From the ruins of the global systemic financial collapse which the world has been witnessing in real-time, with taboo words like “panic” becoming routine, a New Economic Order will arise. That is, another New New Economic Order because Bretton Woods was supposed to be a panacea. The ideas being proposed by the current European leaders are not short on vision. UK P.M. Mr Brown wants to outdo Tony by proposing radical changes to the global capitalist system, with cross border monitoring of the world´s 30 largest banks. He thinks that post-war international financial institutions are out of date and need to prepare for a new era. This means a new version of the 1944 Bretton Woods conference which established the current economic order including the World Bank and the IMF.  French President Sarkozy (also holder of the European presidency until the end of next month) wants to make a “grand geste” by reforming rating agencies, hedge funds, sovereign wealth funds, tax havens (which he wants to stamp out) and even currency systems. Germany is going along with all these ideas for the time being. The Americans wish to keep the American dream alive and are underwhelmed by the idea of global regulation of their institutions; their idea is to include the Group of Twenty (eight developed countries plus twelve emerging countries, notably China and India) in the process, and reinforce the foundations of capitalism. In other words, the whole process will run into a sand bank. The world leaders are not thinking outside the box because they all have an axe to grind. Brown and Sarkozy were long-time Finance Ministers of their countries and they are now trying to fix up what they allowed to break down. Whatever happened to their “vision thing” when they were heading the Finance Ministry? The Americans will never agree to let US banks be regulated internationally (e.g. the International Court of Justice jurisdiction).
 
Lateral thinking is urgently needed and the answer lies in the Orient. Please stand aside, Western leaders and allow the Chinese, who have no international financial Leitmotif, a chance to lead the way forward. Any government overseeing 1.3 billion people and able to reconcile repressive communism with capitalism has displayed the necessary skills for finding a truly new economic order. Above all it has not been intoxicated by debt or the temptations of excess liquidity. Involving China in the solution would draw it towards the center. Furthermore, it can only help to bring in a country with $ 1.9 billion in reserves and very little debt when everyone else is cash-strapped. Here is a list of Back to the Basics ideas to help the Beijing Woods conference.

Privatize the Multilaterals (World Bank and the IMF)

Contrary to Mr Brown´s assertion, the Multilaterals are not to blame; it is the Central Banks, regulatory agencies and private or hybrid financial system.  The Multilaterals should be given an enhanced role. The staff of these institutions has done their job but they are Fat Cats. They cost a fortune and tend to suffer from analysis paralysis. It is also subject to political pressure by the member countries. This is where China could come in very handy. By offering China the ownership while at the same time changing countries from members into associates, these institutions could become really dynamic. The price that China would have to pay is to place at least $1 trillion into the two institutions and apply at least 95% into the system. This would make sure that they were very careful at all times because they would be using their own money. Emerging countries are baying for more involvement in the New Order. As a major contributor, China can also be very effective in getting these emerging countries to put up funds too, just as Mr Brown is trying to convince the Middle Eastern sovereign funds to bank-roll British business. The idea makes a lot of sense because after the dust settles the world may go into an economic nuclear winter and no-one else will have any money. A Golden share could be given to a committee of western nations for vetoing shaky decisions.

Get the Minds of Directors of the Multilaterals back on the job

Recently senior ageing directors have been treating their Washington based institutions as harems whence they can pick out thirty-year old female employees for romance. For a high visibility director, conducting an extra-marital affair is extremely time-consuming. A good realistic solution may be to institutionalize these relationships by allowing each Director a maximum of two affairs during his term providing full advance disclosure is made. In cases of married directors, spousal concurrence would be required in order to remove the extramarital stigma as well all hypocrisy. Proof that this will work is the shrugging off given by the wife of the present Fund director when his affair with a 26 year old Hungarian Fund employee became public last month. Under the new solution, he would not even have to apologize as he did. In any case, a Chinese management team would completely eliminate this problem.

Decision Making Process

China could teach the banking world something about taking pondered decisions. Senior figures use their years of experience to counter the impulses of the young tigers, who look up to their elders instead of retiring them as the West does. This would avoid the problem of recurrence of the same problems. The corporate memory goes when a senior figure goes and when the same errors are repeated they are magnified. Prudence is deemed negativism and high-powered young executives think they know it all.

International Banking System  

In order to avoid contamination, no bank should be allowed to have branches or subsidiaries outside their home country. They just provide a few jobs for bankers, lawyers and accountants in the services sector. China has been able to conduct a huge volume of international trade with minimal international banking presence. Before multinational banking, business was conducted by correspondent banking. Failed foreign branches cause huge legal problems because liquidators in the home country will not recognize foreign branch creditor claims but in the weeks prior to closure all the cash is often been sent back to the home country which may even be a debtor of its foreign branch, as happened in the case of Lehman´s UK operations. Dealing banks say that they need to be physically in the same time zone as the markets. Getting up a little earlier or working later would take care of that argument. Not having a US trading room could have saved UBS from its current woes.

 Transparency

The public did not know it had been playing poker with a marked deck. The regulators could require all financial institutions to allow real-time access to all the records available to bank management except for customer accounts. Bank secrecy for customers died years ago with Know Your Customer and Financial Action Task Force. It is only fair that the financial sector itself should provide complete management information to the markets. This action alone would solve a large part of the excessive risk-taking problem because so many people would be constantly monitoring positions. 

Carrot and Stick Measures 

Bonus systems should be completely removed from financial institutions. Until the seventies, banks were seen as financial fiduciary agents. Banking was a vocation just like medicine, the army, accounting, auditing or even the church. Banks do not produce wealth because they just provide a service to help others do so. The term financial services is a misnomer because it is far more financial than service. This is the case in China, where the basics still apply. It is a complete fallacy to apply industrial and commercial wealth creation concepts to banks. In a bank, a sale is only over when the loan is repaid. Ending the bonus system would remove the incentive to take big risks. Banking needs to be put back into an economic support role instead of a lead role as is evident today. The share of financial sector in the GDP needs to be cut back sharply to somewhere near the low Chinese level, which is still able to make its economy grow at the 10% plus. On the other hand, bank management needs to be penalized for bad decisions. Ferraris are for depositors not for bankers. A banking SOX, which followed Enron, is required.    

Rating Agencies

These have broken down. In many cases, rating agencies get paid by the company and by the investor. Many still A+ rated US bank bonds are giving returns of over 10%. That is what the market now thinks of agencies. They are profit making corporations just like any other business. Evidence of this is their present maintenance of A+ ratings for concerns which would have failed if the government had not stepped in. The whole reason for having rating agencies is for institutional investors to show to their own investors that they only have “investment grade” paper. This is supposed to protect the final investor but the fund manager is in fact shirking from his own analysis leading up to the decision. Therefore, each pension fund needs to set up its own internal independent rating committee so that the responsibility stays with the fund manager. Obviously there will be a proliferation of analyses of the same companies but that may only be to the benefit. Alternatively the World Bank could set up a super rating agency. Both the IMF and the World Bank have good track records in monitoring the situation of countries and they could use their skills on company analysis. Whatever happens, rating agencies must be totally banned from rating structured securitizations such as sub-prime, of any kind. 

Banking Practices

Banks worldwide should be banned from advertising easy credit. This is at the heart of the sub-prime problem. The worst type of advertising involves the so-called home equity line. A typical case is where a retired couple whose mortgage is less than the value of their home is given credit to take a vacation or buy new furniture based on a second mortgage on the home. The couple does not realize that the only way to pay the loan is to sell the house. Second mortgages should be restricted to business loans which have cash flow. Banks should also be required to limit their mortgage loans to 75% of the average value of the property over the last two years. Lastly, securitized personal lending should be restricted to first mortgage loans backed by Fanny Mae and other government agencies.

Conclusions

By going back to the basics, a new order is not really needed. Instead of trying to regulate bad practices it is safer to simply ban them. The free market arose because regulators saw that it is impossible to regulate complex markets so they opted for self-regulation instead. That does not work either so the solution may be to make the markets less complex or more transparent. The real solution would be to follow the Chinese practice of buying things by saving up for them. Just like the West did in the old days.