The 2007 Meltdown: Why the World Should Not Be Flat?

Understanding regional dynamics, reinforcement of national regulations and accountability of financial actors 1) Background Globalisation fuelled world economic growth but with it came an increasing rate of financial crisis across the world over the last 50 years. In April 2007, New Century financial files for chapter 11 bankruptcy protection. This began the worst financial crisis since the great depression of 1929. More than four years later and at the cost of, an estimated, 30millions jobs worldwide and over 7.1Trillion on tax payer money, recovery remains a distant notion. However to understand what made possible this global meltdown, it is necessary to look at the deregulation trend entered in the eighties under President Reagan. The consolidation of financial sector started a vicious cycle. Small, local, investment banks turned into international groups. Disregarding in the process monopoly laws. Regulator, such as the CFTC, failed to implement checks on the derivative market with was worth $50trillions, or just over three times the American GDP. This uncontrolled expansion of this industry and the unstoppable innovation of their financial products culminated to a point where the hold on the economy was so deep that governments couldnt afford politically, economically and socially to let them fail. 2) Significance This big meltdown illustrated how globalised the world is. Showed us that money is more than a medium of exchange, it can lead to prosperity but also cardiac arrest of the system. Most importantly we as citizen pay, in the literal sense, the consequences of individual irrational behaviours and loose economic policies. With western country inexorably aging, it is the savings of an increasing size of the population that is at risk of a future crisis. Similarly it is the economic prospect of our generation that will be impacted if we fail to renew with stable growth. 3) The proposal This paper will propose a top to bottom approach. First looking at supra-national regulatory institution and define the new role developing country have to play. To do so the concept of globalisation will be left for a more continental approach. It will be demonstrated that some emerging countries (ie: China) can afford pursuing down the route of deregulation due to their immense cash reserves and untapped growth potential. Some other baby Asian Tiger (ie: Vietnam) havent reached yet a legislative maturity and political will to enforce stricter regulation on financial flow. Finally it will be argued that the region of the Middle East has cultural & religious safeguards against some aspect that caused the recent crisis. Islamic banking, consistent with Islamic laws, prevents deregulation such as relaxing limitation on leverage. The reminder of our focus will go towards the western nations. If they lack positive trade balance to absorb future crisis or cultural protection against the greed of banks. Thy can rely on a strong experience of financial regulations and the support of a solid judiciary to create and implement the necessary changes.

The 2007 Meltdown: Why the World Should Not Be Flat? Understanding regional dynamics, reinforcement of national regulations and accountability of financial actors The second part will be devoted to national regulatory institutions and the monetary system. Reason for the failure of the regulator to protect the people will be examined. Isolating, whether the deficiency arises from: a) the available tools (laws-institutions) or b) resources (humanfinancial). It will be revealed that the executive and the legislature cannot support a financial industry witch turn its back on society. Follows the analysis of the money creation process and the departure from the gold standard. Interest rate on loans will be criticized for being responsible for the scarcity money and cause of bankruptcy. Finally corporate liability and criminalisation of top executive behaviours will be discussed. Stock Exchange does not operate as the Efficient Market Hypothesis (EMH) predicts. As a result the auditing and rating firms play a crucial role. Especially towards pension funds that are legally obliged to only purchase investment grade (ie: AAA) products. Deflecting their responsibility on the ground that they only emit opinions will be regarded as intolerable. Instead proposal of corporate liability, such as the one found in German law will be brought forward. Behaviour of the remaining actors, CEO and other top executive, will be exposed. By introducing criminal liability based on the consequences of their action (ei: fraud) and controlling bonus distributed. This paper will hope to change the perverse risk taking reward system, that pushed those mans in control of powerful groups into inconsiderate and eventually dramatic decisions for their employee and public at large. 4) Description of the research The proposed reforms in the law and role of institution will be supported by cross-disciplinary research. Understanding the regional disparity in ideological views as to the prospect of economic growth will help to redefine the aim of institution such as the G20, FSB and IMF. Economic theory will be called upon to evaluate the sustainability of various regulatory proposal for more transparent and independent institution and rating agencies. Psychological bias will help us to understand the reason as to why individuals lack rationality when it comes to money. Simple legal concepts, understood by ordinary citizen, such as misrepresentation, fraud, dishonesty will be used to form the legal sanctions against financial actors. Demystifying the idea that this industry and their executives are outside the reach of the law, will serve the purpose to bring the financial sector closer to service the people and show that governments protect their respective community.