Thursday, January 13, 2011

Working together in A World of Trouble

Working together in A World of Trouble

The founder of economics, Adam Smith realized that if you build a system completely on competitive principles it would not work very well. What happened a year ago on Wall Street is a perfect example. Society is not really made to be a purely competitive operation. The whole argument that nature is bloody and that human beings are primarily competitive is flawed. While there is certainly competition, dominance, and hierarchy and animals sometimes fight and even kill each other, many mammilian species stick together because they survive together much better than as individuals or as smaller units alone. I submit that human beings represent the latter type of mammal and this is one of the reasons that I am delighted to see the G8 expand into the G20 and meet together to solve financial isses that impact people all over the world.

The G20 members are Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, South Korea, Mexico, Russia, Saudi Arabia, South Africa, Turkey, The United States, The United Kingdom, and the European Union. This represents a much bigger segment of the world’s population, more political ideologies and is more representative of the disparity of wealth. “This decision (to expand from 8 to 20) brings to the table the countries needed to build a stronger, more balanced global economy, reform the financial system and lift the lives of the poorest,” according to a White House release.

“This "new globalization" requires global governance, based on universal human values and reflecting the reality of economic interdependence. The G20 gives us the chance to shape globalization. The chance to develop a sustainable model to replace the one brought to its knees by the failure of financial markets.” Said European Commission President Jose Manuel Durao Barroso.

The recent meeting of the G20 in Pitsburgh was the third in a year. President Obama was quoted “We brought the global economy back from the brink, we laid the groundwork today for longtime prosperity as well. Still we know there is much further to go.” They agreed to continue to stimulate economies, strengthen banking regulations and stabilize the financial system following the worst financial crisis in decades. They hope to have new rules improving “quanity and quality” of bank capital and to discourage excessive risk-taking set in place by the end of 2010 with enforcement in place by 2012. In addition, they agreed to set new executive compensation standards which would discourage multi-year guaranteed bonuses and require disclosure of compensation for executives. They plan to suggest more executive pay measures next March. They also made progress toward the idea of rebalancing how major countries’ economies interact. Nations with a lot of debt, like the United States, agreed to adopt policies that would support “private savings” and nations like China with big surpluses agreed to spur their own domestic demand. Together these steps have the potential to strengthen the global market’s efficiency and stability.

Working together should be the hallmark of the future on a small planet where everyone is entwined and where the flow of air, of water and of money ends up effecting everyone. As an example, the American Glass-Steagall Act was passed after the Great Depression and it demonstrates the problems that can arise when one country tries to deal with excessive risk taking in isolation. The American Congress decided to separate commercial banking and investment banking to protect bank capital from the risk of the securities business. Time marched on and American companies became more multinational in character and what worked well in a country in isolation did not work as well on the global frontier. More recently it became clear that American banks were at a severe disadvantage on the world stage when they dealt with Japanese and European banks which could offer a greater range of services. In order to deal with this situation, the Graham-Leach-Billey Act (1999) repealed the above Act. Once again it was legal for the investment banking, insurance and a variety of financial services to be offered by one company. This reintegration may have been a direct precursor to last year’s meltdown where risky investing by investment bankers in worthless paper put many banks and the American financial system at risk of collapse when the real estate bubble burst. When the American system is at risk of collapse, the entire world’s financial system is caught in its undertow. The United States was not wrong in trying to protect its banking system after the Great Depression nor was it wrong to try to limit risk or to level the playing field but it would have been much better for everyone concerned it they had been given support for these initiatives from a global community which understood the ramifications and consequences for all involved. This is not to imply that the United States was the only country caught in a bursting bubble. Japan and Spain are only two of the possible other examples. Hopefully, G20 will be empowered to reign in excessive risk takers everywhere.

“There is a growing risk to international markets from poorly co-ordinated national policy responses to the financial crisis,” the Institute of International Finace, the trade association of the world's biggest banks said. The IIF called on world leaders to "resist fragmentation of the global financial system" by pledging to avoid national initiatives, which would isolate pools of liquidity, in favour of globally agreed solutions. It also urged the G20 countries to set up a taskforce to tackle global economic imbalances, which it said "could re-emerge quickly in the recovery, sowing the seeds of future crisis and instability". The warning against inconsistent national policy responses comes as the US presses ahead with reforms that include regulatory requirements for systemically important firms, while France has adopted unilateral rules on bankers' pay.

While countries will agree on some approaches others will be controversial. The debate itself is important. The IIF rejected the US proposal that systemically important financial institutions should be placed in a special category and subject to tighter capital rules, opposing the idea of "setting up artificial categories of systemic firms". Instead, the IIF called on the G20 to launch an effort to create a global bankruptcy regime for international financial institutions that would allow the authorities to manage the collapse of any firm - no matter how big or interconnected. Policymakers see this as the holy grail of regulation - but they worry that it could take decades to achieve, because such a framework would require unprecedented co-operation among regulators and governments. Another suggestion was for a global financial transaction tax. Some ideas will be unworkable, some will be profound but all should be heard and considered.


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By Jennifer Liberto, senior writer Last Updated: September 25, 2009: 5:46 PM ET

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