Sunday, March 7, 2010

The Global Gambit vs. Regulatory Reform

In February, IMF managing director Dominique Strauss-Kahn at Davos, warned the US and European countries should not attempt financial regulatory reform nationally and urged governments pursue a multilateral, global approach.  His concern is that different national reforms will be inconsistent.    He is echoing concerns of international regulators and bank executives who do not want the "closely coordinated" efforts during the financial crisis in 2008-2009 giving why to concrete national initiatives providing reform regulation.  These are the same bankers who tell countries proposing regulatory reforms that banks will just move to other countries.

They are reacting to the proposed "Volcker" rules in the United States, which, as we have discussed previously, would actually leave the big banks as is while imposing a ban on proprietary trading.  The EU finance ministers publicly opposed this limitation on bank size and risk taking as inconsistent with the current European universal banking system.

Yet, when it is discovered that Greece, and other Eurozone countries, used legal currency swaps in 2002 to help hide debt, the EU wants to divert its attention from the real euro crisis to its current manifestation in the pan-European debt crisis to how international large banks made money legally but in a way which is fundamentally systemically dangerous.  Even while we have a demonstration of systemically dangerous investment banking by large international banks, a German economist has written that the re-instatement of Glass-Steagall type laws as the "Volcker" rules imply are unnecessary, because the US "... system of bank separation remained fairly intact up to the outbreak of the crisis."  He argues the US is actually trying to undo the Paulson-Geithner conversion of Goldman Sachs and Morgan Stanley into investment-commercial banks and reassert the legacy of separate commercial and investment banking which, in his opinion, made the crisis worse.  According to this German economist, the cavalier risk taking that led to the crisis was actually "...due to their inadequate capital reserves."

While the need for better capital reserves is obviously necessary, the German economist is actually arguing for a continuation of the current universal European banking system, which the separation of commercial and investment banking would directly challenge.  This raises the question of how systemically dangerous the universal European banking system is even if currently bureaucratic regulatory proposals are adopted and capital reserves increased.

The Baseline Scenario succinctly summed up the illusion of international governmental cooperation.  The WTO and the IMF have no authority and the EU Financial Stability Board is a "paper tiger".  The FSB is merely a forum for regulators and bankers to talk shop.  The big international banks have known this and use it to keep the process "international" and going no where meaningful.

Paul Volcker in a recent speech in Europe argued that commercial banks will become more like hedge funds unless limits on proprietary trading are not imposed.  He asserted that it is not in the public interest to have banks take deposits and use that money to engage in risky trading.  ECB President Jean-Claude Trichet, in defense of the current universal European banking system, expressed concern this would just push regulated activities into the unregulated hedge fund sector.

Who said hedge funds, and other shadow banks, should be left unregulated?

It all comes down to Joseph Stiglitz's early February opinion piece that differing opinions and priorities make global coordination difficult, if not a prescription for paralysis, which would only benefit the bankers. The only way to stimulate effective global cooperation is for individual nations to establish what they believe is a good regulatory structure for their nation.  This would force the bankers to fight multiple regulatory fires here and there and expose their attempts to prefer little regulation.  It is in the best interests of self-protection for each country to deal with its own regulatory needs and the leave the subterfuge of global intertwining behind to enable global regulatory coordination to be addressed later as self-protected countries seek coordination from positions of strength.

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