Cooperation Needed: Harmonizing the Global Financial System

Since early 2008, many of the leaders of the major industrial nations, even China, have urged out loud that the world needs a universal and multinational (cross border) set of financial rules for our increasingly interrelated global economies. The term used is "Global Harmonization", which can be pictured as an orchestra, with no conductor and with each instrument playing its own tune, deciding to hire a conductor to guide the separate instruments (national economies) to play together from one sheet of music (the harmonized accounting rules). Today"s international electronic money system is like a conductorless, discordant orchestra. The new president should shore up Basel II accord and champion a working multinational financial regulatory system (e.g., Organisation for Economic Co-operation and Development).

A globally harmonized set of financial rules would help prevent future global recessions and prevent total world financial collapse mainly by making it possible to determine where and how much risk there is in the global financial markets. These rules would coordinate the various financial centers (exchanges) and the entire global financial network. The rules would apply uniform financial controls focusing on more rigorous accounting standards that put a leash on the new financial investment devices such as derivatives and hedge funds, and do not allow cover ups, disguises, lies. Harmonized financial rules are now critical because the new financial world is exotic, hard to understand and practically impossible to audit.

Setting up a solid information base capturing global financial exposures is imperative. There is a long list of exposures that are not transparent today, for example the cross-border links between large, complex financial institutions (LCFIs) and the whereabouts of credit default swaps, collateralised debt obligations and other asset-backed securities. Putting together a global “risk map” displaying financial links among LCFIs as well as the most important risk drivers, such as asset price changes and yield spread dynamics, would enable authorities to carry out financial system stress tests.

The new financial exotism with derivatives on top of derivatives and cresit swaps of increasing distance from sinmple real assets, along with the lack of matching controls, was a major factor in causing the current recession. As noted by the Harvard MBA holder, Philip Broughton:

“What we have witnessed is a stunning and sobering failure of financial safeguards,......”

We should note: global harmonization is not new; it's just that first, accounting controls are such a sacred cow it has been difficult to create a universal set of rules, i.e an international standard. Second it is hard to get the economic trading nations to adopt a unifom accounting rule.

There are many instances of international standards. One is the International Standards Organization (ISO). ISO has developed over 17500 International Standards on a variety of subjects and some 1100 new ISO standards are published every year. Harmonization of one important segmant of this body of standards, medical devices, is well along the path to completion. The United States, Europe, China, Japan, South america, and many other countries and regions now have the same set of rules for approval of medical devices, and pharmaeuticals. Some problems (non-participating countries)still exist but the near future looks positive.

Some have reacted to global harmonization with fear of the new. Harmonization does not mean global New Deal! But harmnonization is necessary.

The idea of a global, multinational set of financial standards and systems has been growing, but might meet strong opposition from some political ideologists. For instance, some history-preservation conservatives will no doubt view a global system as a threat to the 18th century, self-suficiency spirit that led the Founding Fathers declare independence and to split off the United States from England - a move that was critically aided by the convenient separation of 2000 miles of ocean during the sailing ship days.

But, this is not the 18th century, we are into the 21st century. Modern life and its required systems grow more complex by exponential progression. The coastal villages of 18th century America are no more. National isolation is not a reality even for someone in rural Tennessee -there is no longer a pure, food self-sufficient, self-defense capable, rurality left in America.

The founding fathers did not fly to constitutional conventions in private jets - horse back or carriage travel covered 40 miles a day.They did not communicate by cell phone and private video links. Did not speak internationally in an instant (it took weeks to communicate by ship-born pouch to Europe and China). There were no airplanes. No mass markets. No international electronic banking exchanges. No automobiles. No need for oil beyond some lamp light and most could get by with candles.

It's time. Global coordination and harmonization of financial systems is a critical urgency.