Northern Country

How globalization changes capitalism, the economy and politics

Regulating Wall Street – just how much change can we expect?

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Obama-Blankfein

On the eve of the G-8/G-20 summit in L’Aquila the presidents of France and Brazil jointly published an article in The Huffington Post, the world’s first and famous internet newspaper, titled ‘Alliance for Change’. Their choice of this outlet speaks volume, men of such caliber never do anything without careful consideration.

The first thing comes to mind is a desire to reach a vast international audience more inclined to follow their vision of a new system of world governance. We can therefore assume that whatever it is they are suggesting is revolutionary enough to stir up some controversy and at least for now made them stay away from more traditional news channels.

What Mr. Sarkozy and Mr. daSilva are jointly suggesting is no less than a redundancy of the Group of 8 (G-8) in favor of a much wider allegiance of nations with respect to issues concerning global governance. A multilateral system that was conspicuously unrepresentative and lacking in coherence must be reformed to build a more just, developed and sustainable world.

The G-20 or similar to L’Aquila the G-8 together with the G-5/G-6 are both multilateral platforms on which to discuss various global issues in an interconnected framework. Those issues are indeed monumental and both presidents acknowledged the urgency of a multilateral system by highlighting most of the challenges that face the global community in the 21st century.

Peace and collective security require a wide-ranging reform of the U.N. Security Council. The voice of workers must be heard and their desire for more social justice and greater security met by strengthening the role and influence of the International Labour Organization (ILO) in global economic governance. Last but not least on the agenda of such an international framework is the enormously challenging task of regulation of international finance.

From Huff Post,  both presidents: The decisions taken by the G-20 to improve the regulation and oversight of international finance, to curb speculation, to crack down on tax havens and money laundering centers, and to foster growth must be implemented.

Politicians are very often a bunch of stoic bureaucrats, but no not this time. Sarkozy, daSilva and hopefully others at the recent summit are ready to see eye to eye maybe for the first time with their constituency and clearly acknowledge the vacuum of social justice pervading all layers of society in the 21st century.

This reinvigoration of literally common sense results on the one hand from the advent of Barak Obama and his new leadership in the U.S. and on the other hand from a massive global financial and economic crisis that threatens the very foundations of global world order.

The president of the U.S. has demonstrated his desire for change in many ways but has he been effective and is change indeed coming to Washington, as he has promised many times? The global economic crisis has made regulation of financial markets and the financial industry as a whole a top priority. 

Today Goldman Sachs, Deutsche Bank, UBS and others are equipped with an almost unmitigated license to gamble and at the same time fall into the category of too big to fail. This is not sustainable and even the Bank for International Settlements (BIS) is now openly debating a breakup of these giant cathedrals of capitalism.

The Financial Stability Forum and its successor the Financial Stability Board (FSB) in Basel is working on new rules to give regulators more oversight in establishing important issues such as excessive leverage and forcing banks to provide for anti-cyclical periods with putting more money aside during boom times.

They are asking for an awful lot given the most recent history of the industry but nobody disagrees bold action is necessary because of the magnitude of the current crisis. At the eve of the London summit Nikolas Sarkozy threatened world leaders to quit the talks if president Obama and chancellor Gordon Brown would resist tough regulation.

They did not and so in the end it provoked Mr. Sarkozy to say that the page of the Anglo-Saxon model of free markets had been turned. German chancellor Angela Merkel called it a victory for common sense and Nobel Laureate and economist Stiglitz hailed it a historic moment for the world to admit the push for deregulation was wrong.

The joint communiqué of the London summit included a statement acknowledging major failures in regulation being the cause of the market turmoil. To avoid another crisis hedge funds, credit rating agencies, risk taking and executive pay are subject to stricter regulation in the future.

Just how much more regulation and who those regulators will be nobody knows at this point. It is hard to fathom that a bunch of bureaucrats will be able to reign in Wall Street executives and their armada of lobbyists swarming the hallways of congress. For regulators to push the breaks when everybody else wants to accelerate seems too much to ask, in particular given the history of failed regulations in the past.

A contentious issue in this whole regulation debate is the use of credit derivatives and their contribution to the current crisis. At a recent congressional hearing on a proposal to regulate over-the-counter derivatives congressman Sherman asked Treasury secretary Geithner: “Can you correct that misconception and make a clear statement now that derivatives that are sold today are not going to be the subject of bailouts for either the issuer or the purchaser?”

The secretary even after being asked several times refused to give an answer (the full transcript of the conversation can be seen here, video in video-center). Mr. Geithner’s refusal to cooperate highlights the difficulty of the enormous task that lies ahead.

On the one hand is the commitment to put on the breaks with tougher regulations for the sake of the sustainability of the system. On the other hand are all the safeguards put into place to make sure that this ambitious goal will not kill the golden goose. It is therefore no surprise that credit derivatives experience sort of a revival in the midst of a still slumping economy, mass layoffs and record taxpayer funded economic stimulus programs.

The president of France, Brazil and other nations are talking tough on regulation but in the meantime BAB is back on Wall Street. Today Goldman Sachs released the results for second quarter earnings and revealed that bonuses are indeed back. Goldman compensation may very well reach a record $1 million per employee this year.

For the second quarter the bank set aside a staggering $226,156 for every employee working for the firm. A couple of months ago with Wall Street and the World at the precipice of catastrophe, Goldman received a $10 billion bailout in taxpayer money.

It is no surprise Wall Street has a very short memory but this development gives me indeed little hope that regulation is being seriously considered in the hallways of power on Wall Street and in Washington. Just how much change will we get in the end? Probably not enough!

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