Gordon Brown’s solution to the global financial crisis is to create a system that is structurally sound for the whole international community so this type of crash never happens again. It sounds simple enough, but creating an international regulatory system for banks trading from shore-to-shore is much easier said than done. It requires that politicians in their respective countries secede power over to the international regulatory firms, not something that protectionists sentiments allow in this crisis. There is currently one agreement that is endorsed by the G20, a group of 20 nations that meet to solve international problems, and many finance ministers. This plan is called Basel III.
The Basel Committee is a subsidiary of the Banks for International Settlements Organizations. Basel was formed in 1974. It does not hold any legally binding powers, but it does make recommendations for other international organizations to follow. I should add that this is typical of most international organizations, they can make recommendations, but they cannot implement them. Unfortunately, this is one of the downfalls of the international system. The Basel Committee has come out with numerous recommendations about banks throughout the years, but after the current financial crisis it became important that people listen to their recommendations.
Their conclusions about the crisis were twofold. First, banks did not have enough conservation capital to give out loans at a comfortable rate. Second, banks were also giving out loans to people who did not have the money to pay back the loans. Finally, international banks were not being watched carefully enough, so they engaged in the practice of betting that people would and would not pay back loans. Essentially, they could not lose, until they lost. The analogy I think is if people bet every year that the Washington Wizards were going to not win the NBA Championship, everyone will get rich quick. Eventually though, the Wizards will win and the game will be over so everyone will go bust. Banks did exactly the same thing with everyone else’s money.
In an attempt to correct these mishaps, the Basel III Committee made specific recommendations that would tackle these problems. Now, each country does have their own ability to control their own banks, but when banks trade in different countries they are not subject to the same regulations. Hence their needs to be an international agreement to solve the problem. Gordon Brown’s solution is not the most popular one. He wants to find ways to implement new regulations on international banks and hedge funds by calling an international meeting to solve the problem. While I agree with Brown’s assessment about this crisis being an international problem, his solutions already exist its just that the international community does not want to implement them. The international community likes to endorse these solutions, but not put them into action. It would be better if some binding agreement existed for these types of recommendations by supervisory boards.
One other way to look at why Brown’s solution of having a meeting does not work is the complexity of the issue. When Brown refers to the Great Depression era’s meeting to solve the crisis, he is referring to the Bretton Woods Conference in 1944. At that conference regulations were put in place, but organizations like the IMF and World Bank were created to regulate those changes, along with other domestic policies for every country to follow. Unless new regulatory organizations are created to solve this problem talking about new rules and implementing them will be two different conversations.
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