In this article the main issues I will be looking at the issues raised around the views of Robert Shiller in his recent interview and book, finance and the good society and his opinions on the democratization of finance. The other aspect that I will also be looking at is the current regulatory reform measures that have been introduced in the OECD countries, including the long term and short-term measures and why they have been introduced.
In Shiler’s recent interview and book he raises the issue that financial capitalism is an invention and it should be further expanded and democratize so that financial systems can have a positive impact on a greater number of people around the world (Shiller r 2012). What Shiller means by this is making financial systems more accessible and serving the people better. In turn Shiller explains this will help to reduce the risk of another financial crisis like the recent 2008 economic down turn.
With the recent financial crisis there has been the introduction of regulatory reform measures to reduce risk of systematic failure within the financial system and investor protection. The main measures have included capital regulations e.g. basil 3, ring fencing investment and retail banking and the centralized clearing of derivatives.
The current regulatory reform proposals can be put into three main categories, reform of the markets, reform of the institutions and reform of the regulators. One of the key areas of reforming the markets has been to trade derivatives onto exchanges and to clear them centrally. This is aimed at stopping a repeat of the AIG collapse in 2008 when the US government had to intervene with a $85 Billion dollar bail out to stop it from collapsing, the government said it was an institution to big to fail (Egginton, Hilliard 2010). This has been implemented via the Dod Frank act and this legislation is aimed at increasing greater transparency to control the risk of systemic failure (PWC 2010). By increasing the central clearing of derivatives it is hoped that it will reduce the risk of systematic failure of the banks by ensuring the central party can handle a default. If derivative trading was to carry on as it used to in could cause another systematic failure in the system. By trading the derivatives on exchanges it is hoped that it will ensure traders know how exposed they all are to the market. It has been argued that by centrally clearing all derivatives could in turn increase the pressure on centralized dealers (Langton 2011) and in turn cause systemic risks for the dealers. Another key reform act that is being proposed is the ring fencing of retail and investment banks, this is to ensure that investment banks cannot use commercial banks funds to fund riskier investments, this was first initiated by Paul Volckler who was a former president of the central bank (Sinn 2010), this was the case from 1933 until 1999 in America when it was repealed. By bringing back ring-fencing it should mean that when banks conduct riskier investment activities if they fail they government will not have to pay back the deposits of consumers who they have insured (Crawford 2011) which could cost the government millions of pounds, Although bringing back in an act like this again it has been argued that a lot of the damage done in the 2008-2009 financial crisis was done purley by investment banks eh Lehamn brothers who owed 450 billion (wolf 2011) so it would not have made much difference to the magnitude of the financial crisis. Another reason is why this is not appropriate is that banks that commercial and investment banks work successfully and simultaneously in other parts of the world and lessons can be learnt about how to run them simultaneously (Jackson W 1987).
Basell 3 has also been implemented to help enable the reform of institutions. Basel 3 is to be introduced after it was believed basil 2 did not have though enough regulatory constraints (SINN 2011)....