How to Save the Global Financial System

In the last century, America and its complicated political system resulted in procrastination and delays in joining the two most important threats in the 20th Century: The first and second world wars. Once in, a year or two after the need really arose, America made all the difference.
I believe that is what will happen this time.

As with the two world war efforts, a suspension of normal business, commerce and ownership must be imposed. Here is my fix published now in the Financial Post. The situation is dire. Delay or faint action are not options. The world awaits America's leadership and transformative effort.

Transfusion not triage
This crisis is not about the failure of capitalism, globalisation or free enterprise. It is about the fact that there are two economies: the financial economy and the "real" economy. But only the real one, that builds mines, roads and makes widgets, has rules and regulations that keep it in line globally. The other has been ruined by rogues, fraudsters and gamblers and this now threatens the one that creates real wealth.

Both are dependent upon one another: The financial economy is the blood and the real one the body. The blood brings oxygen, nutrients and fresh corpuscles to all parts of the body. It makes us grow. It heals injuries. But the world's blood is gone, juiced up by a bunch of gamblers and fraudsters to the point where it has drained away from a thousand wounds. Without an infusion, the body will die.
So far, the world's governments have floundered around, applying bandaids and tourniquets, while some have only come to realize the seriousness.

Starting to get it
This weekend, as the world fears market collapses this week, leaders appear to have finally begun to understand how draconian the fix must be.
The only cure is, to switch metaphors, what many economists are calling the "nuclear" option.
1. Guarantee all liabilities of banks, effectively nationalizing the financial system
2. Disintermediate the frozen financial system by having governments lend directly to companies and householders. This is along the lines of what I wrote about over the weekend involving American real estate. The U.S. property market is essentially bankrupt and needs an insolvency workout (see that solution here).

The root of the problem is lack of global financial governance
Real economies are subject to rules, both internally and externally through trade laws, treaties and the World Trade Organization, among others.
The problem is that capital markets globalized without any global controls. That's how a generation of gamblers and fraudsters and rogue traders have brought the financial economy to the ledge. That's why the world's governments must nationalize all the world's banks, then establish the following global institutions:
1. A global Securities and Exchange Commission which every country must accede authority to if it wants to be wired into the global financial economy.
2. A global stock exchange where securities must benchmark to the highest standard, from insider trading to short selling, disclosure, transparency and proper auditing practices. Those exchanges which do not submit to this Super-regulatory regime will not be endorsed for trading.
3. Global business courts to enforce best practices in contract, labor and securities laws.

The world needs more America, not less.

Comments

[Diane Francis - Huffpost Blogger]

I agree that nation-states have to get their acts together, namely the US, but all financial sector reforms, governance and management must be global because of the globalization of capital markets.
To do otherwise, is like excusing stupidity on the part of Callifornia's banking or brokerage systems in the interests of "sovereignty".
In the end, the world will adopt the best-practices of N. America and the EU and the Wall Street Five will go down in history as just another gang of thieves who didn't head for the border with their loot but remained borderless with their ill-gotten gains

[ianrthorpe]

Beware of Catch - 22

In this case if you ask for a loan you will not get one because you are a bad risk (we're all bad risks now) If you don't need a loan you will not put your money in a bank because they might lend it to people who are bad risks.

http://greenteeth.blog.co.uk/2008/10/14/catch-22-revisitedfoodandfuel78a5eb43deef9a7b5b9ce157b9d52ac4inflationa-political-hot-potato-4870643

I recommend all economists and investment bankers be made to watch the Rodney Dangerfield movie back To School in which the much underrated comedian demolishes most academic theiries of how business works in a single comedy riff.

[joebhed]

Pardon the interruption.
I have to disagree.

Go back to the nature of the problem.
It is not the lack of international governance of our central banking systems.

It is, rather and paradoxically, the lack of national control of the central bankers that is the cause of these problems. We wouldn't want to internationalize that.
It is the lack of control by the United States government over the quasi-central bank known as the Federal Reserve System in this country.
Repeated elsewhere, of course, under Bretton Woods and Basel.

And then it is the lack of control BY the Federal Reserve to accomplish the objectives of a stable economy and sound money.
So, you need to step back.
The gamblers, fraudsters and rogues are still in control of this nation's money system. In case you haven't noticed.
They are the defacto central bank of the United States, even though they are a private banking cartel.

Monetary reform must begin here, and in each individual country, to regain control of the money system from the private bankers, before giving over to international control.

We do not need to nationalize the banks.
The banks should remain private entities.
Banks should not have the power to create and control the money system.
We need to nationalize the nation's money system, and then let the bankers lend real money on a 100 percent reserve basis.

And THEN we can start to cooperate on monetary matters as governments, leaving the banking to bankers.