Tuesday, 17 February 2009

New financial architecture

There is an interesting article on SeekingAlpha about the ineffectual efforts of the G7 at their recent meeting in Rome and the even bigger challenge confronting the present day political leadership in really dealing with the ongoing financial crash.
The writer, Simon Johnson, poses the issue as follow:

But the real issue is that no one is yet ready to take on the deeper underlying problem - the political power structure of modern finance.

It's a good question to raise and one that we should be more focused on.
Just for starters some thoughts on the matter:

The financial technocracy that got us into the current crisis are absolutely the worst people to solve it. Not only are they in denial but their academic training, culture of cronyism and their intellectual toolkit are not up to the job.
What is required are structural changes to the financial architecture but that cannot happen as long as the focus is one of sticking band aids all over the current system.
Across the board asset write-downs and a legal moratorium on debt repayment covenants would be a good start while a new bi-modal banking system is allowed to develop with public sector funding initiatives to get them started.
One type of bank would be run like like an utility company. Nothing sexy, no corporate jets, relatively predictable income streams and no great surprises when they release their earnings statements.
The regulation of such banks could still fall primarily within the respective jurisdictions where they do most of their business and cross border financing would have to be supervised by an international regulator with supra-national deposit insurance etc.
The other type of bank which would handle what we, until recently, called investment banking should be separated into entirely different entities. The disclosure rules for any kind of ownership - equity or debt - would have to be rigorously and uncompromisingly blatant that only those who are prepared to engage in highly risky investments would be qualified to participate. Also another stipulation would be that all principals of said institutions would be paid primarily in equity in their firms and would need to keep the bulk of their wealth in such firms for a minimum of five years.
These new banks/shadow banks would be funded by the private sector through the global capital markets and all of them would have to be subject to a new global regulator. Any firm that entered into a counter party deal with another entity which operated without a specific license from this new global regulator would be immediately subject to having its license revoked and all of the principals of the firm violating this code of conduct would be banned from the securities industry.
The whole labyrinth of offshore tax havens, complex tax treaties etc would have to be cleaned up and most importantly under no circumstances should any taxpayer ever have to clean up the mess resulting from their inevitable misjudgments.

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