Peter Foster: Bolting the Stability Door

Why has the Financial Stability Forum so spectacularly failed? By Peter Foster If you are a bank, your survival depends on your prudence and insights about profitable lending. If you are a car company, your viability is a function of your skill in providing well-priced and attractive cars that consumers want. Generally, however, we do not have companies called “The Prudent and Insightful Bank,” or the “Well-priced and Attractive Automobile Company.” These titles are not particularly grabby, and incorporate objectives which we take for granted.

Also, such names might be regarded as examples of hubris, thus inviting the wrath of the capricious Gods of the market. Private sector failure has harsh but necessary consequences (unless you can utilize the political system — and taxpayers’ money — temporarily to thwart them). Public sector failure, by contrast, has more bizarre, almost Alice-in-Wonderland, results.

Say you are an international bureaucratic institution. In that case, you can come right out and vaunt the most hubristic pretensions right in your title, fail spectacularly, and have not the slightest concern that there will be adverse consequences. Indeed, your failure will almost certainly guarantee your expansion.

Take the Financial Stability Forum, the organization set up in 1999 in the wake of the Asian financial crisis on a “Never Again” basis. Given that the world is currently experiencing the greatest period of instability in living memory (unless you happen to be an octogenarian) you might imagine that fingers would be pointed and questions asked about exactly what the FSF was doing up there in the supposed crow’s nest of the Titanic? One may be sure that the risk management departments of banks and the new product development departments of the Big Three automakers have come under enormous pressure as a result of their financial problems, however successful they are at sucking in taxpayers to delay reality. But the response to the FSF’s transparent failure is that what it really needs is more members, bigger meetings and a fatter budget.

The one thought that does not seem to have crossed any bureaucrat’s or politician’s mind is: Why has this institution, which represents myriad national and international government organizations, so spectacularly failed? Even less has anybody suggested that the FSF is completely useless and indeed may well have created a false sense of security. Do you think any government has thought about scrapping it? And pigs might fly away from pork marketing boards. In 1999, one of the FSF’s big supporters, Gordon Brown — then British Chancellor of the Exchequer, now Prime Minister — claimed that the forum would become “the world’s early-warning system for regional and global financial risk.” Not only has this failure been ignored, but Mr.

Brown, a reflexive socialist and policy wonk, continues to promote an expanded FSF to provide the services which it has conspicuously neglected to provide so far. Eighteen months ago, although the turbulence had started, the FSF gave little indication that the financial world was in danger of falling off a cliff. A year later, this past April, as turbulence had turned to turmoil, the FSF lamely called for “tougher oversight.” A report from the organization declared with surprise that “A striking aspect of the turmoil has been the extent of risk-management weaknesses and failings at regulated and sophisticated firms.” Clearly, regulation and sophistication had been little or no use.

Neither had the FSF. The FSF’s head, Italian Central Banker Mario Draghi, produced a prosaic wish list. “We want,” he said, “to recreate a financial-services industry capable of creating value but immune to the perverse incentives that characterized the recent past.” But the industry hardly needed to be told that, any more than investors now had to be warned of the dangers of opacity or complexity.

The FSF’s members are hardly without expertise. They come from the leading government financial institutions of Australia, Canada, France, Germany, Hong Kong, Italy, Japan, the Netherlands, Singapore, Switzerland, the U.K. and the U.S.

It also has representatives from the Bank for International Settlements, the European Central Bank, the International Monetary Fund, the OECD and the World Bank. Then there are reps from the “standard-setting bodies and other groupings,” including the Basel Committee on Banking Supervision, the Committee on the Global Financial System, the Committee on Payment and Settlement Systems, the International Association of Insurance Supervisors, the International Accounting Standards Board and the International Organization of Securities Commissions. Last weekend’s G20 declaration declared, boldly but vaguely, that the IMF and the World Bank needed to be “comprehensively reformed” (even as they were put in charge of “peer review” of countries’ financial sectors).

But what the FSF needed, apparently, was to “urgently expand;” that is, to be made fatter and even more unwieldy by the addition of another slew of new members from the “emerging powers” of BRIC — Brazil, Russia, China and India. These new members, as they travel to well-expensed meetings in exciting places, will undoubtedly become staunch advocates of more and bigger meetings, and more frequent consultations (The FSF’s six most recent — major — conflabs have taken place in Rome, New York, Frankfurt, Stockholm, Paris and Sydney). Being an international bureaucrat, it seems, means never having to say you’re sorry, especially if you can pull more bodies aboard the gravy train. Financial Post.

Wed Nov 2008 10:11 (1 month, 2 weeks ago)