RE-REGULATING FINANCE IN THE LIGHT OF THE GLOBAL CRISIS Tsinghua University Beijing, China.

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RE-REGULATING FINANCE IN THE LIGHT
OF THE GLOBAL CRISIS
Tsinghua University
Beijing, China.
9-11,2009
Leonardo Burlamaqui
l.burlamaqui@fordfound.org
A SUGGESTED DEPARTURE POINT
“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”
SOME OLD ADVICE
“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 SCARY NEWS
“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)
EVEN MORE SCARY ….
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)
A WINDOW OF OPPORTUNITY FOR GETTING ECONOMICS RIGHT ?
( AND, THEREFORE, A BETTER ROADMAP TO FIX THE ECONOMY)
“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)
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:
Burlamaqui
The Global Financial System:
Multilateral and
Public
DC and Geneva
BIS
(G7 Central
Banks)
SEC
FED
IMF
OECD
WB
EUROPE
WTO
Fin
Stability
SWFs
European
Central
Bank
FSF
GATS
Multilateral and Public
Asia, Russia, Middle
East and Latin America
South
Bank
IAIS
Credit Rating
Agencies
BRICS
Int Ass of
Insurance
Supervisors
National
Fin Reg
Agencies
Reg
Dev
Banks
Chang
Mai
Init
IASC
Toxic finance at its best:
WFE
Global markets
for
derivatives:
UNREGULATED
IFAC
Insurance
LAW
FIRMS
Note: world GDP ~ 42Companies
trillion
IOSCO
Forum
Int Org of
Sec Comm.
Int Acc
Standards
Board
World
Fed of
Int Fed of
Accountants
Exchanges
ACC
FIRMS
Bilateral
Int.
Investment Arbitration
Treaties
Tribunals
Mortgage
Funds
Banking
System
Credit card
Companies
Fiscal
Shelters
Hedge and
Private Equity
Funds
RMBS
Export
Credit
Agencies
SIVs
Global
Corporations
GLOBAL PRIVATE
Pension
Funds
COUNTRIES
&
NATIONAL
STATES
Governance Failure (1)
Financial Regulation in the US: A Very Inefficient Maze
Commercial banks
Thrifts
Industrial Loan Companies
Bank Holding Companies
Securities and Exchange
Insurance
Credit Unions
Futures
GOVERNANCE FAILURE (2):
“MARKET DISCIPLINE” AND RENT-SEEKING IN FINANCE
CAPABILITIES REQUIRED:
Unique knowledge of business
firms competences; strategies and
of their competitive ecology
Schumpeterian
Long-term
Funding &
Venture Capital
Creative
destruction
Financial
innovation
financing
productive
Investment
DEVELOPMENT/
Structural
Change
RETURNS
Sorosian
Hedge Funds,
Securitization &
Leverage
Financial
innovation
financing
speculation
CAPABILITIES REQUIRED:
Knowledge about the regulatory/legal
loopholes and how to structure bets on
the formation & evolution of
prices in currency &
securities markets
PONZI
CAPITALISM
Destructive
creation
What has to be done ?
To bring the financial system
back from its current “rentseeking” configuration to a
“productive” fit.
HOW ?
The answer to that question, I
leave to you all to figure out
in the next three days…
Thank you.
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