The Role of Finance
The latest financial crisis which dragged the world into an economic recession has been extensively analyzed and by and large understood.
In summary, though, the combination of artificial and not well understood and wrongly rated financial products and lack of trust among financial institutes created large credit problems, sudden depreciation of assets and withdraw of capital from major banks, leading the economic world towards collapse; which obliged governments to take actions, i.e., print unprecedented amounts of money and offer guaranties, while worsening their already delicate country budgets.
Many predict we will have high inflation rates as a result.
The world needs to prevent that mistakes made by non-creating-but-shifting-wealth individuals and institutions can damage the productive side of the economy again.
Finance and financial markets should serve the purpose of enabling entrepreneurs to implement their ideas and investors to rely on solid business plans without being wiped out by credit issues somewhere in the world.
The ultimate goal is to have a stable and growing economy enabling more individuals around the world to earn their living and out of poverty.
A New Payment System
Christian de Coster, an economist, has proposed the creation of a world bank that ensures payments of international invoices issued by businesses. By no means should such payments be withheld. Can the WTO or the IMF deal with it?
We shall add that, ideally, the notion of bad debt should be revisited and possibly eliminated when happening as a consequence of wrong judgment of rating agencies.
Segregation of Duties
This Guide finds it hard categorizing banks, sometimes even for their core competence. Almost every retail bank has a merchant arm or subsidiary, a trading room and so forth. It cannot be that deposits in a bank are put at risk in the trading room.
Depositors, whether they are individuals or businesses, need to know their money is safely administered and can rely on it at all times. During trust crisis (“panic conditions”) which entail massive withdrawals of money, such banks may return right there and then just a limited percentage of funds, with the rest scattered over time; this will have a crisis smoothing effect and will guarantee the bank operations during the crisis.
Other banks, such as properly labeled “investment banks” or “merchant banks”, will have the capability to create sophisticated products for their clients and take the risks they were created for. It will be a clear choice of their clients to use such vehicles, for whatever reason and need.
We need bankers to select their profession and stick to it. Even more so for insurers, who should not be granted any banking license (see AIG, for instance).
A New Exchange Mechanism
A big role is played by the stock exchanges; the original idea was to create an efficient way for businesses to raise money for their investments. It turned out to be relatively expensive and cumbersome (only an extremely low percentage of businesses can afford using exchanges), but very useful to speculators. In the end a few powerful speculators can dictate the fate of traded companies, currencies, commodities, etc., in most cases heavily influencing the real economy.
We believe the current exchanges have a lot to improve, but the relatively simple rule of suspending the trade of a product when it fluctuates above a certain threshold during a single session should discourage raiders and short-term speculators. For instance, the ‘market’ believes that a share should gain 10%? Well, it will just take 10 days to do so. If that is believed to be the real valuation, so be it, just some days later.
One more thing… what about hedge funds, a typical target during dire times, someone may ask? They may not have the biggest responsibility, although some made huge gains from the crisis (whilst others went bust), but their original ‘institutional’ intention - risk insurance or protection - is not to be blamed, in principle. We’ll suspend the judgment until we see how they fare on the above described limited trading range mechanism, if ever implemented.