Thursday, April 1, 2010

Parlez Vous la Regulation?

You know you are doing something very wrong in the global financial arena when the French have to tell you how to fix it.  France is not exactly a powerhouse in financial markets, despite its attempt to lure investment banks and funds from London to La Defense.  Yet the vertically-challenged Nicolas Sarkozy came to Washington this week and let it be known that the United States is not doing its part to reform regulation. Hinting strongly that Washington cannot run the world on its own, he urged the Obama administration to work closely with France and the G20 in regulation reform.

Meanwhile a senator from that Mecca of financial markets - Tennessee - has thrown his toys out of the pram and is threatening to jeopardize reform.  According to the Wall Street Journal, Republican Senator Bob Corker said Tuesday he "absolutely cannot support" a bill written by Senate Democrats to overhaul financial regulations unless changes are made. (He is clearly not a "corker" in the English slang sense - i.e. an excellent and outstanding thing or person.)

I wonder if Senator Corker ever reads the financial press. If so, he might have come across reports yesterday on the real cost of the financial crisis. Speaking at the Institute of Regulation & Risk, North Asia (IRRNA), in Hong Kong this week, Andrew Haldane - the succinctly titled executive director for financial stability at the Bank of England - called the banking industry a 'pollutant' where systemic risk is the byproduct.

Them's fightin' words to U.S Republicans, seemingly bent on supporting the banks in their quest to dominate the world - unfettered by rules and regulations. This shot across the bow was accompanied by a breakdown of the actual cost of the crisis, or "the $100 billion dollar question."  

According to Haldane, the approximate outright cost to the US government (and taxpayers) of the financial crisis was about $100 billion. So far, so what? This is less than 1% of GDP.  The kicker here is that, as a result of the crisis, world output in 2009 "is expected to have been around 6.5% lower than its counterfactual path in the absence of crisis," said Haldane. To the tune of output losses of $4 trillion in the US alone. Moreover, he said that some of these GDP losses are expected to persist and may even be permanent. If this is the case then the $4 trillion will be an understatement.

Doing nothing is not an option - $4 trillion is not chicken feed and if it were to happen again I fear financial Armageddon..... Republican naysayers will have to pitch in with concrete ideas that support financial markets reform. Otherwise the French and the rest of the G20 will make the US government look weak. Like it is enslaved by its banking giants.

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