Guide The Road to Financial Reformation: Warnings, Consequences, Reforms

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It is safe to say that a general sense of normalcy pervades the lives of most Americans. Today, the economic environment could not be more optimistic: The U. Banking profits have roared back. Has the global financial system truly recovered? Equally important, however, are the reforms aimed at enabling the authorities to deal with a bank insolvency without imperiling the financial system. According to Herring, crisis prevention efforts have focused largely on requiring banks to hold more and higher quality capital, as well as increased asset risk weights and capital surcharges for systemically important global financial institutions.

They also include the introduction of a total loss-absorbing capital and global leverage ratio, liquidity requirements as well as heightened prudential supervision including the implementation of stress tests.

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They include living wills and resolution policies designed to accommodate the insolvency of even a very large bank without causing damaging spillovers to the rest of the financial system or costs on taxpayers. European banks, however, have not fared as well as American banks. Primarily this is because the U.

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This was a bold measure because in fact 11 of the 19 banks failed the stress test. This transparency greatly increased public confidence in the process and the results — and fundamentally restored confidence in the U. They lacked financial resources to recapitalize banks that were inadequately capitalized, which led them to cover up rather than address the problem. Although most European banks have managed to recover, the process has been slow and has impeded economic recovery.

Banks have been impaired in their ability to perform their fundamental role in financing investment. Schwarz notes that European banks are far behind the U. An illustration of this can be seen right now in the exposure of European banks to the Turkish devaluation , a shock that they should have been easily able to absorb. Wharton finance professor Itay Goldstein concurs that the U. You can see that banks in Europe continued to have problems for a longer period, and the overall economic problems in Europe [stayed] longer and [were] deeper than in the U.

I think to some extent this is still the case today. By and large the banking system here is in better shape than in Europe. Europe has some issues that are specific to them that they still have to deal with. Most of it is about coordination across the different countries in the EU.

All of these issues are just increasing the uncertainty about the stability of the banking union and central regulation … [and] are clearly weighing on the European banking system. Herring points to another challenge. Thus, in addition to the financial crisis, Europe has had to contend with a series of country debt crises. Getting the financial crisis under control globally took a coordination of policies by the G20 governments, wrote IMF Managing Director Christine Lagarde in a recent blog. Central banks slashed policy rates and later sailed deep into unknown seas with unconventional monetary policy.

Governments propped up demand with large fiscal stimuluses. But more needs to be done. Bank capital should probably go up further. A lot of the murkier activities are moving toward the shadow banking sector. On top of this, continued financial innovation — including from high frequency trading and fintech — adds to financial stability challenges.

In addition, and perhaps most worryingly of all, policymakers are facing substantial pressure from industry to roll back post-crisis regulations.


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No one knows exactly how this is going to end, and it clearly puts some uncertainty around [the situation]. The financial crisis has cast a long shadow. Public debt in advanced economies increased by more than 30 percentage points of GDP, which she attributed to economic weakness, efforts to stimulate the economy and for bailing out failing banks.

In the U. Nine million jobs were lost in the crisis and eight million homes were foreclosed in the worst recession since the Great Depression. Government Accountability Office.

The Road to Financial Reformation: Warnings, Consequences, Reforms

The impact on the rest of insurers was fairly limited. Today, U. They have been reassessing and adjusting business strategies, growth plans, balance sheet positions, cost bases, organizational structures, scope of activities and geographic presence, according to a January report by the Committee on the Global Financial System CFGS , a central bank forum that monitors global financial markets for stability and other issues.

This is particularly apparent in global, systemically important banks, according to the CFGS. In Europe, the ratio of bank assets to GDP was a mixed bag, plunging in some and rising in others. Banks in emerging markets have not been as impacted by the crisis and continued to show robust growth, the report said. It is now the largest in the world. Since then, the bank has taken steps to strengthen its balance sheet. It decided to focus on lending to U. What is more, the crisis engages private actors and competent public authorities on the national, regional and international level in serious reflection on causes and on solutions of a political, economic and technical nature.

The crisis thus becomes an opportunity for discernment, in which to shape a new vision for the future. With due respect for the competent civil and political authorities, the Council hereby offers and shares its reflection: Towards reforming the international financial and monetary systems in the context of global public authority.

We hope that world leaders and all people of good will find this reflection helpful. It is an exercise of responsibility not only towards the current but above all towards future generations, so that hope for a better future and confidence in human dignity and capacity for good may never be extinguished. Every individual and every community shares in promoting and preserving the common good. To be faithful to their ethical and religious vocation, communities of believers should take the lead in asking whether the human family has adequate means at its disposal to achieve the global common good.

Economic Development and Inequalities. The grave economic and financial crisis gripping the world today springs from multiple causes. Opinions on the number and significance of these causes vary widely. Some commentators focus above all on certain errors that they consider to be inherent in the economic and financial policies. Others stress the structural weaknesses of political, economic and financial institutions. Still others say that the causes are ethical breakdowns occurring at all levels of a world economy that is increasingly dominated by utilitarianism and materialism.

At every stage of the crisis, one might discover particular technical errors intertwined with certain ethical orientations. In material goods markets, natural factors and productive capacity as well as labour in all of its many forms set quantitative limits by determining relationships of costs and prices which, under certain conditions, permit an efficient allocation of available resources. In monetary and financial markets, however, the dynamics are quite different.

In recent decades, it was the banks that extended credit, which generated money, which in turn sought a further expansion of credit. In this way, the economic system was driven towards an inflationary spiral that inevitably encountered a limit in the risk that credit institutions could accept. They faced the ultimate danger of bankruptcy, with negative consequences for the entire economic and financial system. After World War II, national economies made progress, albeit with enormous sacrifices for millions, indeed billions of people who, as producers and entrepreneurs on the one hand and as savers and consumers on the other, had put their confidence in a steady and progressive expansion of money supply and investment in line with opportunities for real growth of the economy.

Since the s, we have seen that money and credit instruments worldwide have grown more rapidly than the accumulation of wealth in the economy, even adjusting for inflation. From this came the formation of pockets of excessive liquidity and speculative bubbles which later turned into a series of solvency and confidence crises that have spread and followed one another over the years.

A first crisis, in the s through the early s, was related to the sudden sharp rises in oil prices. A series of crises in the developing world followed, for example, the first crisis in Mexico in the s and those in Brazil, Russia and Korea, and then again in Mexico in the s as well as in Thailand and Argentina. The speculative bubble in real estate and the recent financial crisis have the very same origin in the excessive amount of money and the plethora of financial instruments globally.

Whereas the crises in developing countries that risked engulfing the global monetary and financial system were contained through interventions by the more developed countries, the outbreak of the crisis in was characterized by a different factor compared with the previous ones, something decisive and explosive. Generated in the context of the United States, it took place in one of the most important zones for the global economy and finances.

It directly affected what is still the currency of reference for the great majority of international trade transactions. A liberalist approach, unsympathetic towards public intervention in markets, chose to allow an important international financial institution to fall into bankruptcy, on the assumption that this would contain the crisis and its effects.

Unfortunately, this spawned a widespread lack of confidence and a sudden change in attitudes. The consequences for the real economy, what with grave difficulties in some sectors — in the first place construction — and widespread communication of pessimistic economic forecasts, have generated a negative trend in production and international trade. This has led to very serious repercussions for employment as well as other effects that have probably not yet seen their full impact.

The costs are extremely onerous for millions in the developed countries, but also and above all for billions in the developing ones. In countries and areas where the most elementary goods such as health, food and shelter are still lacking, more than a billion people are forced to survive on an average income of less than a dollar a day. Global economic well-being, traditionally measured by national income and also by levels of capabilities , grew during the second half of the twentieth century, to an extent and with a speed never experienced in the history of humankind.

But the inequalities within and between various countries have also grown significantly. While some of the more industrialized and developed countries and economic zones — the ones that are most industrialized and developed — have seen their income grow considerably, other countries have in fact been excluded from the overall improvement of the economy and their situation has even worsened. After the Second Vatican Council, in his Encyclical Letter Populorum Progressio of , Pope Paul VI already clearly and prophetically denounced the dangers of a liberalist conception of economic development because of its harmful consequences for world equilibrium and peace.

Today the modern means of communication make these great economic, social and cultural inequalities obvious to everyone, rich and poor alike, giving rise to tensions and to massive migratory movements. Nonetheless, it should be reiterated that the process of globalisation with its positive aspects is at the root of the great development of the world economy in the twentieth century. It is worth recalling that between and the world population increased almost fourfold while the growth in wealth produced worldwide was much greater, resulting in a significant rise of average per capita income.

At the same time, however, the distribution of wealth did not become fairer but in many cases worsened. What has driven the world in such a problematic direction for its economy and also for peace? First and foremost, an economic liberalism that spurns rules and controls.


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It purports to derive the laws for how markets function from theory, these being laws of capitalistic development, but it exaggerates certain aspects of markets and downplays or ignores others. An economic system of thought that sets down a priori the laws of market functioning and economic development, without measuring them against reality, risks becoming a tool subordinated to the interests of the countries that effectively enjoy a position of economic and financial advantage.

Regulations and controls, imperfect though they may be, already often exist at the national and regional levels; whereas on the international level, it is hard to apply and consolidate such controls and rules.

The inequalities and distortions of capitalist development are often an expression not only of economic liberalism but also of utilitarian thinking: that is, theoretical and practical approaches according to which what is useful for the individual leads to the good of the community. This saying has a core of truth, but it cannot be ignored that individual utility — even where it is legitimate — does not always favour the common good.

In many cases a spirit of solidarity is called for that transcends personal utility for the good of the community. In the s, some economists had already warned about giving too much weight, in the absence of regulations and controls, to theories which have since become prevailing ideologies and practices on the international level. One devastating effect of these ideologies, especially in the last decades of the past century and the first years of the current one, has been the outbreak of the crisis in which the world is still immersed. In his social encyclical, Pope Benedict XVI precisely identified the roots of a crisis that is not only economic and financial but above all moral in nature.

In fact, as the Pontiff notes, to function correctly the economy needs ethics; and not just of any kind but one that is people-centred.

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The Role of Technology and the Ethical Challenge. The great economic and social developments of the past century, with their bright spots and serious shadows, can also be attributed in large part to the continued development of technology and more recently to advances in information technologies, and especially to their applications in the economy and most significantly in finance. However, if we are to think clearly about the current new social question , we must avoid the error — itself a product of neo-liberal thinking — of regarding all the problems that need tackling as exclusively technical in nature.

In such a guise, the problems evade the discernment and ethical evaluation that are urgently required. It also minimizes the value of the choices made by the concrete human individual who works in the economic-financial system by reducing them to mere technical variables. Given the complexity of the phenomena of concern, the importance of ethical and cultural factors cannot be overlooked or underestimated. In fact, the crisis has exposed behaviours such as selfishness, collective greed and the hoarding of goods on a mammoth scale.

No one can be content with seeing man live like a wolf to his fellow man, according to the concept discussed by Hobbes. No one can in good conscience accept the development of some countries to the detriment of others. If no solutions are found to the various forms of injustice, the negative effects that follow on the social, political and economic level are destined to create a climate of growing hostility and even violence, and ultimately undermine the very foundations of democratic institutions, even the ones considered most solid.

This implies abandoning all forms of petty selfishness and embracing the logic of the global common good which transcends merely passing and limited interests. Today his warning needs to be heeded without delay and a road must be taken that is in greater harmony with the dignity and transcendent vocation of the person and the human family. In the prophetic Encyclical Letter Pacem in Terris of , he observed that the world was heading towards ever greater unification.

In view of the unification of the world engendered by the complex phenomenon of globalization, and of the importance of guaranteeing, in addition to other collective goods, the good of a free, stable world economic and financial system at the service of the real economy — in this perspective, the teaching of Pacem in Terris appears to be even more vital today and worthy of urgent implementation.

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Consistent with the spirit of Pacem in Terris , Benedict XVI himself expressed the need to create a world political authority. Think, for example, of peace and security; disarmament and arms control; promotion and protection of fundamental human rights; management of the economy and development policies; management of migratory flows and food security; and protection of the environment. In all these areas, the growing interdependence between States and regions of the world becomes more and more obvious as well as the need for answers that are not just sectorial and isolated, but systematic and integrated, rich in solidarity and subsidiarity and geared to the universal common good.

Therefore, it should be endowed with structures and adequate, effective mechanisms equal to its mission and the expectations placed in it. This is especially true in a globalized world which makes individuals and peoples increasingly interconnected and interdependent, but which also displays the existence of monetary and financial markets of a predominantly speculative sort that are harmful for the real economy, especially of the weaker countries. This is a complex and delicate process. A supranational Authority in this arena should have a realistic structure and be set up gradually.

It should be favourable to the existence of efficient and effective monetary and financial systems; that is, free and stable markets overseen by a suitable legal framework, well-functioning in support of sustainable development and social progress of all, and inspired by the values of charity and truth It is a matter of an Authority with a global reach that cannot be imposed by force, coercion or violence, but should be the outcome of a free and shared agreement and a reflection of the permanent and historic needs of the world common good. It ought to arise from a process of progressive maturation of consciences and advances in freedoms as well as awareness of growing responsibilities.

Consequently, reciprocal trust, autonomy and participation cannot be overlooked as if they were superfluous elements. Consent should engage an ever greater number of countries that adhere with conviction, through a sincere dialogue that values the minority opinions rather than marginalizing them. So the world Authority should consistently involve all peoples in a collaboration in which they are called to contribute, bringing to it the heritage of their virtues and their civilizations.

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The establishment of a world political Authority should be preceded by a preliminary phase of consultation from which a legitimated institution will emerge that is in a position to be an effective guide and, at the same time, can allow each country to express and pursue its own particular good. The exercise of this Authority at the service of the good of each and every one will necessarily be super partes or impartial: that is, above any partial vision or particular good, with a view to achieving the common good.

Instead, they should be made in the interest of all, not only to the advantage of some groups, whether they are formed by private lobbies or national governments.