Friday, October 1, 2010

A Clear Analysis of New Global Financial Regulations

As the global sub-prime meltdown of 2007-08 showed, the financial systems of the world's major countries have been tightly integrated over the last 30 years. When U.S. banks wanted investors to buy bonds linked to subprime mortgages, they found them overseas. When overseas investors wanted to get higher returns on bonds, they bought supposedly safe subprime mortgage CDOs. Capital is global and mobile.

Meanwhile, banks and investment firms were able to leverage their assets, borrowing far more than they should have been able to, against the supposed value of their supposedly safe portfolios. It's clear to everyone that stricter capital requirements on banks would help. And that's exactly what the major players in global finance have agreed to in the so-called Basel III agreement. It's "so-called" because it's the third major agreement on global banking negotiated through the Bank of International Settlements in Basel, Switzerland. 

For a wonderfully clear and insightful analysis of this new deal, see a new article written by my former student, Dan McDowell. Dan makes the point that the enforcement of these new standards, which require banks to "keep more cash on hand" (as Dan puts it so clearly) will be voluntary. No international body will monitor compliance with the new Basel III standards, so the various participants might be tempted to cheat.

Basel III is a classic case study of global "governance without government" (which I discuss in chapter 9 of my book). There are standards, but there is no global authority to punish those who violate them (despite the misplaced fears of those who imagine that "a one world government" is just around the corner). Thanks to Dan, this is now clear. Nice work, Mr. McDowell!

1 comment:

  1. I just saw you posted this. Thanks--you know, I wouldn't be thinking about these things if it weren't for you.