Mike Beversluis

Monday, November 23, 2009

More translations - Are they markets or casinos?

Are they markets or casinos?

By Francesco Giavazzi

Sono mercati o case da gioco?

The more time passes, the more the probability that this crisis will be a wasted occasion increases. There is not the faintest sign of reforms of financial markets, whose urgency was shown with evidence by the unfolding of the crisis. And yet these reforms would be the only benefit of a crisis which has been so costly.

The problem is not the lack of analyses and proposals. It is months since the Financial Stability Board has identified the rules that should be changed. Reforms aren't made because the interest and determination of national governments, on which the task of translating those proposals into laws and regulations falls, have waned. In the U.S. Congress, where the need of reforms is strongest, the discussion has just started, and on a wrong footing. The independence of the central Bank is put into discussion, but nothing is done that could irritate the bankers.

In the meantime financial markets have started to work exactly as they did before the crisis, with the same rewards and incentives and the same weaknesses.

Postponing reforms means choosing not to do them anymore, because the more time goes by, the more banks mend their balance sheets, the more their power increases, as well as their ability to convince policy makers not to do anything that could make a dent in their profits.

The focus of public discussion is now on bankers' remunerations. But it is a trap: the shrewdest among the bankers are in reality quite happy that the debate is focused on this and their apparent opposition is strategic, that is, it is a way to avoid rules that could decrease banks' profits. If the profits are large, a way to distribute them can always be found, whatever the rules on remuneration are. If the criteria for bankers' pay and bonuses will change, but all the rest will not, the system will remain as weak as it was before the crisis.

Is there anything that the Italian government could do to avoid this disaster? The major Italian contribution to the financial industry has been the creation of the "Mercato telematico dei titoli di stato" (Mts)(in English "Electronic Market of Government Bonds"), one of the first examples of a transparent public platform for bonds' negotiation, a model that has become the standard in many countries. The government could leverage this success of ours and ask that the G20 adopt - just as the Fsb has proposed - a norm to forbid "over the counter" exchanges, that is exchanges through a bank, and to move the buying and selling of financial products onto transparent platforms. This norm could be adopted tomorrow and would transform financial markets. Not only because it would enforce transparency and therefore traceability of transactions. Today the monies that whoever buys a bond must deposit as a guarantee are used by banks as if they were their own assets, and are one of the sources through which activities that leave the bank balance sheets exposed to inappropriate risks are financed. Transparent platforms consider the guarantee monies just for what they are, that is guarantee monies, not chips for casinos.

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