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Saturday, March 7, 2009

My Wish List - The New Global Financial Architecture

Scales Of JusticeImage by vaXzine via Flickr

If you have been following this blog, you would know I have a major bee in my bonnet.

If I could write every day about the need for a new global financial architecture, I would.

If I could spend all day designing what I have termed not just a new global financial architecture, but a stronger, more stable, more equitable and more sustainable global financial and economic system, I would.

But since I can't here's my very quick wish list, in no particular order of significance because they all are to me. By the way, this list is not meant to be comprehensive. Let's think of this as a good start.

1. In my ideal world, there is no abuse of power. Not by anyone. That's right.
  • In my ideal world: Financial institutions do not abuse their power over anyone. Why? People depend on their banks - they trust them. Rather, let me correct myself. They used to trust them; and they want to trust them. Leading people astray into undertaking obligations they cannot manage, or selling them investments they do not understand is not only immoral, it is an abuse of power. What is that power? It is the power of information.
  • In my ideal world: Regulators do not abuse their power, or make it up when they have none. Why? Regulators are to ensure the efficient and fair functioning of the markets. Because the cornerstone of functional financial markets is that people have confidence in the regulators even if they cannot have confidence in the institutions. People need to believe that there is someone or something or some institution charged to make sure their money and their investments are as safe as possible. So regulators have a responsibility to act predictably, transparently, within the confines of the law and regulations, according to the law and regulations and only constitutionally with due respect to people's rights.
  • In my ideal world: Ratings agencies do not abuse their power. Why? Rating agencies are crucial for functional markets. As we see, the whole world can spin on their advice. So that advice MUST be based on reasoned technical assessments in a transparent process that is supervised. They are to be supervised by an independent body comprised of representatives of different countries from the developed and the developing world. Respectfully, that institution cannot be the IMF or any of the other multilaterals. Independent ratings agencies must be independent from the financial sectors and companies they rate, independent from the IFIs and independent from the influence of any one individual or country. They must be independent of their perception of their own self importance.
2. In my ideal world, there is mandatory financial education for everyone - in every country. Why is this important? Because people must understand 1) how to manage their own money 2) what affects their money and the value of their investments 3) how to question all the financial advice they get. In my ideal world, financial education would start at kindergarten and be mandatory at every level through to the end of college. I am totally serious. Think about it. You need money all though your life, and you need to be able to manage your money all through life. So why don't you have access to financial education the same way you learn to read, or do arithmetic, or learn spelling and grammar?

3. In my ideal world, financial education must be funded by the financial sector, but not conducted by the financial sector. That's right. I'm probably alone here but I think that the financial institutions should fund an independent foundation that finances the school education project in 2. above as well as public education initiatives through the media. I completely support their right to makes lots of money. But to whom much is given much is expected. So, the more exotic you get with the financial engineering, the more money you should be required to provide to the foundation. You do plain vanilla banking in a conservative manner - then you get to pay less. This fund should be an international fund under the auspices of the United Nations. There are loads of ways to determine fair allocation - I could write a whole paper on how the fund should be financed and how it should function to make it fair for all people in all countries. Talk about a dream job! By the way, this kind of remedy is not unprecedented. Back in the early 2000s, the SEC made Wall Street pay for financial education for investors after they - Wall Street - made another mess, albeit minor compared to this. Check the history.

4. In my ideal world, the free for all is over. There are to be product limits, effective regulation, transparency, supervision and audit. It is beyond my comprehension that any type of financial product could be sold in such sufficient quantities that the market for any one type of financial product could exceed the GDP of the entire world. Really, did anyone think this was sustainable? Seriously, Credit Default Swaps - one type of Credit Default Obligations - exceed the GDP of the whole world. Insane. No more of that. Traders et. al. have all admitted that no one knows who even owns what. Are they kidding? No more of that. We need clearing houses, proper records, proper accounting, proper auditing and STRONG incentives to remain compliant. Yes, I did write incentives. Why? We've tried sanctions - people either don't care, or they are just not working or strong enough. People need to understand that the world is interconnected and it is in their "enlightened self-interest" for their own survival to act responsibly and build a sustainable system. By the way, everybody - yes, absolutely everybody - who takes or trades or engages in a transaction with even one cent of someone else's money gets regulated. Different levels of regulation for different players, I agree. But as long as you want to participate in the financial sector, you must agree to have a second pair of eyes - regulators - have a look at what you are doing. No ifs ands or buts. And no, I do not support overregulation. And yes, I made the abuse of power - by regulators - a big no-no. But there is no way I can support people doing whatever they want with other people's money. No more of that.

5. In my ideal world, the world's best universities lead the actual design of this stronger, more stable, more equitable and more sustainable global financial and economic system. Hey, this is just my wish list. Universities have studied this and are studying this. There are tons of experts. We need a year of structured seminars with working groups and working papers . THIS is something the IMF can host - because it has money. Bring in the practitioners, but don't give it to them to design. We are well overdue a balance between the public interest and the private interest. We are well overdue a balance between the bankers and the non-bankers. And we are well overdue a balance between the general public and all the various players in the financial sector - including the institutions, regulators and the rating agencies.

6. In my ideal world, international cooperation is effected by treaty with domestic legislation enactment
. I hear and support the G20 in the very good and noble intention to have greater clarity and yes, control over what happens in the financial cyberspace. But realistically, one body to regulate everyone is just unlikely to happen. The reasons for that is really worthy of a book. Volume I would have to cover politics and political history just for context. However, it is possible to have international treaties with domestic legislation for enactment - you know, everyone agrees it is in their mutual interest to play by a certain set of minimum rules (to be decided), and that the local domestic regulators would enforce same, and that these local domestic regulators would meet frequently and talk frequently. This route is more possible than a super regulator for everybody. Further, having the IMF as that super regulator would require MAJOR reform of the IMF, and even the IMF has admitted that.

7. In my ideal world, we have a "grownup" - a super stablizer body comprised of membership from the developed and the developing world. How do I explain this? We cannot go through this again. We need some "body" whose job it is to keep an eye on everyone else. Not a regulator, but some kind of independent watchdog group. Maybe the media can form a partnership with some prominent NGOs. Maybe we should start a new NGO. Whatever or whoever, but here's what this body must do:
  • Some "body" to make sure all the powerful people and parties do not abuse their power - and expose them if they do
  • Some "body"to make sure mandatory financial education is taking place, and if it is not, then expose that
  • Some "body" to make sure the foundation is funded and is funding what it is intended to fund, and expose the financial sector if it does not make it's donations, and expose the foundation if it is not doing what it should
  • Some "body" to make sure the free for all is over, and expose anyone getting back into the reckless behavior with no limits, no or limited audits, no or limited regulation, no or limited transparency, no or limited supervision
  • Some "body" to make sure the universities lead the design of this stronger, more stable, more equitable and more sustainable global financial and economic system, and expose them if they get off track
  • Some "body" to make sure domestic regulators are keeping their commitments with regard to the treaties, and expose them if they don't
If it were up to me, this is what I would do.

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1 comment:

Anonymous said...

Idealistic, but I learned a lot. Your frame of reference is a good guide for policy making at the state and private level. Companies could decide to put serious effort in engaging their efforts along lines you suggest, even if governments hesitate.

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Reasoning The Reasons by Deika Morrison is licensed under a Creative Commons Attribution-No Derivative Works 3.0 United States License.