The World needs Financial Firewalls against Toxic Derivatives

The world financial system has allowed toxic derivatives to be sold around the world with no questions asked from any government or financial institution. Why is it we quarantine animals, food, drugs and even illegal aliens but allow billions of dollars in derivatives to pass through our countries unchallenged?

One thing this globalization of financial markets did was encourage massive growth in international credit and the aftermath of the Dot Com boom gave the financial whiz kids the Internet infrastructure to package debt and move it around the world so fast the financial and government watch dogs just lost the plot. Our national financial borders were left unguarded.

Globalization has resulted in the contagion of the US sub prime problems spreading around the world at Internet speed. But that doesn’t mean globalization is wrong. It just means that the globalization frontier needs some sheriffs who can tame it.

Just as the Dot Com boom put in place an Internet infrastructure that enabled the massive growth in electronic financial services which has seen many people in the world benefit before the credit crunch, so too will the next round of global financial reform if governments think outside the box rather than trying to protect themselves.

Unfortunately I believe the answer the G7 will come up with will be more central control which will be ineffective. The IMF and World Bank just don’t have any clout so why any new world organization would do any better I don’t know.

I see there was a big meeting in China over the weekend and the result was, “The world needs more regulation”. There were no suggestions on how to do this though.

What they should do is get all the whiz kids that created this sub prime mess in a room and not let them out until they come up with a way to market and sell “good” complex derivatives that are fully transparent and easily priced. Collateralized securities are not bad in themselves. They are only bad when people package up bad debt and Rating Agencies give them a triple A rating for a few dollars down.

These whiz kids also need to come up with a way to implement financial firewalls around countries. This is because national governments are charged with their citizens welfare, not some international organization. They put national self-interest first if they are likely to be voted out of office. Ireland was the first to guarantee bank deposits and the UK had to follow, then many other countries. Firewalls might have prevented this domino effect.

These firewalls should have built-in “financial virus derivative detectors” if you like that sound alarm bells when certain financial rules are being exceeded, or transaction types being sold in one country and being spread to another.

Financial Firewalls would also need to publicly list in some way what was happening in the financial markets in each country, so that the world could see immediately when firewalls are being attacked. The country affected could then take appropriate action in their national interest and prevent the toxic derivative spreading into their financial system.

Firewalls would need constant updating, just like Virus and Spam filters on computer networks. Whenever a new financial instrument is introduced it should be identified,  checked, verified and listed so it can be monitored.

That way there would be an early warning system when one country was doing something that was not within the financially internationally agreed guidelines of risk, credit and debt. Other countries would have the right to block toxic derivatives from  further transactions through their own firewall.

There should also be a way to quarantine any country that gets into financial trouble. Then the rest of the world would be able to help out from a position of strength.

If we cannot protect our national financial borders with firewalls without stopping all good financial activity, it will lead to much lower investment returns for us Baby Boomers in the future as governments over-regulate.

Leave a Reply

CommentLuv badge