On 2 April 2009, the G-20 issued the: Declaration on Strengthening the Financial System. The Declaration vested “enhanced capacity” to the former Financial Stability Forum–now re-named the Financial Stability Board. It also seems to have appointed the IMF with an enhanced role in the arena of financial regulatory reform. Several reports and articles have since been produced, many of which are quite comprehensive.
The G-20 document references many component parts; one of which deals broadly, with compensation. This is the subject of the post by Professor Ferrarini and Ms. Ungureanu.
However, before I turn attention to my comment, I would like to make an observation. We still live in a world which subscribes to a Westphalian system (well discussed by Padoa-Schioppa in his intellectually breathtaking Per Jacobsson Lecture). Much of the declaration reads as if it were some form of treaty by sovereign governments. As these types of issues do not garner much press or interest for that matter, and are not very well understood by legislators (empirically evident in the U.S.), the liability extant is that it will meet with opposition when finally understood by those with responsibility. Surveying several legislators, economics and business professors, bankers and business chieftains in the U.S, it is interesting to note that 99 out of 100 have never heard of the BIS–much less one of its secretariats the FSB.
The idea of misalignment of compensation being a central cause (of the Turmoil of 2007) is a “red herring” of immense proportion. It’s tantamount to a medical doctor chasing the symptoms of a patient rather than dealing with the source of the illness.
The turmoil and consequent damage caused globally was primarily a failure of sovereign governments and central banks to monitor and understand what was occurring under their charge. This primarily was a U.S. problem of faulty legislation and poor use of regulation; but most importantly, monitoring in an holistic fashion. Putting forth the idea that “greed” (let’s call it what it is) can be regulated is unrealistic and counter-productive–as well as counter-intuitive.
It is a fact that Wesphalian systems are dirigistic and need to set rules and guidelines–especially in the insured banking sector. Yes leverage requirements, yes de-construction of too big to fail institutions offering too many diverse products and services, yes prudential supervision, yes reform of CRA’s, etc. But the attempt at moderating compensation from outside of the internal entity or organization by an authority that is not part of the actual Sovereign is a non-starter and will not gain traction.
The turmoil developed over a 25 year period; very specific events occurred in the timeline which led up the collapse. It’s time to revisit those events.
Comment by Stephen R. Ganns — April 13, 2011 @ 7:04 pm