Sudip Bandyopadhyay’s Blog

The debate regarding globalisation, opening up of  barriers, controls, etc. has been predominantly restricted to the area of International Trade and commerce.  The International negotiations, debates and dis-agreements, all have centered around international trade only. The other two critical components of globalisation i.e. movement of capital and people have not yet been subjected to similar discussions, debate and consensus.  This exercise needs to begin without any further delay.  In today’s globalised world, if we expect movement of capital and people across national borders in a seamless manner, it is of utmost importance that the rules for the same are defined and universally accepted.  Absence of such consensus would lead to inadequate checks and balances resulting in chaos and confusion.

On a  different note ,finacial services sector definitely  requires reforms. We must start by recognizing four powerful truths; the world cannot afford another such crisis for many generations; without significant changes, a repetition is quite conceivable; Three principles should guide reform.  First, since markets are bubble-prone, regulators must accept responsibility for preventing bubbles from growing too big.  Alan Green span, the former chairman of the Federal Reserve, and others have  expressly refused that responsibility.  If markets cannot recognize bubbles, they argued, neither can regulators.  They were right and yet the authorities must accept the assignment, even knowing that they are bound to be wrong.  They will, however, have the benefit of feedback from the markets so they can and must continually recalibrate to correct their mistakes.  Second, to control asset bubbles it is not enough to control the money supply; we must also control the availability of credit.  This cannot be done with monetary tools alone we must also use credit controls such as margin requirements and minimum capital requirements.  Currently these tend to be fixed irrespective of the market’s mood.  Part of the authorities’ job is to counteract these moods.  Margin and minimum capital requirements should be authorized to suit market conditions.  Regulators should vary the loan-to-value ratio on commercial and residential mortgages for risk weighting purposes to forestall real estate bubbles.  Finally, we need to look at the  regulation of derivatives.  The prevailing  opinion is that they ought to be traded on regulated exchanges.  That is not enough.  The issuance and trading of derivatives ought to be as strictly regulated as stocks.  Regulators ought to insist that derivatives be homogenous, standardized and transparent.  Custom made derivatives only serve to improve the profit margin of the financial engineers designing them & rarely benefits the buyers.