Today is the Future of Economics
When even Alan Greenspan, the epitome of Ayn Rand's Objectivist philosophy, says that unregulated markets created the current financial problem, it's safe to say that unregulated, winner-take-all, cowboy capitalism is dead as a serious policy recommendation.
Its results are harmful to most of the population. It is entirely predictable that income maldistribution and criminal behavior will follow the introduction of cowboy capital.
But, what is the alternative?
Right now, serious politicians are crafting laws and regulations to restrain some of the poor behavior of free markets. Sadly, they are doing so in an intellectually handicapped framework. As a result their actions may be less than effective.
This is an attempt to create a framework for policy.
The overriding goals and first priorities of any new policies and regulations should be to protect consumers from harm, to create jobs for the population and to correct income and wealth maldistributions so that a tolerable level of well being is provided throughout the society.
Part of securing this goal is to recognize that providing the means to create additional capital to the already wealthy in the hopes that they will use that capital to create more jobs is a foolish hope.
The world already has too much capital - there are more goods being produced than consumers have the ability to buy. It is time to reduce the amount of capital and to increase the wages of workers.
Markets wherein entrepreneurs use capital to create businesses and jobs are necessary in any modern economy. Without markets, a society is likely reduced to barter and subsistence farming.
But, markets are inherently flawed and require supervision to ensure the common good. The philosophy that equates the freedom to create wealth with the betterment of the entire society is a myth. We have seen the results of believing that myth again and again.
Managing markets for the common good allows for reasonable profits and entrepreneurial incentives.
But, that market supervision prohibits and punishes criminal behavior, monopolies and maldistribution of income and wealth.
Commercial banks and investment brokers of every kind created the current situation because of ineffective market supervision.
What should effective supervision look like?
Any effective market control should allow for the global interdependency of financial markets.
Currency exchange markets operate virtually in cyberspace and around the clock pretty much unsupervised.
Capital routinely seeks safety and returns globally without concerns about borders except as borders affect risk.
FINANCIAL TRADE ORGANIZATION [FTO]
Create the FTO. Give it the task to write international standards for bank management, bank lending and investment disclosure and control.
Seek membership of all developed economies in the FTO and allow any developing country to join.
Central banks of FTO members reinstall or create separations between commercial banking activities and investing activities. Commercial banks are constrained from selling investment assets, definition to follow.
Central banks take responsibility to manage commercial banks with regard to lending standards, management competence and balance sheet ratios. The central bank has the power to institute changes in bank management where required in its judgment.
Central banks and deposit insurance agencies guarantee all deposits in commercial banks regulated by the CB and guarantee all loans to member banks. To prevent the moral hazard problem, bank principals' deposits are exempt from the deposit guarantee and they are forbidden to borrow from their bank.
FTO members create an SEC type disclosure process for ALL investment properties. This will eliminate derivatives.
The goal of the FTO is universal membership and compliance. A compromise which attracts more members should be taken. Capital will seek the greatest reward, smallest risk location. If the regulation system is not consistent in every country, then capital will find the weak link.
Free [unregulated] trade brings the good and the bad of unregulated markets wherever it is tried: economic growth, criminal behavior and poor income distribution.
The philosophy behind it rests on the idea of a general world equilibrium where every consumer in every country is well off.
This is a pipe dream. It will never happen. Policies which support that idea create the evils of unregulated markets.
Each country must manage its trade to take advantage of the benefits and avoid the problems trade brings.
Trade should be encouraged. It should be managed so that there is neither a deficit nor a surplus from trade, i. e., the current account balances in each country are even every year. A country should not buy more from other countries than it sells to them, as measured in currency. See my article on balanced trade at www.mkeever.com
Consumers should be protected from dangerous imports. Hypothetically only, if China were to allow melamine in dairy products - which it does not - then any country which prohibits melamine in dairy products has the right to ban the import of diary products from China without penalty.
If the WTO requires a country to allow Chinese dairy imports, then the WTO should be scrapped.
The above is only a start toward a rational economic policy framework.
McKeever Institute of Economic Policy Analysis
October 28, 2008
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