Mon, Oct 27, 2008 page10

• Over-regulation a ‘trap’: OECD

  ‘BETTER NOT MORE’ In an interview previewing a keenly awaited OECD report next month, OECD’s chief economist discussed the crisis’ impact on the real economy

  • AFP
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  The world has been saved from another Great Depression by massive state intervention, the Organization for Economic Co-operation and Development’s (OECD) chief economist said, but he warned of the “trap” of excessive regulation as the debate about global financial reform heats up.

  “This is the worst financial crisis in decades, but a repeat of the 1930s Great Depression is highly unlikely, thanks in large part to those massive rescue plans now in place,” Klaus Schmidt-Hebbel said.

  Big changes are needed in financial and capital markets but governments must avoid the “trap” of a regulatory over-reaction, he said in an interview in the OECD Observer magazine to be published today.

  “Excessive regulation can do damage too, by inhibiting future financial innovations, market integration and growth,” said the top economist at the OECD, one of the main forums for international policy-making.

  “We require better regulation, not just more regulation,” he said in the interview in which he predicted that many of the 30 OECD economies will slip into recession and that recovery from the world economic slowdown will take longer than was the case after previous downturns.

  Schmidt-Hebbel’s interview previewed the Paris-based OECD’s keenly awaited Economic Outlook report due next month which will examine the impact of the financial crisis on the real economy and ask what lessons can be drawn from it.

  His comments came as world leaders meeting in Beijing over the weekend vowed to overhaul the global financial system to avoid a repeat of the current financial crisis sparked by the collapse of the US subprime mortgage market.

  Governments have pumped hundreds of billions of dollars into the banking system to try to prevent a global recession, get banks lending again and calm panicky stock markets that have swung wildly in recent weeks.

  Everyone agrees that change is needed in the financial system, but leaders disagree on how radical the reform should be.

  Questions remain. Should the unprecedented state intervention of the last two weeks to save banks in Europe and the US be seen as a temporary move by governments as lenders of last resort in line with the lessons of the 1930s Depression?

  Or should it be the start of a reversal of the opening up and deregulation of global markets since the 1980s?

  French President Nicolas Sarkozy appears to be leading the latter camp of critics of US-style free market capitalism.

  He declared on Thursday that “the ideology of the dictatorship of the market is dead” and announced a French sovereign wealth fund to “intervene massively” in companies of national strategic importance.

  But the leaders of the US, Britain and Germany take a far less radical view.

  US President George W. Bush, moving to set an agenda for a key international economic summit in Washington on Nov. 15, said on Saturday that its participants must “recommit” to the principles of free enterprise and free trade.

  The US summit is being billed as a Bretton Woods II, a follow-up to the conference after World War II that founded the system of the last 60 years based on the IMF, the World Bank and the body now known as the WTO.

  Schmidt-Hebbel in his interview with the OECD Observer identified four main types of systemic weakness which nearly brought the global financial system crashing down.

  The first was poor company management combined with huge incentives for top people in finance, lack of information about risks, weak supervision of credit rating agencies and weak supervisory regulations in many countries.

  “Regulatory omissions and failures were rife,” he told the magazine, adding that steps had to be taken to ensure that in the future financiers did not “assume bailouts are the norm.”

  Second, authorities had to review their interest rate, tax and financial policies to counter and reduce the intensity of economic cycles, thereby preventing a repetition of such a global crisis.

  Third, governments had to improve their contingency and crisis management because the current crisis had been managed “in a pretty haphazard way” in the early stages.

  And finally, he said there was a need for “rethinking” the way the international financial system works, which is the aim of the Washington summit.

  His comments echo the initial lessons drawn by another top financial policy forum, the Bank for International Settlements (BIS) in Switzerland, which sets standards for central banks around the world. It said at a meeting in May and June that central banks should lay down rules for rescuing markets so that those responsible for failures pay a price and called for more prudent pay incentives.

  It also said that the performance of rating agencies should be improved.

  The BIS called for a “counter-cyclical” readiness by central banks to raise interest rates even when inflation is low, arguing that the root cause of the crisis was too much cheap money and credit available for too long.

  The BIS banking supervision committee has already issued “substantial” changes to its guidelines that seek an increase in the cash cushions held by banks, tightened incentives for traders and managers to take risks and better information about risk exposure.

  The huge amounts of money traders can earn are said by analysts to be one cause of excessive risk-taking and are seen by the public as evidence of unacceptable excesses in the system.
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