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THE FINANCIAL CRISIS AND REFORMING GLOBAL FINANCE Problem Statement, Recent Developments, and Contours of a Reform Agenda Leonardo Burlamaqui

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Presentation on theme: "THE FINANCIAL CRISIS AND REFORMING GLOBAL FINANCE Problem Statement, Recent Developments, and Contours of a Reform Agenda Leonardo Burlamaqui"— Presentation transcript:

1 THE FINANCIAL CRISIS AND REFORMING GLOBAL FINANCE Problem Statement, Recent Developments, and Contours of a Reform Agenda Leonardo Burlamaqui New Delhi, India, January 29-30,2010

2 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. THE VISION

3 I believe that the root cause of the present crisis lies in the intellectual failure of economics. It was the wrong ideas of economists which legitimized the deregulation of finance which led to the credit explosion which collapsed in the credit crunch ( Lord Skidelsky, 2009 – Keynes: The Return of the Master ) THE PROBLEM STATED PROPERLY

4 At a deeper level, the crisis of and our continued dangerous financial system are very much the fault of our regulators. Bank executives are supposed to make money. They pursues profits – and rent extraction from the government. It is the governments responsibility to prevent people like Jamie Dimon from creating massive social costs. The failures here – and they were colossal – were on the part of the people who ran the Federal Reserve, the Treasury, and associated agencies over the past 20 or so years. (S. Johnson. Jan/2010). THE INSTITUTIONAL IMPLICATIONS

5 Were facing a big trade-off between corporate sponsored globalization and democracy. THE POLITICAL ECONOMY DIMENSION

6 THE ANALYTICAL DIMENSION RETURNS Financial innovation financing productive Investment Schumpeterian Sorosian Long-term Funding & Venture Capital Hedge Funds, Securitization & Leverage Development/ Structural Change PONZI/ MADOFF CAPITALISM 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, commodities & securities markets Financial innovation financing speculation Creative destruction Destructive creation Late 19 th Century trough the end of Bretton-Woods Post-Reagan Washington-Consensus

7 THE CHANGING FINANCIAL LANDSCAPE

8 Fiscal Shelters BIS (G20 Central Banks) Credit Rating Agencies Burlamaqui IMF WB Chang Mai Init WTO Banking System South Bank Reg Dev Banks Multilateral and Public Asia, Russia, Middle East and Latin America The Global Financial System : SEC FED BRICS OECD Export Credit Agencies Int. Arbitration Tribunals Bilateral Trade & Investment Treaties Multilateral and Public DC and Geneva COUNTRIES & NATIONAL STATES Mortgage Funds EUROPE European Central Bank LAW FIRMS Insurance Companies SWFs IOSCO Int Org of Sec Comm. IFAC Int Fed of Accountants WFE World Fed of Exchanges FSB Fin Stability Board IAIS Int Ass of Insurance Supervisors Credit card Companies SIVsRMBS IASC Int Acc Standards Board Global Corporations Hedge and Private Equity Funds ACC FIRMS GLOBAL PRIVATE Pension Funds GATS National Fin Reg Agencies Much broader than the banking system Totally interconnected Mostly unregulated Structurally changing as we speak

9 The financial landscape: new developments in 2009 The G20 leaders summit in November 2008 urged that the FSB must expand to a broader membership of emerging economies. In January 2009, the IASB expanded its members and guaranteed geographical diversity on its Board for the first time. In February 2009, IOSCO invited securities regulatory authorities from Brazil, India and China to join a body that previously included mostly G7 countries.

10 The financial landscape: new developments in 2009 In March, the BASEL COMMITTEE expanded its membership by inviting Australia, Brazil, China, India, Korea, Mexico, and Russia to join the existing members (who had previously all been from developed countries). Most dramatic of all was the announcement that same month to expand the FSB to include all G20 countries. Summing-up : the emergence of G20 as a new – potential- source of power in global financial governance. BUT also: the emergence of the G2. G2 overriding G20 ?

11 The financial landscape: new developments in 2009 Aggressive calls from European regulators for a comprehensive overhaul of the financial system. Will it last (?) Asian and Latin American emerging economies surface as better equipped the weather the financial storm than Europe or the US. A structural change (?) The American Recovery and Reinvestment Act (5.8 % GDP) starts to impact the non financial sector. Depression avoided (?) The Chinese stimulus package kicks in (13.5 % of GDP). Asian growth reassured (?) The Return of the State: Public ownership of financial assets and financial institutions skyrockets. A new form of capitalism shaping up (?) Mr. Turner is daring to ask the very question that many Britons, and indeed, many Americans, are asking themselves: What good are banks if all they do is push money around and enrich themselves? As he sees it, the City takes too much from British society and gives back too little. It has grown too big and too powerful. And, he contends, the bankers have co-opted many of the regulators who watch over them ( A. Turner: Chief British Financial Regulator, quoted in NYT 9/24/2009) Banks should be split into separate utility companies and risky ventures…. Its a delusion to think tougher regulation [alone] would prevent future financial crises ( Mervyn King. Governor of the Bank of England, quoted in FT 10/21/2009)

12 Toxic assets are still in hidden in banks balance sheets (which the Fed refuses to disclose).. A year after Washington rescued the banks considered too big to fail, the ones deemed too small to save are approaching a grim milestone: the 100th bank failure of 2009 – 400 on the watch list.(NYT – October 10, 2009). Economic conditions in the real economy continue to deteriorate – unemployment has climbed to almost 10 % (not seen since 1983) and could reach 11% in The mortgage crisis far from solved: ON THE DOMESTIC FRONT (US): The underlying roots of the crisis remain

13 Serious Delinquency among Mortgagors

14 Number of Foreclosures Started

15 Financial concentration has increased: the top 3 US banks now control 30 % of all deposits, (up from 20 %). Or…Too big to fail got worse… Investment banks are back in business ( JP Morgan: B in 09), but credit is not flowing… And other jumbo banks are still on the ropes (BOFA: -5.9 B in 4 th Q, Citigroup: -1.6 B in 09). The Volcker Plan (1/2010). Will it succeed? Is it enough ? The elephant in the room: the political influence of finance. ON THE DOMESTIC FRONT: The underlying roots of the crisis remain "And the banks – hard to believe in a time when we're facing a banking crisis that many of the banks created - are still the most powerful lobby on Capitol Hill. And they frankly own the place. -Senator Dick Durbin (D-IL), April 27, Lobbyists Mass to Try to Shape Financial Reform The financial services industry has poured more than $220 million into lobbying in NYT, October 15, The Obama administrations proposal for a new Consumer Financial Protection Agency risks being watered down by lawmakers in Congress after lobbying from banks -FT, October 16, 2009.

16 THE COUNTOURS OF A REFORM AGENDA

17 THE COUNTOURS OF A REFORM AGENDA - US Resolve the mortgage crisis through the homeowners side – not the banks - & demand complete transparency of mortgage lending, Rationalize the regulatory maze (ex. Dodd proposal), Establish a broad Financial Products Safety Agency, Realign compensation schemes to ensure skin in the game for fund-managers, traders, and CEOs, Address financial industry political influence peddling – stop revolving door and reform campaign finance.

18 Governance Failure : Financial Regulation in the US:A Very Inefficient Maze Commercial banks Futures Industrial Loan Companies Thrifts Bank Holding Companies Credit Unions Insurance Securities and Exchange

19 THE COUNTOURS OF A REFORM AGENDA - GLOBAL Re-regulate the financial system: a Glass-Steagall for the 21 st Century Establish a new division of labor among banks and financial institutions in general: traders should not be deposit takers and vice versa. Regulate credit and liquidity: limit leverage and raise capital requirements to banking and non-banking institutions(from Ponzi to Hedge units). Subject OTC custom made derivatives to a pre- approval process (like prescription drugs…). If regulators dont fully understand them, dont allow. If they do, establish a trial period.

20 THE COUNTOURS OF A REFORM AGENDA - GLOBAL Access best regulatory practices outside the US and UK and incorporate them. Bring all bank assets and liabilities onto bank balance sheets, subject to reserve & capital requirements. After a grace period, all off-balance sheet assets and liabilities declared null and void, unenforceable contracts. Create an adequate incentive system for regulators ( unless we want good regulation under bad regulators).

21 THE COUNTOURS OF A REFORM AGENDA - GLOBAL Reform the BIS/BCBS: make it transparent assure broad representation and coordination capabilities. Replace Basel II in the direction of more intense macro-prudential regulation, less leverage and an early-warnings risk assessments system. Make rating agencies a public utility. Prevent too big to fail: restore the distinction among financial institutions and…. Use competition policies to prevent excessive concentration.

22 THE COUNTOURS OF A REFORM AGENDA - GLOBAL Develop a global financial governance for development agenda based on regional financial cooperation and enhanced representation by non- G20 countries (The UN back at the negotiating table). Create a global financial governance body (GFGB) where national regulation would prevail, but would be supplemented by international supervision, regulatory coordination and enforcement power (Housed where?). Establish a mechanism for coordinated capital account control under this GFGB. Reform the GATS agreement under the WTO.

23 QUESTIONS FOR DISCUSSION: 1.The tensions between recovery and reform. 2.The political influence of the financial industry versus democracy. 3.The need to overcome the Anglo- American intellectual hegemony. 4.The need to evolve from criticism towards building a coherent alternative.

24 Thank you

25 Appendix

26 THE SYSTEM IN MOTION MINSKYS MODEL AND THE NEW FINANCIAL SYSTEM : MAD MONEY INSTITUTIONAL FRAMEWORK: MARKETS AS WEBS OF CREDIT AND DEBT CONTRACTS Long Expansion: Δ credit + Fin innov. Overshooted expectations Lax monetary policy Trade Imbalances (Δ liquidity) Reckless finance Asset price inflation Δ Debt financing Exc rate fluctuations Financial meltdown PONZI FINANCE PONZI SQUARE FINANCE Asset price deflation Liquidity & solvency problems Δ Profits Fin Deregulation: Δ liquidity + Opaqueness Δ Leverage Debt interest rates interest rates MADOFF FINANCE SIVs, Derivatives,& Securitization Hedge & Private Eq Funds Exc rate volatility Policy Change Bad debt/ Losses Financial fragilization Profits

27 A few interesting books on the crisis, Keynes and Minsky

28 Fiscal Shelters BIS (G7 Central Banks) Credit Rating Agencies Burlamaqui IMF WB Chang Mai Init WTO Banking System South Bank Reg Dev Banks Multilateral and Public Asia, Russia, Middle East and Latin America The Fin Governance Grants Cluster : SEC FED BRICS OECD Export Credit Agencies Int. Arbitration Tribunals Bilateral Investment Treaties COUNTRIES & NATIONAL STATES Mortgage Funds EUROPE European Central Bank LAW FIRMS Insurance Companies SWFs IOSCO Int Org of Sec Comm. IFAC Int Fed of Accountants WFE World Fed of Exchanges FSF Fin Stability Forum IAIS Int Ass of Insurance Supervisors Credit card Companies SIVsRMBS IASC Int Acc Standards Board Global Corporations Hedge and Private Equity Funds ACC FIRMS GLOBAL PRIVATE Pension Funds GATS National Fin Reg Agencies IBASE SIENA CEPR TJN LEVY North South LEVY CUUS ERF/ IDEAS CEDES IPD OXFORD (GEG) FORUM CFI NEW RULES DEM Center. IPDCEPR Multilateral and Public DC and Geneva BIC PUBLIC CITIZEN TWN EURODAD TWN De Justicia OXFORD (GEG) South Center


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