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RE-REGULATING FINANCE IN THE LIGHT OF THE GLOBAL CRISIS Tsinghua University Beijing, China. 9-11,2009 Leonardo Burlamaqui

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Presentation on theme: "RE-REGULATING FINANCE IN THE LIGHT OF THE GLOBAL CRISIS Tsinghua University Beijing, China. 9-11,2009 Leonardo Burlamaqui"— Presentation transcript:

1 RE-REGULATING FINANCE IN THE LIGHT OF THE GLOBAL CRISIS Tsinghua University Beijing, China. 9-11,2009 Leonardo Burlamaqui

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 A SUGGESTED DEPARTURE POINT

3 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

4 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

5 Ive 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 theyve suddenly realized that they dont understand the complex financial system they created. ( Krugman: December 2007) EVEN MORE SCARY ….

6 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)

7 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.

8 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 regulators side of the equation (e.g. What are the essential measures to enable effective regulators once we have effective regulation ?).

9 Taking a Step Back:

10 Whats wrong with the Global Governance System ? Its 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.

11 Whats wrong with the Global Financial Governance System ? Its 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.

12 Maps and Facts:

13 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 Global Financial System : SEC FED BRICS OECD Export Credit Agencies Int. Arbitration Tribunals Bilateral 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 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 Toxic finance at its best: Global markets for derivatives: UNREGULATED Note: world GDP ~ 42 trillion

14 Governance Failure (1) 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

15 GOVERNANCE FAILURE (2): MARKET DISCIPLINE AND RENT-SEEKING IN FINANCE RETURNS Financial innovation financing productive Investment Schumpeterian Sorosian Long-term Funding & Venture Capital Hedge Funds, Securitization & Leverage DEVELOPMENT/ Structural Change PONZI 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 & securities markets Financial innovation financing speculation Creative destruction Destructive creation

16 To bring the financial system back from its current rent- seeking configuration to a productive fit. What has to be done ?

17 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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