Regular readers know that the way to reign in global capital is to bring transparency to all of the opaque corners of the financial system. Transparency subjects global capital to the best disinfectant: sunlight.
With sunlight, each participant in the global financial system encounters a force greater than it is: the market. Specifically, each participant is subject to market discipline.
Subjecting global capital to transparency harnesses market discipline to clean up and fix this mess.
"How do we fix this mess?" That may be one of the stupidest questions I have ever asked myself, as of course I don't know the answer. What I do know, however, is that few of the structural flaws in how the global economy operates, which took us from unsustainable boom to intractable bust, have been fixed....
Here are just a few of the surreal characteristics of the worldwide financial and economic system that is our lot.
We have global regulations for banks that incentivise them to make it impossible for ordinary mortals – including their owners, regulators and even their own directors – to know with confidence the risks they are running.This reflects the fact that current disclosure practices leave banks resembling 'black boxes'.
This can be fixed by requiring the banks to provide ultra transparency and disclose on an ongoing basis their current global asset, liability and off-balance sheet exposure details.
With this data, market participants can independently assess the risks the banks are running.
And at the same time these rules encourage senior bank executives to run their respective operations in a way that maximises the short-term profits they make – and of course their pay and bonuses – subject to those regulations, rather than simply concentrating on providing the credit and services of most use to their customers.
I am referring to the so-called Basel rules, set by a largely unaccountable priesthood of regulators and central bankers who meet in camera in a sleepy Swiss town and have determined how banks protect themselves against shocks since the 1980s. Think of these money priests as the financial equivalents of the members of Fifa's governing body or the International Olympic Committee – which is not to suggest that there has ever been a hint of corruption at the Basel committee on banking supervision, but is to say that transparency and openness are not the strongest suits of a committee whose recommendations have a powerful bearing on all our livelihoods.
The Basel rules were originally designed to ensure that all big banks anywhere in the world retained a minimum amount of capital relative to their loans and investments, to absorb losses when it all goes wrong. In other words, they were supposed to make the banking system safer and to create a level playing field between banks.
In practice, and almost from the start, the rules were written in such a complicated way that they created a virtual licence for clever bankers and their respective banks to cheat. And the devastating consequence is that they actually allowed banks to become both dangerously enormous and to hold less capital relative to their loans than at any point in history, although you could not see how weak banks had become because of the eccentric way that the rules calculate capital and risk.The rules were introduced to let banks increase their leverage in an opaque way so that they could generate a higher ROE and presumably be better able to attract capital from the markets.
Which brings me to an elephant that has been in the room in which prime ministers and business leaders swank and swagger for 20 years – namely that globalisation is real and (ahem) global, but government is national.
Or to put it another way, the flaws in globalisation cannot and will not be tackled effectively unless and until there are much better mechanisms for politicians and people to hold in check global capital and global businesses.
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