STAFF NEWS & ANALYSIS
More Calls for Global Financial Rules
By - October 06, 2008

Strengthening international regulation of the finance markets is not a new idea. German Finance Minister Peer Steinbrück has long been calling for an international system that would strengthen accountability of traders, ban the practice of short-selling and harmonize stock market regulations in Europe. Other ideas include those voiced by Peter Bofinger, a member of the German Council on Economic Experts, which advises Berlin on economic policy. He would like to require banks, insurance companies and funds across the world to be required to declare the origin of all liabilities and he wants to see private ratings agencies be jettisoned in favor of a more transparent, state-run system, among other proposals. Sarkozy on Monday repeated his call for a meeting of world leaders "to set the foundations for a new international financial system." What that new system might look like according to the French president was outlined in a speech he gave last Friday in Toulon. "The idea of an all-powerful market which must not be constrained by any rules, by any political intervention, was mad," he said. "The idea that markets were always right was mad." He also said that self-regulation and laissez-faire capitalism "were finished." But perhaps the most influential voice calling for a new system of market regulation comes from Dominique Strauss-Kahn, the head of the International Monetary Fund. Strauss-Kahn has made significant changes to the IMF since he took over in November 2007, but none is as ambitious as his goal of turning the institution into a global enforcer of financial standards. "We can have national or regional authorities, such as the European Union for example, but we need a global guarantor, an institution which monitors standards," he said last Friday. The IMF, he continued, was "ready to do what is required if we are given the mandate." … The IMF head says that he has widespread backing for such a plan-including China, Brazil, France, Great Britain, Spain and Germany. – Business Week

Dominant Social Theme: Lesson learned. Bring on the regulators.

Free-Market Analysis: We began to predict calls long ago for more international regulation based on the current "financial crisis." Our perception of what was bound to occur has indeed come true in various regions.

Take the United States. Here, the Democrats have been gearing up for a "new era" of financial regulation. The Democratic candidate Barack Obama shares the point of view of House Speaker Nancy Pelosi that "the party is over." In fact, here's a recent quote of Pelosi's, courtesy of the London Times:

"They claim to be be free-market advocates when it's really an anything-goes mentality: no regulation, no supervision, no discipline. And if you fail you will have a golden parachute and the taxpayer will bail you out. Those days are over. The party is over in that respect." She added: "Democrats believe in a free market. We know that it can create jobs, it can create wealth, it can create many good things in our economy. But in this case, in its unbridled form as encouraged, supported by the Republicans – some in the Republican Party, not all – it has created not jobs, not capital, it has created chaos."

The problem that Pelosi and the other Democrats have, however, is that they are an obvious part of the problem. Here is American conservative writer Thomas Sowell on Democratic culpability:

It was liberal Democrats, led by Sen. Christopher Dodd and Congressman Barney Frank, who for years – including the present year – denied that Fannie Mae and Freddie Mac were taking big risks that could lead to a financial crisis. It was Sen. Dodd, Congressman Frank, and other liberal Democrats who for years refused requests from the Bush administration to set up an agency to regulate Fannie Mae and Freddie Mac. It was liberal Democrats, again led by Dodd and Frank, who for years pushed for Fannie Mae and Freddie Mac to go even further in promoting subprime mortgage loans, which are at the heart of today's financial crisis. Alan Greenspan warned them four years ago. So did the chairman of the Council of Economic Advisers to the president. So did Bush's secretary of the Treasury, five years ago. Yet, today, what are we hearing? That it was the Bush administration "right-wing ideology" of "de-regulation" that set the stage for the financial crisis. Do facts matter? We also hear that it is the free market that is to blame. But the facts show that it was the government that pressured financial institutions in general to lend to subprime borrowers, with such things as the Community Reinvestment Act and, later, threats of legal action by then Attorney General Janet Reno if the feds did not like the statistics on who was getting loans and who wasn't.

Perhaps, as a result of all the above, America's left wing has lost some of the moral luster necessary to lead the United States into Pelosi's new era of increased federal regulation. But what of Europe and the IMF? The leaders of Europe are calling for more regulation and more business transparency. Do they have the moral authority that America's Democrats probably do not? In a word, "no."'

In the past few years, the EU leaders have fumbled away even the dregs of credibility they yet retained as a result of previous unbecoming legislative activities. The opaque nature of EU rule-making and the constant voting do-overs it forces on recalcitrant partners, are just some of the obvious sins. In fact, the litany of misleading statements and actions as regards the EU goes all the way back to its foundation. The union was sold to a gullible public as a way to increase the efficiency and profitability of private enterprise by making cross-border transactions easier (see next article). But that was obviously never the goal, and endless enlargements have shown this clearly. The result is that, unlike the American republic, the EU has the distinction of having been built on subterfuge, reinforced by daily mendacity. Not a very credible platform from which to launch a vast, regulatory overhaul of the private sector's behavior.

And what about supra-regulators outside of the EU? Just as surprising is the call by the IMF for a global guarantor, an institution to comprehensively monitor corporate standards. As with the EU, one would think that the IMF would spend more time cleaning up its own reputation and methodologies and less time worrying about additional responsibilities.

Of course, that may be just the point. Having been seen as a perennial botch, the IMF may be looking for something new to do. (A version of failing upward?)

Here is but one of numerous commentaries on the IMF's performance as a lender of last resort to nation-states on behalf of the world community. It appeared recently in the Daily Times of Pakistan, entitled IMF Popularity at All-Time Low … Pakistan Economy Watch president says IMF policies ruined 68 economies worldwide:

The Pakistan Economy Watch has said that the popularity of the International Monetary Fund (IMF) has dwindled significantly and it should modify its policies to increase the level of acceptance. The popularity of the fund established in 1945 is at an all-time low. Lack of customers has put its own existence in jeopardy. It's high time for international lenders and the IMF to reconsider their policies often blamed for enhancing poverty and the gap between rich and poor, said Dr Murtaza Mughal, President of the Pakistan Economy Watch. Currently only Turkey was accepting the IMF programme and Georgia had no other option after war with Russia. This is because of the perception that the policies of the IMF were behind 68 ruined economies in the world. … "The International Monetary Fund, World Bank and other mega banks could be termed as doctors who never helped a patient survive," he said. "These institutions are also behind irresponsible lending that only promotes corruption and the masses are the ultimate sufferers.

After Thoughts

In the United States, the Democrats struggle with their call for more regulation because their activities are perceived by many to have either generated or enhanced the severity of the current crisis. Throughout Europe, leaders are calling for more regulation, but the EU itself has struggled with credibility. It could not get a constitution put in place and more recently, when it tried to do so by treaty instead of a full vote, little Ireland derailed that plan as well. The IMF announces that it stands ready to be a global enforcer and guarantor of corporate good behavior, but given the IMF's lamentable performance, one wonders where the reservoir of good will necessary to perform such a task will come from.

In this era of instant communications, it is hard to avoid the conclusion that while corporate malfeasance is almost instantly available to a viewing public, increasingly regulatory misconduct is available as well. The state certainly profits from the perception that it is a necessary regulatory authority, but since this often, indeed ‘perception" rather than reality, the ability to create increased regulatory consensus is increasingly questionable.

What may occur, as a result of the latest economic crisis, is a regulatory and supra-national consensus for more regulatory activism that has little to do with the desires of the public itself. In fact, having declared itself useful and relevant, the regulatory elite may decide it will do its best to arrogate additional powers no matter what the perception is "on the street." This is a most dangerous way to govern. First comes credibility, then responsibility. The elites ignore their own failures and the perception of the public at their own risk.

When credibility is lost in a fiat-money economy, where money is not backed by gold or silver, the currency itself can lose credibility and value in a very short period of time. The result of this latest financial crisis, if it is not handled carefully and credibly will be to drive even more savers into money metals.

Gold and silver are barometers of people's trust in their government. But if the government treats this trust with disdain, or ignores the necessity to cultivate, then that government may not have to worry about the value of its paper money for it will have little if any.

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