best cure after blame game?

Oct 22, 2008
THINK-TANK
After blame game, what's the best cure?
By Ho Kwon Ping

IF CANCER patients react first with denial, then anger and finally acceptance, the classic response of politicians to financial disaster is first denial, then widespread blaming (of everyone but themselves) and finally, self-righteous, punitive laws to 'regulate' the scandalised industry.
Now that no one can possibly deny there was indeed a bubble and that it burst, the blame game has started in earnest. Regulatory zeal will soon follow.
Politicians blamed investment bankers, who blamed accountants for 'mark-to-market' rules that rendered all their exotic creations worthless. The chief executive of Lehman Brothers even blamed short-sellers and the Federal Reserve for not rescuing him.
United States presidential candidates Barack Obama and John McCain blamed President George W.Bush without mentioning his name. Mr Bush pointed to former president Bill Clinton, under whose watch US banking deregulation began. Mr Clinton fingered former Fed chairman Alan Greenspan, whose easy credit policies and stout defence of derivatives fuelled the profligacy of recent years. Other Greenspan critics extended the blame further - to the late Milton Friedman, the prophet of unregulated, unfettered markets.
Main Street blamed Wall Street; Wall Street blamed the credit rating agencies for giving triple-A ratings to homes purchased by jobless buyers; and the rating agencies blamed the home owners for not resisting the temptation to buy homes they could not afford.
The Europeans blamed American capitalism, until their own banks started collapsing. Then they blamed tiny Iceland, which became the first country in the current crisis to effectively declare a national bankruptcy and nationalise its entire banking industry. Iceland blamed Internet banking for making it too easy for debt-happy Europeans to borrow from banks in Reykjavik.
To top it all, writer Tom Wolfe, who coined the term 'Masters of the Universe' to denote Wall Street hotshots, said there were no more investment bankers left to blame: The smart ones had all become hedge fund managers.
Some blamed China for selling goods so cheaply to Americans that they were lulled into a false sense of financial security, and argued that the Chinese penchant for high savings led to excessively high asset prices. That is like the American robber who sues the owner of the home he has robbed for failing to make it difficult to break into his home.
So who is the culprit? The answer: All of the above. The present crisis is as dangerous as it is because so many events over the past decade contributed to it. A clean-up will inevitably have to be as comprehensive as the causes of the crisis.
As the crisis deepens, there will be inevitable calls to prevent future excess and abuses by shackling future wrong-doers, rather than by reforming a structurally flawed global banking system. The problem with laws enacted for largely emotional, punitive reasons is that they tend to be an overreaction.
What then is 'good', as opposed to 'bad', regulation?
Years of aggressive laissez-faire capitalism led to the rise of a 'shadow' banking system - consisting of hedge funds, private equity funds, investment banks and other unregulated financial institutions - that was outside regulatory controls. It was non-transparent and heavily leveraged. 'Good' regulation would subject the 'shadow' banking system to the same scrutiny which commercial banks face.
But there is a danger that the pendulum could swing too much the other way. 'Bad' regulation is that which inconveniences the 90per cent who never intend to be irresponsible, while not effectively curtailing the rogue behaviour of the 10per cent. These are usually knee-jerk measures with punitive intent. After-the-fact responses to crises are often not very useful because they tend to be backward-looking, while new disasters always occur in unexpected areas.
For example, the Enron scandal spawned the Sarbannes-Oxley Act to rein in accounting abuses. It is arguable whether it really curbed corporate abuses or simply directed the brightest financial engineers to new, uncharted territories.
Rather than be backward-looking and punitive, regulation should be anticipatory in approach, with the goal of creating and preserving a sustainable environment for profitable enterprise.
Some argue that self-regulation may be the most effective form of regulation. It is in our enlightened self-interest, after all, to rein in our greed, before we crash and have others clean up after us. A possible model of self-regulation would be Britain's press council or various national advertising industry councils, which review their members' activities for the public good. Cynics argue, however, that self-regulation is tantamount to asking smokers to approve anti-smoking advertisements.
Another idea is to extend the concept of consumer advocacy to financial products. A financial product-safety commission, comprised not just of specialists but also laymen, could act as watchdog over exotic financial products with possible hidden risks. This would be akin to a consumer product safety commission - a financial-services version of the Consumers Association of Singapore, or Case. The largest gathering ever in Speakers' Corner of some 600 irate retirees who bought now-failed derivatives, may well lead someone to advocate such a financial-services consumer body.
One irony arising from the single biggest news of recent weeks - the massive nationalisation of banks in America and Europe - is the question of how governments would regulate themselves. History has shown that governments, once having owned something, are often reluctant to relinquish control.
Recently, calls for banking regulation have broadened to a complete revamp of the global regulatory framework. The post-war Bretton Woods system is obviously woefully inadequate to deal with the truly globalised nature of capital flows today. The system's biases towards Western banks during the 1997 Asian financial crisis, and its virtual impotence in the current crisis originating in the US, have made it clear that if a new global regulatory system is to emerge, large Asian central banks must not only participate in it but also provide leadership.


The writer is chairman of the board of trustees of the Singapore Management University. Think-tank is a weekly column rotated among eight leading figures in Singapore's tertiary and research institutions.

(Thanks to ST)