GLOBAL ECONOMIC CRISIS, FINANCIAL REFORMS & "THE BROWN DOCTRINE"

PREAMBLE: Over the past month, the world has faced an unprecedented near-collapse of its banking systems. The crisis is not over yet, and – it may fairly be stated – is due to a combination of poor political leadership in the United States (asleep at the wheel) and a combination of greed, negligence and corruption in its financial industry. This of course does not take the inaction and practices of other countries off the hook, as consequential national and global failures are documented extensively elsewhere, especially in Europe. Clearly, no country (rich or poor) has been spared, and it will take many years for individuals, families, communities and societies as a whole to recover from this crisis of greed, neglect and incompetence.

Perhaps needless to say, the necessities of life and the social fabric of all countries e.g, health and educational systems along with secure food supply, clothing and shelter depend on integrity in our financial systems. Trust must be restored in those systems.

Out of this morass some good has come in the leadership of UK Prime Minister Gordon Brown. He has put forward a 5 point plan which appears to have galvanized the world financial community around new principles, thereby giving some hope for the rest of us.

Implicit in the “Brown Doctrine” is an analysis of what is so seriously wrong with the world financial order. It forms a clear case for supra-national supervision of international finance, which clearly cannot any longer be left to the caprices of any one country.

The key features of the Brown Doctrine now follow, extracted from a media report.

Reference: Saunders D. The man who saved the world banking system. Globe and Mail Oct 15, 2008.

THE BROWN DOCTRINE
British Prime Minister Gordon Brown outlined a five-point program yesterday (October 14, 2008) to reform the world’s financial system. He hopes the principles will be the basis of a new set of global institutions to replace those that have governed international finance since 1944.

Transparency: Banks must fully disclose key information globally, not just nationally. Accounting standards will have to become international, and they must extend to the credit-insurance market, which has been heavily criticized.

Integrity: A worldwide effort is needed to end conflicts of interest, such as those involving rating agencies that receive fees from the firms they rate. Worldwide limits also need to be placed on pay and bonuses in banks, so that they reflect actual results and are no longer able to distort business practices.

Responsibility: All members of company boards must hold full responsibility for the company’s risk, and must not be able to walk away from their institutions. This will require international supervision.

Tighter Regulation: To create “a system with solvency and liquidity”, there must be “adequate protection through the economic cycle” to prevent speculators from distorting markets when they are rising and sort positions from having undue impacts when markets are falling.

New Institutions: The new system of banking cooperation will need “a new international financial architecture for the Global Age”. New institutions will provide “an effective global early warning system for the world economy, to alert us to the risks at hand”, and “globally accepted standards of regulation” and the cross-border supervision of global corporations.

Source: Saunders D. The man who saved the world banking system. Globe and Mail Oct 15, 2008.