Financial Crisis Regulation - Essay Example

? FINANCIAL CRISIS REGULATION Task: Financial crisis regulation Introduction The economic crisis that began in the year 2007 has attracted attentions of various economists. Policy makers and analysts are constantly searching for strategic procedures for managing economic crisis to develop strong economies. Economy affects all aspects of people’s life, which affirms the importance of monitoring the global economic performance. Countries have established numerous financial crisis regulations that aim at checking emergence of crisis in the future. Particularly, the OECD countries are presently practicing various regulatory measures to safeguard the world’s economy. Robert Shiller examined the controversy of the global economic crisis and its management and raised prudent arguments about the practice. The economist argues that democratization of finance provides an ideal strategy of managing the contemporary and future economic crisis. Some analysts support Shiller’s perspective while others have criticized his ideology. Interestingly, few economists argue that the financial regulations adopted by the OECD countries are sufficient in containing financial crisis (Gray & Akseli, 2011 p. 2). Considering the magnitude of the idea of global financial crisis management, there is a need of developing knowledge of ideal approaches of managing the problem. This article provides an analysis of the debate started by Shiller concerning democratizing finance while comparing the argument with the types of regulatory measures practiced by the OECD countries. The Shiller’s perspective on financial crisis Shiller explores the importance of moral reputation of finance institutions in management of economic crisis. After the 2008 global economic recession, anger expressed itself in objections around the world. People constantly criticized how powerful profit oriented social-economic procedures have influenced financial institutions. The Occupy movement staged serious actions challenging the relationship between the government and businesses. A clear insight was that individuals responsible for the crisis would revitalize their moral reputations by adopting acceptable financial procedures (Kroszner, Shiller & Friedman, 2011 p. 4). Shiller has popularized an idea that economists need to reclaim the finance for the common good instead of condemning it. He argues that finance is a powerful tool that the society can utilize in solving its problem and in developing its general welfare. The global economy needs more finance but not less and the finance should facilitate the attainment of the society’s goals (Tropeano, 2011 p. 5). Consequently, the analyst emphasizes the need of rethinking about finance and its responsibility in the society. Particularly, Shiller claims that financial management should not merely include the manipulation of money or control of risks but should mainly involve the stewardship of community’s assets. The economist highlights how individuals serving in the financial careers can manage, safeguard and increase the public assets. Moreover, the analyst explains how finance has contributed to the good of the society through inventions, savings accounts, mortgage and pensions. Consequently, Shillers insists that economists and policy makers should devise new strategies for rechanneling financial creativity to benefit global economies (Princeton University, 2012 p. 1). Previous regulations schemes have targeted restricting the financial sector by slowing down the development of lending or trading. However, Shiller’s alternative believes that this ideology is unproductive especially in the current dynamic industry that presents high degrees of dynamism. The Shiller’s model values the importance of creativity, personal morality, education and effect of finance on the people’s lives (Princeton University, 2012 p. 1). Shiller supports the present financial regulation system arguing that although the system is imperfect, it plays a significant role in stabilizing the global economy. Furthermore, he is optimistic that these regulations have the potential of developing better financial industries. Shiller’s arguments are rational because it is apparent that a good society needs an effective financial industry. Moreover, the society can extend the good life to more persons by providing flexible financial procedures. However, Shiller states that this perception does not mean that fraudsters and others who violate financial regulations should not be liable for their actions. He guides that individuals can avoid such situations by valuing society’s assets stewardship, the concept that was previously disregarded by many investors (Princeton University, 2012 p. 1). Examination of the measures currently used by OECD Countries OECD countries have developed regulations that are concerned with the governing of the complex and diverse economies. Presently, OECD comprise of 30 countries that include United States, UK, Canada, Japan, Belgium, Finland and Denmark among others (Jackson, 2011 p. 4). Regulatory procedures provide policy-makers with the opportunity of balancing competing interests that have enhanced the establishment of democracy in financial management (Friedman & Kraus, 2011 p. 36). The main issues addressed by the OECD regulations include the need of increasing transparency, establishing effective surveillance and increasing accountability of the public. The regulations emphasize the importance of strategic reforms for sustainable economic growth that would avoid future financial crisis (Green, Pentecost & Weyman-Jones, 2011 p. 15). These ideologies support Shiller’s concept of democratizing financial regulations. Consequently, the regulations may be very effective in managing the present and future financial crisis. The OECD countries have proposed the Basel III policy that controls bank capital adequacy, examines economic stress and market liquidity within its members. The policy has been effective in strengthening bank capital requirements and has introduced now controls on bank liquidity. Studies indicate that the Basel III activities have decreased the annual GDP growth by 0.2% (Gregoriou, 2009 p. 62). However, critics argue that this model fail to offer the urgent intervention that the world needs in order to recover from the late 2000s crisis. Furthermore, economist identify that the Basel III procedures are likely to increase the incentives of banks in the context of the regulatory framework. This has the potential of affecting the stability of the financial regulation systems leading to worse crisis in the future (Gregoriou, 2009 p. 30). On August 2012, the US adopted regulations proposed in the Dodd-Frank scheme that targeted discouraging corruption and enhancing transparency among companies participating in resource extraction. However, studies highlight that the scheme is entirely unpractical especially in the management of minerals conflicts. Economists believe that the Dodd-Frank regulations are likely to make US companies have a competitive disadvantage in terms of natural resource payment reporting obligations (Elliot & Santos, 2012 p. 10). The US adopted Dodd-Frank plan to reform the country’s financial system; however, critics have highlighted that the scheme has social-political interests. The model’s evaluation and reporting systems are unreliable and terrifying. For example, the plan demands detailed reverse supply chain examination and frequent reporting to determine whether the US public companies use particular conflict minerals. Moreover, the regulation demands the US companies that deal with resources to disclose the amount they pay the US government and the foreign partners for access to natural resources. Economists are worried of the effect of such excessive disclosure of financial information especially on the US companies. Studies have criticized these regulations by noting that they fail to offer exemptions for reporting confidential or sensitive information (Gregoriou, 2009 p. 40). For example, disclosure of some sensitive information may lead to violation of foreign laws that force the companies to choose between adopting US guidelines or the host country laws. This creates problems that weaken the global financial regulation procedures (Elliot & Santos, 2012 p. 38). Furthermore, regulations in OECD countries have proposed the concepts of narrowing banking and established extensive consumer protection models. Narrow banking withdraws the subsidy that is currently provided to banks through free deposit insurance (Green, Pentecost & Weyman-Jones, 2011 p. 57). Deposit insurance is small in countries like UK that have deposit protection schemes. The strategy of narrow banking has created new competition in the section of the fiscal service industry. OECD countries follow structured good practices that targets encouraging financial education and improving knowledge of credit management and consumer protection (Friedman & Kraus, 2011 p. 75). This effective model is capable of preventing financial crisis in future. The model aligns with the Shiller’s concepts because individuals and institutions that have financial management skills are capable of exercising financial democracy. OECD codes may offer strategic guidelines for preventing future occurrence of financial crisis, but the system has detrimental weaknesses that undermine the efficiency of the model. Initially, the system faces a challenge of lack of effective global initiative. The OECD regulations have experienced serious difficulties in compliance and implementation in some countries (Pavlat, 2009). For example, the policy has recorded poor performance in United States and other industrialized capital market. Furthermore, the standards and regulations do not emanate from all countries, but are designed primarily by the Group of 7 (G7) and other developed countries. These countries are not the sole determiners of the global economy. Consequently, the system may perform poorly especially in situations where developing countries fail to cooperate (Stigliz, 2011). Furthermore, the objective of the OECD codes exercise is global financial stability. However, many countries have not prioritized the idea of global financial stability. Ideal procedures capable of preventing future crisis should utilize standards to benchmark financial reforms while appreciating that the prolonged reforms in the sector are likely to develop global financial stability. This would promote the re-prioritization of resources and efforts in developing effective finance management procedures. Imperfect information has the capability of causing market failures. This is because misleading information leads to poor planning indicating that the approach may not provide the ultimate finance monitoring strategies. Gray & Akseli (2011) questions the ideology of the OECD policies that value the need of providing financial information to the private sector. The strategy has an intention of empowering private sectors with essential resources for making calculative assessment to minimize risks. This follows assumption that more information is likely to act as tools for crisis prevention. However, although analysts acknowledge the need of transparency, some believe that excessive transparency may lead to crisis (Kroszner, Shiller & Friedman, 2011 p. 12). Furthermore, a tension develops between the information needed by the market in simplified quantities structures and time consuming sophisticated procedure of implementing the proposed codes whose performance can hardly be quantified. Analysts have challenged the role of the IMF in monitoring system (Friedman & Kraus, 2011 p. 34). IMF still lacks strong response mechanisms for preventing the occurrence of crisis in the future. According to Stigliz (2011), the IMF attempted to rescue the 2007 financial recessions unsuccessfully because it was not suited for the occasion. For example, the institution lacked adequate funding because many Middle East and Asian countries did not support the organization (Davies & Green, 2008 p. 39). Although presently the institution is strong, its minimal authority especially in imposing control policies cannot prevent recurrence of financial crises in the future. The need for stronger regulations of financial systems There is need of adopting stronger regulations, which are capable of responding to the contemporary financial management challenges. The lasting economic damage to the society and businesses is a constant reminder that emphasizes the need of reforming financial regulatory system and restructuring the economy to assume a sustainable recovery. There is a need of establishing a new strategy of financial regulation and supervision that is less complicated and more effectively enforced. Furthermore, the strategy should have the potential of protecting consumers and investors, encouraging innovation and capable of evolving with the changes in the financial market (Begg, 2009 p. 28). Particularly, the new financial regulation strategies should consider the need of limiting financial innovation and the complexity of financial products. The idea of financial innovations mainly targets access of financial products and the suitability of products for a particular consumer group (Jackson, 2011 p. 30). Financial regulations should be conscious about these factors because innovative products encourage access of finance. Interestingly, products that result in increased access to finance are capable of prompting suitability issues. Consequently, consumers have difficulties in understanding innovative products. This means that better financial education is essential in promoting financial literacy. Furthermore, financial regulations should establish appropriate control mechanisms to ensure that consumers do not experience inappropriate exposures. Eijffinger & Masciandaro (2011) supports the significance of limiting complex products by noting that sophisticated financial products lead to unintended consequences. He argues that when a scheme is too complex, one can hardly predict how it is likely to behave in extreme market conditions (Eijffinger & Masciandaro, 2011). Moreover, the society should attempt to minimize the size and importance of finance in the economy. Jackson (2011) argues that emphasizing the significance of finance in economy provides the society with a single approach of addressing financial crisis. This is detrimental because in some situations the model may lack the capacity of correcting problems. Consequently, the society should establish integrated crisis prevention strategies. This would distribute risks, which would increase the reliability of the regulation strategies (Davies & Green, 2008 p. 32). The Shiller’s alternative Shiller’s approach of viewing the problem with finance as lack of democracy instead of too much complexity would also provide a strategic model of preventing future financial crisis. Shiller’s perspective would increase transparency in financial regulation schemes. This is essential because the complexity of products hinders assessment of risks. A community that values democracy will establish local and international commitment of ensuring that comprehensive, effective and updated statistics and indicators are available. This would aid risk assessment procedures that would prevent the emergence of financial crisis in future (Begg, 2009 p. 2). Aligning financial regulation procedures with Shiller’s perspective will also promote accountability and strengthen surveillance mechanisms. Governments and financial institutions will acknowledge their roles in collecting and disseminating data. The ideology emphasizes that governmental authorities should publish annual frequent reports that highlight the performance of financial systems and identify the major risks while proposing the strategies for managing them. Furthermore, the approach would enhance surveillance systems by encouraging close cooperation among institutions. This will result in the establishment of joint crisis management model in which parties respect financial democracy. This would be very effective in prevent financial crisis in the future. Conclusion Financial crisis and the procedures introduced to reduce its effects on the global economy is still a sensitive subject. The OECD countries understand the significance of the financial crisis management as evident in their strategic regulations. However, the regulations that are presently used by these countries are not effective in preventing financial crisis in the future. Consequently, there is a need of designing strategic regulation procedures that are compatible with the market dynamisms. These strategies should address the concern of financial innovation and the complexity of financial products. Furthermore, financial regulations procedures should value Shiller’s perspective. Reference List Begg, I 2009, 'Regulation and Supervision of Financial Intermediaries in the EU: TheAftermath of the Financial Crisis', Journal Of Common Market Studies, 47, 5, pp. 1107-1128, Business Source Complete, EBSCOhost, viewed 8 November 2012. Davies, H., & Green, D 2008, Global financial regulation: the essential guide. Cambridge, Polity. Eijffinger, S. C. 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New York, NY, ReadHowYouWant.com Tropeano, D. 2011, 'Financial Regulation After the Crisis', International Journal Of Political Economy, 40, 2, pp. 45-60, Business Source Complete, EBSCOhost, viewed 8 November 2012. Read More