Finance in Turmoil?

by Ali M.S. Fatemi, Ph.D.

Posted on December 7th, 2009

While the media seems to be overwhelmed with Dubai fiasco and its deep ramifications, the world of finance is simultaneously under pressure from three different directions- pressures which tend to reshape is nature and functions. Globalization, technology and regulation each are making their own impact and marking the future of finance as we know it.

Globalization came first in the mid-seventies when the old world order of doing things began to crumble under the pressure of dwindling US gold supply and inadequacy of world reserves for rapidly growing volume of free trade. The collapse of the old Breton-Woods system happened so fast that in went almost unnoticed. Simultaneously, as currencies were breaking away from the non-convertibility restrictions of IMF restrictive rules, the use of information technology was growing exponential rate. International financial transactions that used to take hours, if not days, all of sudden could be concluded with a click of the mouse.

The three catchwords of the time were liberalization, deregulation and privatization. In the US, at the time the only major financial center of the world, the legislation repealing the Glass-Steagall Act was signed into law by President Clinton in 1993, substantially decreasing legal restrictions on American banks. Repeal of this act which was originaly enacted by the US Congress in 1933 after the Great Depression was necessary and inevitable. However, in retrospect, perhaps the mood of the public, the Congress and the White House was too permissive at the time and not cautious enough to foresee the implications of this radical move. As the US banks ventured into totally none banking activities such as insurance, real estate and brokering, for the next fifteen years no one complained. Then came the rude awakening with the world-wide financial crisis of 2008.

Now as the world is trying to extricate itself from its near collapse, once again the pendulum seems to be swinging totally in the opposite direction and the danger of over-regulation seems to be a real threat.

While the process of globalization and the rapid progress of IT are inevitable, the specter of over-regulation is running in the opposite direction. The genie will not fit in the bottle, even if governments reach agreement on how to do it. International trade as well as foreign investment are the two crucial factors for this newly found and highly cherished prosperity in countries like China, India, Brazil and others. World leaders are fully aware of this vital link between finance and trade and in spite of all pious proclamations, are unlikely to undertake any radical measures. As a matter of fact, presidents or prime ministers need the support of their elected representatives in the democratic countries before they can move and will be very hard to get if radical changes are attempted. As politicians and advocacy groups clamor for change and are stalled in their efforts by the vested interest, the other two elements, namely globalization and technology continue to move ahead. Will at the end all this culminate in a harmonious change for the better or will it lead to continuous turmoil in the financial markets? That is the preverbal $64,000. question.

Disclaimer: The views expressed in the Op-Ed section of this website are the views of the authors of the articles and do not necessarily reflect the opinions of the American Graduate School in Paris as an institution.