Markets - not politicians - have the answer to this crisis

One of the first debates in Davos, The New Boundaries of Financial Governance, looked at how the financial crisis has exposed a systemic failure of risk management and assessment and questioned the role of watchdog agencies.

It concluded that there is a need for a set of global rules and better co-ordination among more powerful regulatory agencies.

While I support global reporting and auditing standards and, in principle, would like to see a level playing field for other market regulation, I am not convinced that any global regulator or grouping of national regulators can keep up with the smart guys who will look for and find ways around the rules. And we have to accept there will always be jurisdictions which want to get competitive advantage and attract business by having looser regimes, either overtly or covertly.

More important is to encourage principles-based regulatory environments in the developed economies with effective criminal and civil sanctions for transgressors. National regulators should co-operate to prevent non-compliant businesses playing one jurisdiction off against another through special purpose vehicles, off-shoring, transfer-pricing abuse and the like and to help identify and stamp out criminal activity.

Co-operation amongst national regulators should also encourage exchange of information on good practice, results of regulatory research and development and intelligence on developing business issues.

Politicians are notoriously inept at providing sustainable and effective control mechanisms for markets. That's why, despite their massive shortcomings, the solution to the current problems lies in the markets themselves. 

Boards, managements, auditors, investors, credit rating agencies, the media and, yes, regulators have together the skills and motives to provide an effective control environment for business in which checks and balances and challenges expose and deal quickly with unacceptable extremes of behaviour. Each stakeholder has a part to play and recent experiences are probably the best stimulus for these groups to examine their consciences and performance and sharpen up their acts.

Heavy-handed legislation and intervention by governments and their agencies risks prolonging the agony and costing the taxpayer dear.

Comments

[Tyler]

I think the idea that the media has a responsibility to help the market is a very interesting point. The media traditionally views itself as a protector of the public, but has not in this situation.

[Tara]

I agree that all relevant bodies - in addition to political institutions - must open themselves up to one another in order to crawl out of the current economic situation. Globalisation is the inevitable future, so why not embrace it and make it work for us in a positive way?