Can a Collapse of the Global Financial System Be Prevented?

has even sufficient information to under- Campbell Harvey is J. Paul Sticht Professor of International Business at Duke University’s stand the market’s operations. The market Fuqua School of Business. After studying economics and political science at the University of Toronto is totally opaque and is now popularly and MBA studies at York University, he chose the University of Chicago for his formative Ph.D. stud- referred to as ‘the dark market.’ ” ies. Harvey’s Ph.D. research examining the effect of interest rates on the United States’ business cycles enabled him to predict the recessions of 1990, 2001, and 2008. He also pointed out that standard Seek Truth in Facts approaches and finance theory in developed markets should not be applied to the analysis of many Alan Greenspan says, “Why was vir- developing countries, proposed new ways of dealing with the special challenges of emerging markets, tually every economist and policymakers and examined how opening financial markets to foreign investors can lower the cost of financing and of note so blind to the coming calamity? I increase investment and GDP growth in developing economies. have come to see that an important part of the answers to those questions is a very old idea: ‘animal spirits’…. The trouble is that by John Milligan-Whyte mercial banking from investment banking. such behavior is hard to measure and stub- bornly resistant to any systematic analysis.” t the World Economic Forum in Implement and Enforce the Harvey was able to foresee the finan- 2005 Professor Campbell Harvey “Volcker Rule” cial crisis by using his interest rate model. Awarned Senator Richard Shelby, The Wall Street Journal reported The Duke/CFO Magazine Global Business chairman of the U.S. Senate Banking on December 9, 2013 that, “The so-called Outlook Survey has been polling thou- Committee, “We’re going to have a massive Volcker rule will put in place new hurdles sands of CFO’s worldwide and assembling crisis unless you do something.” Harvey for banks that buy and sell securities the survey results economic, financial and told him, “These banks are incredibly prof- on behalf of clients, known as market business indicators. itable and because they're running like making, and will restrict compensation hedge funds. They're using these cheap arrangements that encourage risky trad- Can the “Once Bitten, Twice Bitten deposits to finance incredibly risky activity.” ing. Five U.S. financial regulatory agencies Problem” be Solved Before the Second Harvey emphasizes, “A large part are expected to approve the rule, which Bite? of this crisis is what we call in econom- bans banks from making bets with their William White warned Greenspan ics moral hazard where you have got the own money and limits their ability to and other central bank heads of the com- incentive to take a huge bet.” “The U.S. invest in certain trading vehicles.” It is ing financial crisis since 2003. White government has lent, spent or guaranteed urgently needed. was the chief economist of the Bank of as much as US$12.8 trillion to rescue the International Settlements owned by fifty- economy” according Bloomberg News. Implement Derivative Regulation five central banks that meets in Basel He warns that low interest rates, which Globally every two months. “White wanted central allowed banks to make huge profits, now Before the financial crisis, from bankers to take things a step further by only exacerbate the global financial crisis. within government, Brooksley Born, preventing the development of bubbles head of the Commodity Futures Trading and taking corrective action. He also Reenact Glass-Steagall Act Commission warned of the potential for advised the banks to beef up their reserves On December 2, 2013 Senator economic meltdown and campaigned for during a recovery so they would be in a Elizabeth Warren warned, “The four big- the regulation of the multi-trillion-dollar position to lend money in a downturn. If gest [American] banks are 30 larger than derivatives market whose crash helped trig- White's model had been applied, it might they were five years ago. And the five ger the financial crisis. But, Federal Reserve have been possible to avoid the collapse largest banks now hold more than half of Chairman Alan Greenspan, Treasury of the financial system, ” according to an the total banking assets in the country.” Secretary Robert Rubin, Assistant Treasury article Der Spiegel Online. Senator Warren and John McCain have Secretary Larry Summers advising Warnings from bright stars about called for a reenactment of the Glass- President Clinton and Congress succeeded the black holes of finance in the parallel Steagall Act. It’s repeal in 1999 allowed in preventing such regulation. universes of regulation and politics were depository institutions to undertake risky “Without significant regula- not strong enough to prevent the financial securities trading.” tory reform, our financial system will crisis. The horrible economic impact of the According to the Atlantic article, “A be exposed to continuing dangers and crisis on billions of people is not strong parade of former high-ranking executives repeated crises. No federal or state regula- enough to prevent the now foreseeable has called for bank breakups, tighter regu- tor has market oversight responsibilities catastrophic implosion of the global finan- lation, or a return to the Depression-era or regulatory powers governing the over- cial system. That has to change. So what Glass-Steagall law, which separated com- the-counter derivatives market or indeed happens now?

China International Business | December 2013 41