Monday, May 10, 2010

We do not need a "Financial Stability Board" we need a "Financial Systems Working for the World Board."

You can put the responsible for the financial stabilization from all the countries of the world on this Board and you will not achieve diversity nor will it serve any real good purpose since finance is much more than a pure wimpy quest for stability.

Allowing these one-kind-of mind regulators to do whatever they please in their mutual admiration club will only result in that hubris that had them thinking they could control for risk; designing capital requirements for banks that required a 12.5 to one leverage when lending to small businesses and entrepreneurs, those on whom we depend so much on for jobs, but cannot afford being rated by the raters; but allowed a 62.5 to one leverage, five times higher, when banks were stocking on public debts like Greece’s, just because some human fallible credit rating agencies rated Greece as good.

Do you believe for instance this should be the Charter for an institution designed to make the Financial System to work for us?

Article 1. Objectives of the Financial Stability Board

The Financial Stability Board (FSB) is established to coordinate at the international level the work of national financial authorities and international standard setting bodies (SSBs) in order to develop and promote the implementation of effective regulatory, supervisory and other financial sector policies. In collaboration with the international financial institutions, the FSB will address vulnerabilities affecting financial systems in the interest of global financial stability.

Article 2. Mandate and tasks of the FSB

(1) As part of its mandate, the FSB will:

(a) assess vulnerabilities affecting the global financial system and identify and review on a timely and ongoing basis the regulatory, supervisory and related actions needed to address them, and their outcomes;
(b) promote coordination and information exchange among authorities responsible for financial stability;
(c) monitor and advise on market developments and their implications for regulatory policy;
(d) advise on and monitor best practice in meeting regulatory standards;
(e) undertake joint strategic reviews of the policy development work of the international standard setting bodies to ensure their work is timely, coordinated, focused on priorities and addressing gaps;
(f) set guidelines for and support the establishment of supervisory colleges;
(g) support contingency planning for cross-border crisis management, particularly with respect to systemically important firms;
(h) collaborate with the International Monetary Fund (IMF) to conduct Early Warning Exercises; and
(i) undertake any other tasks agreed by its Members in the course of its activities and within the framework of this Charter.

(2) The FSB will promote and help coordinate the alignment of the activities of the SSBs to address any overlaps or gaps and clarify demarcations in light of changes in national and regional regulatory structures relating to prudential and systemic risk, market integrity and investor and consumer protection, infrastructure, as well as accounting and auditing.

Warning!: After some years of giving the big banks growth hormones to help them turn into “Too-Big-To-Fail-Banks” any day these stabilizers will inform us who these definite TBTF are, and then we are really stuck with them, forever, or at least while they eat each other up and we are finally left with “The Only Bank of the World”

Perhaps Joseph Stiglitz should return his Nobel Prize

Stiglitz correctly holds that whenever there is imperfect information or asymmetric information, in essence always, the reason the invisible hand seems to be invisible it is because it is not there. One of the problems for this is of course that the markets are not efficient information transmitters… because if they were “no one would have any incentive to gather information”.

Is this why he never spoke out when the regulators appointed the credit rating agencies as official information gatherers for the purpose of establishing the capital requirements of banks?

If so how intellectually stupid to think that giving so much power to some very few opinion givers would solve the lack of asymmetric information in the market and not just dangerously increase the size of the asymmetric information gaps? He should perhaps return his Nobel Prize!

Stigliz is now also telling us we should ask “what is the financial system supposed to do?” Why did he himself not ask that before? Did he not know that our current primary bank regulators, those holed up in the Basel Committee, do not utter a word on the purpose of our banks in the Basel II regulations approved by G10 in June 2004?

The regulators in Basel, with amazing hubris thinking they could control for risk, designed capital requirements for banks that while allowing for what sounds like a reasonable 12.5 to one leverage when lending to small businesses and entrepreneurs, those on whom we depend so much on for jobs, but cannot afford being rated by the raters; they permitted the banks to leverage 62.5 to one, five times more, when stocking on public debts like Greece’s, just because some human fallible credit rating agencies rated Greece as good? Did Stiglitz not know about this either? For someone who likes to talk so much about development, he should have.

PS.1. Stiglitz states “The financial sector paid good money to make sure the regulators weren’t doing what they were supposed to do!” If I was a member of the Basel Committee, which of course I am not, I would ask Mr. Stiglitz to clarify what he seems to be implying.

PS.2. In minute 55:50 you hear Stiglitz saying: “What rate of return do we need to get on our investments in order for the tax revenues that we get from the short run growth and from the long run growth lead to an actual reduction in the national debt in the long run?; and the answer is a very low return, only about 5 to 6 percent return on public investments will lead to a long lower long term national debt; and the evidence is that the returns from investments for instance in public technologies are much-much higher…. so we should encourage expenditure that yield returns.”

And when I hear that I shiver, because I know that he knows, this argument will support expenditure that will not yield returns… but which is ok with his agenda. Somewhere in there, Stiglitz refers to “when we hear those politicians talk” What a laugh!