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

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THE FINANCIAL CRISIS

AND

REFORMING GLOBAL FINANCE

Problem Statement, Recent Developments,

and Contours of a Reform Agenda

Leonardo Burlamaqui

[email protected]

New Delhi, India, January 29-30,2010


THE VISION

“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 PROBLEM STATED PROPERLY

“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 INSTITUTIONAL IMPLICATIONS

“At a deeper level, the crisis of 2008-09 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 government’s 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 POLITICAL ECONOMY DIMENSION

We’re facing a big trade-off between corporate sponsored globalization and democracy.


THE ANALYTICAL DIMENSION

CAPABILITIES REQUIRED:

Unique knowledge of business firms competences; strategies and of their competitive ecology

Creative

destruction

Late 19th Century trough the end of Bretton-Woods

Financial

innovation

financing

productive Investment

Long-term

Funding &

Venture Capital

Development/

Structural

Change

Schumpeterian

RETURNS

HedgeFunds, Securitization & Leverage

PONZI/

MADOFF

CAPITALISM

Financial

innovation

financing

speculation

Post-Reagan Washington-Consensus

Sorosian

CAPABILITIES REQUIRED:

Knowledge about the regulatory/legal loopholes and how to structurebetson the formation & evolution of

prices in currency, commodities &

securities markets

Destructive

creation


THE CHANGING FINANCIAL LANDSCAPE


The Global Financial System:

Burlamaqui

Multilateral and Public

DC and Geneva

Multilateral and Public

Asia, Russia, Middle East and Latin America

BIS

(G20 Central

Banks)

SEC

FED

BRICS

Reg

Dev

Banks

SWFs

IMF

OECD

European

Central

Bank

  • Much broader than the banking system

  • Totally interconnected

  • Mostly unregulated

  • Structurally changing as we speak

WTO

WB

EUROPE

Chang

Mai

Init

South

Bank

National

Fin Reg

Agencies

FSB

Fin

Stability

Board

IAIS

Int Ass of

Insurance

Supervisors

GATS

Credit Rating

Agencies

IOSCO

Int Org of

Sec Comm.

IASC

Int Acc

Standards

Board

WFE

World

Fed of

Exchanges

IFAC

Int Fed of

Accountants

Insurance

Companies

LAW

FIRMS

Banking

System

ACC

FIRMS

Export

Credit

Agencies

Credit card

Companies

Bilateral

Trade &

Investment

Treaties

Int.

Arbitration

Tribunals

Fiscal

Shelters

Mortgage

Funds

Hedge and

Private Equity

Funds

Pension

Funds

RMBS

SIVs

COUNTRIES

&

NATIONAL

STATES

Global

Corporations

GLOBAL PRIVATE


The financial landscape new developments in 2009
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.


The financial landscape new developments in 20091
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 ?


The financial landscape new developments in 20092
The financial landscape: new developments in 2009

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)

  • 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 thanEurope 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 (?)

“ Banks should be split into separate utility companies and risky ventures….

It’s 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)


ON THE DOMESTIC FRONT (US):

Theunderlying roots of the crisis remain

  • Toxic assets are still in hidden in bank’s 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 2010.

  • The mortgage crisis far from solved:




ON THE DOMESTIC FRONT:

Theunderlying 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, 2009 .

  • 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: +11.9 B in 09), butcredit is not flowing…

  • And other jumbo banks are still on the ropes (BOFA: -5.9 B in 4th 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.

  • “Lobbyists Mass to Try to Shape Financial Reform”

  • “The financial services industry has poured more than $220 million into lobbying

  • in 2009”

  • NYT, October 15, 2009.

  • “The Obama administration’s proposal for a new Consumer Financial

  • Protection Agency risks being watered down by lawmakers in Congress after

  • lobbying from banks”

  • FT, October 16, 2009.



The countours of a reform agenda us
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 CEO’s,

  • Address financial industry political influence peddling – stop revolving door and reform campaignfinance.


Governance Failure : 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


The countours of a reform agenda global
THE COUNTOURS OF A REFORM AGENDA - GLOBAL Inefficient Maze

  • Re-regulate the financial system: a Glass-Steagallfor the 21st 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 don’t fully understand them, don’t allow. If they do, establish a trial period.


The countours of a reform agenda global1
THE COUNTOURS OF A REFORM AGENDA - GLOBAL Inefficient Maze

  • 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”).


The countours of a reform agenda global2
THE COUNTOURS OF A REFORM AGENDA - GLOBAL Inefficient Maze

  • 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.


The countours of a reform agenda global3
THE COUNTOURS OF A REFORM AGENDA - GLOBAL Inefficient Maze

  • Develop a global financial governance for development agendabased 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.


Questions for discussion
QUESTIONS FOR DISCUSSION Inefficient Maze:

The tensions between recovery and reform.

The political influence of the financial industry versus democracy.

The need to overcome the Anglo-American intellectual hegemony.

The need to evolve from criticism towards building a coherent alternative.


Thank you
Thank you Inefficient Maze


Appendix
Appendix Inefficient Maze


THE SYSTEM IN MOTION Inefficient Maze

MINSKY’S MODEL AND THE NEW FINANCIAL SYSTEM :MAD MONEY

INSTITUTIONAL FRAMEWORK: MARKETS AS WEBS OF CREDIT AND DEBT CONTRACTS

Fin

Deregulation:

Δ liquidity +

Opaqueness

Δ Leverage

∆ Debt

Bad debt/

Losses

Asset price

deflation

Overshooted

expectations

SIVs,

Derivatives ,&

Securitization

Long

Expansion:

Δ credit +

Fin innov.

Reckless

finance

Asset price

inflation

Financial

fragilization

Financial

meltdown

Δ Debt

financing

Δ Profits

Liquidity &

solvency

problems

Trade

Imbalances

(Δ liquidity)

Lax

monetary

policy

Hedge &

Private Eq

Funds

Exc rate

fluctuations

Exc rate

volatility

Profits

Policy

Change

∆ interest

rates

interest

rates

MADOFF FINANCE

PONZI FINANCE PONZI SQUARE FINANCE



The Fin Governance Grant’s Cluster Inefficient Maze:

Burlamaqui

Multilateral and Public

DC and Geneva

Multilateral and Public

Asia, Russia, Middle East and Latin America

LEVY

BIS

(G7 Central

Banks)

LEVY

SEC

FED

OXFORD

(GEG)

BRICS

Reg

Dev

Banks

SWFs

IMF

IBASE

OECD

European

Central

Bank

OXFORD

(GEG)

EURODAD

CEDES

NEW

RULES

ERF/

IDEAS

WB

WTO

SIENA

IPD

CEPR

National

Fin Reg

Agencies

EUROPE

Chang

Mai

Init

South

Bank

PUBLIC

CITIZEN

TWN

TWN

BIC

FSF

Fin

Stability

Forum

IAIS

Int Ass of

Insurance

Supervisors

South

Center

GATS

Credit Rating

Agencies

IOSCO

Int Org of

Sec Comm.

IASC

Int Acc

Standards

Board

LEVY

WFE

World

Fed of

Exchanges

IFAC

Int Fed of

Accountants

Insurance

Companies

LAW

FIRMS

Banking

System

ACC

FIRMS

Export

Credit

Agencies

North

South

Credit card

Companies

IPD

FORUM

DEM

Center.

CUUS

CEPR

LEVY

Bilateral

Investment

Treaties

Int.

Arbitration

Tribunals

Fiscal

Shelters

Mortgage

Funds

Hedge and

Private Equity

Funds

CFI

TJN

IPD

Pension

Funds

RMBS

SIVs

COUNTRIES

&

NATIONAL

STATES

Global

Corporations

De

Justicia

GLOBAL PRIVATE


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