A SYMPOSIUM OF VIEWS

Is Financial Globalization Beginning a Process Of Reversal?

Intl Economy Symposium

Is the era of financial globalization over, or at least about to begin a significant reversal? Witness the disagreements over capital adequacy, regulation of derivatives, and the sudden questions from some non-European banks about holding European bank paper. Given that the European banking sector represents 65 percent of global banking, to what extent has the European sovereign debt crisis contributed to any reversal? What effect will Chinese banks have on the future of financial globalization?

Some of the world's foremost experts offer their perspectives.


[Mr. Melamed's response appears below - click here to view the ENTIRE article in ,pdf format.]

Globalization, financial or otherwise, cannot be reversed.

LEO MELAMED
Chairman Emeritus, Chicago Mercantile Exchange, and Chairman, Melamed & Associates

Leo MelamedThe 2008 financial meltdown exposed fraud and weakness in the global financial system that had been obscured by bubbles and irrational exuberance. In response, the world's financial regulators, minimizing their own contributing failures, set about imposing restrictions on the financial services sector. The timing and nature of the restrictions and their long-range impacts vary depending on local politics. The United States reacted with a massive overhaul of its financial system, which incorporated a wide range of financial fixes, many of which were politically motivated and not responsive to the actual causes of the meltdown.

Other jurisdictions, better attuned to the consequences of regulation on financial service companies, moved more deliberately — gaining a significant competitive advantage over the United States. However, this regulatory disparity does not signal the reversal of financial globalization. Globalization, financial or otherwise, cannot be reversed. Technology has enabled capital flows to ignore national borders. This will not abate. Unfortunately, the disparate government actions will induce jurisdictional and regulatory arbitrage — a serious and troublesome consequence. But there is worse. The real reversal has been to the perception of the legitimacy of financial institutions and the value of derivative instruments in efficiently redistributing risk. The blame for the meltdown has been transferred from government to "Wall Street," and translated into a "failure of the American free market ideal." This misguided notion is roundly applauded by every enemy of liberty on the planet.

In case we forgot, as economist Friedrich Hayek explained, the free market ideal is a social philosophy encompassing ethics, moral values, jurisprudence, ideas, and a way of life. To one degree or another, the free market ideal was adopted by nearly every nation on the planet and changed the course of civilization. It became the decisive driver of progress in science, technology, and economic development. It created a crucible for innovation. It unshackled human energies whether in medicine, agriculture, space, health, markets, or education. It was the locomotive for a vast number of new jobs. The world of today is hugely different than a century ago not simply because of advances in science and technology, but because those very advances were a product of the free market ideal that swept across this planet. Standards of living have broadly improved, life expectancy has greatly expanded, and the quality of life for much of civilization is vastly enriched; not to speak of the desire for individual freedom. Make no mistake, the internet, Google, Microsoft, Apple, Amazon, and a host of other business enterprises based on amazing innovations for advancing information and knowledge are a primary consequence of the free market ideal. Woe to our civilization if this truth is misdirected. As Milton Friedman warned, "The challenge for my generation was to provide an intellectual defense of liberty. The challenge for your generation is to keep it."

 

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