Wednesday, May 28, 2008
Advice of the Day: On the regulation of financial markets
I feel the western consensus on the relation between the market and the government should be reviewed. In practice, they tend to overestimate the power of the market and overlook the regulatory role of the government and this warped conception is at the root of the subprime crisis. —Liao Min, director-general and acting head of the general office of the China Banking Regulatory Commission (CBRC) as quoted in "China rebukes west’s lack of regulation"
Lest this quote be dismissed as some sort of anti-capitalist rhetoric, I should point out that hedge-fund billionaire George Soros has been delivering the same message.
When asked what other countries could learn from China’s regulatory system, he pointed out that Chinese financial institutions needed CBRC approval to launch individual product types, making it nearly impossible for exotic financial instruments, such as the ones blamed for the subprime crisis, to exist in China.
These "exotic financial instruments" were recently decried by super-capitalist Warren Buffett. In an interview with Der Spiegel he opined—
SPIEGEL: .... You yourself have referred to some of the tools of the financial industry as "weapons of mass destruction." It sounds almost like what German President Horst Köhler said about the financial markets, which he described as "a monster."
Buffett: I don't condemn the entire industry. When I mentioned weapons of mass destruction, I was merely referring to the out-of-control trading in derivatives. It doesn't make sense that hundreds of jobs are being eliminated, that entire branches of industry in the real economy are going under because of such financial gambles, even though they are in fact completely healthy. Besides, these types of constructs are so complicated that hardly anyone understands them anymore.
SPIEGEL: Even bankers don't know what's going on anymore.
Buffett: They concocted a poisonous brew, and in the end they had to drink it themselves. This is something bankers are normally extremely loath to do. They'd rather sell it to someone else.
Unfortunately Buffett has fallen prey to financial fatalism, quite contrary to the
SPIEGEL: How can these financial instruments be monitored?
Buffett: That's the problem. You can no longer control or regulate this sort of thing. It's taken on a life of its own. You can't put the genie back into the bottle. The American central bank, the Fed, tried to exert its influence by lowering interest rates, for example. The Fed and the US government have absolutely no interest in promoting the extreme fluctuations we are now experiencing. Nevertheless, they were also unable to prevent them.
SPIEGEL: Based on your logic, any future US administration will also be powerless....
Perhaps Buffett has concluded that the power of the capitalists has exceeded the power of governments—and I fear that he's right. But to suggest that the raising or lowering of interest rates is the only means left to control the financial markets only shows how deeply economic theory has corrupted the thought of even the richest.
Will China be able to whip our capitalists into shape?
Thanks to China’s lack of integration with global financial markets as well as the cautious regulatory approach of the CBRC, Chinese banks have emerged relatively unscathed from the global credit crisis, which so far has caused nearly $380bn of losses at western financial institutions. [A gross understatement of the losses. —HF]
Apart from Bank of China, which reported a subprime-related writedown of nearly $1.3bn by the end of last year, no other Chinese bank has been seriously affected.
The CBRC is advocating new international laws requiring governments to provide timely, accurate information in times of crisis.
That would be a start. So much of western financial chicanery transpires "over the counter," which is a wonderful euphemism for "under the table."
And you have to love the irony when the Chinese government acts as the voice in the wilderness calling for greater transparency!