:
SECFED BRICS
OECD
ExportCredit
Agencies
Int.ArbitrationTribunals
BilateralInvestment
Treaties
Multilateral and Public
DC and Geneva
COUNTRIES&
NATIONAL STATES
Mortgage Funds
EUROPE
EuropeanCentralBank
LAWFIRMS
InsuranceCompanies
SWFs
IOSCOInt Org of Sec Comm.
IFACInt Fed of
Accountants
WFEWorldFed of
Exchanges
FSFFin
Stability
Forum
IAISInt Ass of Insurance
Supervisors
Credit cardCompanies
SIVsRMBS
IASCInt Acc
StandardsBoard
Global Corporations
Hedge andPrivate Equity
Funds
ACCFIRMS
GLOBAL PRIVATE
Pension Funds
GATS
NationalFin Reg
Agencies
Toxic finance at its best: Global markets for derivatives: UNREGULATED
Note: world GDP ~ 42 trillion
Governance Failure (1) Financial Regulation in the US: A Very Inefficient Maze
Commercial banks
Futures
Industrial Loan Companies
Thrifts
Bank Holding Companies
Credit UnionsInsurance
Securities and Exchange
GOVERNANCE FAILURE (2): “MARKET DISCIPLINE” AND RENT-SEEKING IN FINANCE
RETURNS
Financial innovationfinancing
productive Investment
Financial innovationfinancing
productive Investment
Schumpeterian Schumpeterian
SorosianSorosian
Long-termFunding &
Venture Capital
Long-termFunding &
Venture Capital
Hedge Funds, Securitization &
Leverage
Hedge Funds, Securitization &
Leverage
DEVELOPMENT/StructuralChange
PONZICAPITALISM
CAPABILITIES REQUIRED:Unique knowledge of business
firms competences; strategies and of their competitive ecology
CAPABILITIES REQUIRED:Unique knowledge of business
firms competences; strategies and of their competitive ecology
CAPABILITIES REQUIRED:Knowledge about the regulatory/legal
loopholes and how to structure bets on the formation & evolution of
prices in currency &securities markets
CAPABILITIES REQUIRED:Knowledge about the regulatory/legal
loopholes and how to structure bets on the formation & evolution of
prices in currency &securities markets
Financialinnovation
financingspeculation
Financialinnovation
financingspeculation
Creative destruction
Destructivecreation
To bring the financial system back from its current “rent-seeking” configuration to a
“productive” fit.
What has to be done ?
The answer to that question, I leave to you all to figure out
in the next three days…
Thank you.
HOW ?
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