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February 16, 2011

Financial Reform vs. Strategic Economic Reform

Deloitte just launched a quarterly podcast entitled, Global Insight. Geared towards investors, it provides a sense of how to evaluate cross-border investments and foreign regulations. The speaker makes the point that his clients usually want to begin their conversations about prospective investments by delving into a discussion about tactics and international regulations. He tells them that they shouldn’t worry about the tactics or procedures quite as much as determining their strategic goal.

You are probably asking yourself -- what in the world does this have to do with the goal of this blog -- to act as a resource and foster discussion among teachers /students of economics and the Fed? As I was listening to the podcast, I couldn’t help but relate this basic investor advice to the conversation surrounding financial reform. There are many smart and talented people discussing and evaluating all the details of newly proposed regulations, such as clearinghouse issues, capital requirements, etc. I wonder, however, what would happen if we all began to think about financial reform as an investment. Would that change our conversations/solutions? There is currently a lot of focus on the incentives, tools and regulations that are needed, but not much on the larger, strategic goal of what makes interconnected economies more stable. Could it be that if we get every regulation just right in the financial sector, we could still be vulnerable to financial/economic instability? Probably.

Here are two articles that I hope can begin the conversation about what may make interconnected economies more stable.
• American Banker, “Social Force, More than Bad Actors, Led to Crisis”
• South Centre, “What’s Next After Global Recession?”

The American Banker article makes the case that growing economic inequality contributed to the crisis. Therefore, “rebuilding social safety nets and restoring the middle class are essential steps toward financial services reform.” The South Centre’s piece takes this one step further and talks about how in many export leading countries the share of wage income (as opposed to investment income) to GDP has been falling. Therefore, although these economies are happy to soak up global demand for their products, they are not contributing to growth proportionally. The article argues that a coordinated rebalancing of international accounts is a necessary step toward financial reform.

Maybe the simple investor advice the Deloitte professional offers can be instructive. The answer is not found only in improving the tools, incentives and regulations, but in focusing on the larger strategic goal -- more stable economic and financial systems. Therefore, reform in this broader sense will involve more economic reforms in a more coordinated fashion around the globe.

What else do you think would be important to look at as we think about reform as an investment in economic and financial stability?

(Anyone catching onto my latest focus on the balance of payments… if you have any thoughts/work on this topic in relation to the financial crisis, please do post.)

Posted by Cindy at 8:05 PM | Comments (94) | TrackBack