Business | Opinion
It's time to seek a new world order
Gulf states can certainly have a role in the light of an apparent US' inability to keep its own house in order.
- By Dr rod monger, Special to Gulf News
- Published: 23:39 September 24, 2008
This is the crisis - not that the underlying assets in the US mortgage market, or any capital market for that matter, are unsound, but that insanely constructed layers of financial instruments are artificially created that bear little or no relation to the actual underlying assets.
Indeed, some of these financial instruments are 'synthetic' in the sense that there are no underlying real assets. They are based on any number of indices, any figure which may not even be financial in nature.
This is not finance. This is betting on the ponies. This is Las Vegas, Macau and Monaco. This is legalised gambling under the very nose of government regulators who are responsible for protecting the public by making sure that financial markets are sound.
Mostly these airy, frothy layers of financial investments that contribute nothing to the real economy generate revenues for the financial services industry.
Now, lest accusations fly that I wish to return the world to a financial ice age by eliminating all innovation, let me go on record that hedges and similar innovations can play a valuable role in managing investment risk.
But this role is limited, if for no other reason, because global capital markets can support only so much. History has clearly demonstrated this with the 1987 stock market and other financial crises including the current one.
Indeed, we now understand that any capital market that relies on financial innovations like hedges is subject to the same vulnerabilities. This is why the US housing industry crisis is only incidentally related to the larger debacle.
The current losses have created a problem of global dimensions. China's losses alone are estimated at $340 billion (Dh147.12 billion) with other international investors similarly compromised. Is it any wonder that bankers, other financiers and government ministers throughout the world are terrified?
Globalisation, like any major regime change, requires new paradigms. Much about the world's laws, regulations, education and technologies have evolved to accommodate this new economic order.
After the devastation of World War II, the Bretton Woods agreement was created to regulate the international monetary system. In the half century since, the US played a central role in that system because of the size of its economy and strength of the dollar.
What capital market crises - those we have already experienced and will experience in the future - have made clear is that we have failed to adequately construct the institutions needed to regulate highly interdependent capital markets. What is needed is nothing less than a new world financial order to address globalisation.
Who will create this new order? By habit, every head in the room would swivel to the US. But the US and others in the free-market cohort - the IMF and World Bank come to mind most readily - can no longer be relied upon to provide the required leadership. The US needs to focus its current energies on solving internal problems - not the world's.
Need for rationalisation
Not only are US capital markets unstable and the dollar shrinking, but the US must also grapple with trade and budget deficits, the need to rationalise both its social welfare systems, reverse the decline in educational quality, curtail bloated military expenditures and address the competitiveness of its economy.
Also many observers throughout the world believe that the time is long overdue for the US to rethink its foreign policy, focusing on a more participative role.
Besides, past economic leadership has not always produced wins. Free-market westerners have often taken other nations to task for not completely unleashing their markets. Yet, many nations have come to distrust the advice which led to the bungled Russian privatisation and contributed only grief in the 1997 Asian financial crisis.
The interest in free markets continues to grow around the world and the US deserves kudos for blazing that path to prosperity. But a difference exists between a free market and a free-for-all.
What undermines US credibility - as it relates to the current and previous financial crises - is its apparent and burgeoning inability to keep its own house in order.
Who then should be responsible for reform leadership? The Gulf nations which are building new economies based on petro-dollars should certainly have a leadership role. China and India are no-brainers.
And other nations - developing and developed alike - around the world with a stake in the health of global capital markets need to come to the table as well.
The US will have a role too. Just not the role.
Dr Rod Monger is a Dubai-based independent writer on global economic and business issues.
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