Transcript Slide 1

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
Late
CAPABILITIES REQUIRED:
Unique knowledge of business
th
19 Century
trough strategies
the endand
of
firms competences;
of their competitive ecology
Schumpeterian
Long-term
Funding &
Venture Capital
Creative
Bretton-Woods
destruction
Financial
innovation
financing
productive
Investment
Development/
Structural
Change
RETURNS
Sorosian
Hedge Funds,
Securitization &
Leverage
Post-Reagan
Financial
innovation
financing
Washington-Consensus
speculation
CAPABILITIES REQUIRED:
Knowledge about the regulatory/legal
loopholes and how to structure bets on
the formation & evolution of
prices in currency, commodities &
securities markets
PONZI/
MADOFF
CAPITALISM
Destructive
creation
THE CHANGING FINANCIAL
LANDSCAPE
Burlamaqui
The Global Financial System:
Multilateral and
Public
DC and Geneva
BIS
(G20 Central
Banks)
SEC
FED
IMF
OECD
European
Central
Bank
the banking
• Much broader than
EUROPE
SWFs
IAIS
•FSB
Totally interconnected
Fin
Int Ass of
GATS
Stability
IOSCO
Board
Int Fed of
Accountants
South
Bank
• Structurally changing as we speak
Mortgage
Funds
Banking
System
Credit card
Companies
Chang
Mai
Init
WFE
World
Fed of
Exchanges
Export
Credit
Agencies
Fiscal
Shelters
Hedge and
Private Equity
Funds
RMBS
National
Fin Reg
Agencies
Reg
Dev
Banks
IASC
Int Acc
Standards
Board
Insurance
Companies
LAW
FIRMS
ACC
FIRMS
Bilateral
Int.
Trade &
Arbitration
Investment
Tribunals
Treaties
Insurance
Supervisors
• Mostly unregulated
Int Org of
Sec Comm.
IFAC
Credit Rating
Agencies
BRICS
system
WTO
WB
Multilateral and Public
Asia, Russia, Middle
East and Latin America
SIVs
Global
Corporations
GLOBAL PRIVATE
Pension
Funds
COUNTRIES
&
NATIONAL
STATES
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 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 – potentialsource of power in global financial governance.
BUT also: the emergence of the G2. G2 overriding G20 ?
The financial landscape: new developments in 2009
Mr. Turner
is daring
ask the very
question that
Britons,
Aggressive
calls
fromtoEuropean
regulators
formany
a comprehensive
indeed,
many Americans,
are it
asking
overhauland
of the
financial
system. Will
last 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.
Asian and Latin
American
emerging
economies
surface as better
It has grown too big and too powerful.
equipped
the
weather
the financial storm than Europe or the US.
And, he contends, the bankers have co-opted many of the regulators
A structural change (?)who watch over them
( A. Turner: Chief British Financial Regulator, quoted in NYT 9/24/2009)
The American Recovery and Reinvestment Act (5.8 % GDP)
starts to impact the non financial sector. Depression avoided (?)
“ Banks should be split into separate utility companies and risky ventures….
It’s a delusion to think tougher regulation [alone] would
The Chinese stimulus
package
kicks crises”
in (13.5 % of GDP). Asian
prevent
future financial
growth reassured (?)
( Mervyn King. Governor of the Bank of England, quoted in FT 10/21/2009)
The “Return of the State”: Public ownership of financial assets
and financial institutions skyrockets. A new form of capitalism
shaping up (?)
ON THE DOMESTIC FRONT (US):
The underlying 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:
Serious Delinquency among Mortgagors
40
35
30
25
20
15
10
5
0
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Prime FRM
Subprime FRM
Prime ARM
Subprime ARM
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Number of Foreclosures Started
650000
600000
550000
500000
450000
400000
350000
300000
250000
200000
150000
100000
50000
0
ON THE DOMESTIC FRONT:
The underlying roots of the crisis remain

Financial concentration has increased: the top 3 US banks
"And
– hard (up
to believe
now control 30 %
of the
all banks
deposits,
from 20 %).
in a time when we're facing a banking crisis that many of the banks created
- are
still the mostbig
powerful
lobbygot
on Capitol
Hill. And they frankly own the place.“
 Or…“Too
to fail”
worse…
-Senator Dick Durbin (D-IL), April 27, 2009 .

Investment banks are back in business ( JP Morgan: +11.9
B in 09), but credit is not flowing…
“Lobbyists Mass to Try to Shape Financial Reform”
“The
financial
services
industry
has
poured
than ropes
$220 million
into lobbying
 And
other
jumbo
banks
are
stillmore
on the
(BOFA:
-5.9
in 2009”
B in 4th Q, Citigroup:-NYT,
-1.6
B in 09).
October 15, 2009.


The “Volcker Plan” (1/2010). Will it succeed? Is it enough ?
“The Obama administration’s proposal for a new Consumer Financial
Protection Agency risks being watered down by lawmakers in Congress after
lobbying from banks”
The elephant in the room:
the political influence of finance.
-FT, October 16, 2009.
THE COUNTOURS OF A
REFORM AGENDA
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 campaign finance.
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
Re-regulate the financial system: a Glass-Steagall for
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 preapproval 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 - 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”).
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.
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.
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 AngloAmerican intellectual hegemony.
4. The need to evolve from criticism
towards building a coherent alternative.
Thank you
Appendix
THE SYSTEM IN MOTION
MINSKY’S MODEL AND THE NEW FINANCIAL SYSTEM : MAD MONEY
INSTITUTIONAL FRAMEWORK: MARKETS AS WEBS OF CREDIT AND DEBT CONTRACTS
Long
Expansion:
Δ credit +
Fin innov.
Lax
monetary
policy
Δ Debt
financing
PONZI FINANCE
Bad debt/
Losses
Asset price
deflation
Derivatives ,&
Securitization
Reckless
finance
Trade
Imbalances
(Δ liquidity)
Asset price
inflation
Financial
fragilization
Exc rate
fluctuations
∆ interest
rates
PONZI SQUARE FINANCE
Financial
meltdown
Liquidity &
solvency
problems
Δ Profits
Hedge &
Private Eq
Funds
Policy
Change
Δ Leverage
∆ Debt
Exc rate
volatility
∆
Overshooted
expectations
SIVs,
∆
Fin
Deregulation:
Δ liquidity +
Opaqueness
Profits
interest
rates
MADOFF FINANCE
A few interesting books on the crisis, Keynes and Minsky
The Fin Governance Grant’s Cluster:
Burlamaqui
Multilateral and
Public
LEVY
DC and Geneva
LEVY
SEC
FED
NEW
RULES
WB
BIC
IMF
OXFORD
(GEG)
PUBLIC
CITIZEN
WTO
TWN
GATS
IOSCO
Int Org of
Sec Comm.
IFAC
Int Fed of
Accountants
FORUM
DEM
Center.
Bilateral
Int.
Investment Arbitration
Treaties
Tribunals
Multilateral and Public
Asia, Russia, Middle
East and Latin America
BIS
(G7 Central
Reg
OXFORD
Banks)
Dev
BRICS
(GEG)
SWFs
IBASE European
Banks
EURODAD
CEDES ERF/
OECD
Central
IDEAS
Bank
National
Chang
EUROPE IPD
SIENA
CEPR
Fin Reg
South
Mai
Agencies TWN
Init
Bank
FSF
South
IAIS
Fin
Int Ass of
Center
Credit Rating
Stability
Insurance
IASC
Supervisors
Forum
Agencies
Int Acc
Standards
LEVY
WFE
Board
World
Fed of
Insurance
Companies
LAW
FIRMS
ACC
FIRMS
IPD
CEPR
Mortgage
Funds
Banking
North
System South
Exchanges
CUUS
LEVY
Hedge and
Private Equity
Funds
RMBS
Fiscal
CFISheltersTJN
SIVs
Global
De
Corporations
Justicia
Export
Credit
Agencies
Credit card
Companies
GLOBAL PRIVATE
Pension
Funds
IPD
COUNTRIES
&
NATIONAL
STATES