23 February 2009

Reining in the rogues: Europe calls for global financial reform

Let's face it. The world's financial system is a mess. Unencumbered by appropriate regulation it has run amok for years. It has finally crashed and taken the economy down with it. Europe's leading nations are now serious about fixing it.

A few hundred international currency traders, including big banks, mutual fund managers and other investment dealers, shift trillions of dollars around the world every day enabled by the modern miracle of telecommunications. Their influence is impressive. In 1992, one trader, George Soros, almost single-handedly drove down the British pound, forcing it out of the European Monetary System. The British public’s respect for their government went down with it. The power of money traders is on a par with nations. Soros himself has said, “The main enemy of the open society, I believe, is no longer the communist but the capitalist threat.” He predicted a global system dominated by finance would disintegrate. He was right.

These transient trillions are primarily speculative. Only a small portion of foreign-exchange transactions go into world trade. We have become captive to the vagaries of the world’s largest lottery. Quite aside from its inherent arbitrariness and instability, it is tailor-made for gangsters, money launderers, terrorists and tax evaders.

Other observers than George Soros have recognized the need for action. James Tobin, a Nobel Prize-winning American economist, has suggested a one per cent tax on all foreign currency exchange transactions. When Paul Martin was Finance Minister, he pushed finance ministers in other countries to give the International Monetary Fund and the World Bank greater supervisory powers over international financial markets. He observed, “I’ve felt we had to go much further in terms of supervision and international regulation and that has been borne out by the Asian crisis.” Germany has for years attempted to tighten controls on hedge funds but has been stymied by Great Britain and the United States.

It is now clearly time governments reined in the rogues of finance. Government’s right, if not obligation, to regulate markets has been recognized even by free-marketers back to Adam Smith. If we can extend this right to negotiate a world-wide General Agreement on Tariffs and Trade, we can negotiate supranational regulations for financial markets. This, the Europe Union's most influential nations plan to do. Germany, Britain, France, Italy, Spain, the Netherlands, the Czech Republic and Luxembourg have issued a joint statement that they will push for international standards requiring banks to hold larger reserves, requiring market participants to exercise greater transparency, and allowing international authorities to clamp down on tax havens.

The Americans, whose inclusion is essential to such a plan, may resist. They are ambivalent about international financial regulations. They would like to track the financial arrangements of terrorists, gangsters and tax evaders, but on the other hand they are reluctant to interfere with their own investors and havens for shady operators -- Dubai, for example -- are helpful to the U.S. for other reasons. Needless to say our government, still largely driven by its neocon ideology, will support the Americans in any opposition. But the U.S. has a new man at the helm, a man of progressive persuasions, and the crisis is dire indeed, so perhaps good sense will prevail and global finances will finally be subjected to transparency and responsibility.

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