Wednesday, January 04, 2006

Another International Regulatory Body?

George Soros, international funds financier, has a plan to stabilise the flow of funds, something he was pretty good a profiting from in the past.

According to Simon Tay, chairman of the Singapore Institute of International Affairs, Mr Soros’s ‘thinking favours mechanisms for introducing stability to mitigate the free flow of funds’ and that ‘global markets require international institutions capable of sustaining them’. To achieve this objective, Mr Soros recommends ‘reform of economic institutions such as the WTO and IMF.

Without details I cannot comment on practicality of these suggestions, though the idea of putting the WTO and the IMF in charge of global fund flows does not generate immediate confidence in its practical value, or, if by ‘reform’ he means to remove and replace them with something better. Yet another international body?

By way of clearing the ground for a visit by Mr Soros to the Singapore Exchange next Monday (is this piece a bit of pre-visit publicity for the tv channel newsasia?), Simon Tay writes:

Controversial financier and thinker George Soros coined the term "market fundamentalism" to criticise the assumption that an unfettered Adam Smith's hand rules global capitalism for the better.”

At least Simon Tay spares us a description of Adam Smith’s hand as invisible. Smith did not favour ‘unfettered’ players in markets – he favoured ensuring their competitiveness, an altogether different notion. Unfettered players tend to form monopolies, to rig markets, to raise prices by restricting supplies, and to act against the public interest. It is when governments and international institutions adopt policies that enable such monopolist players to take advantage of privileges they are awarded or from opportunities created by institutional interventions in markets (exchange rates), that powerful players extract their profits.

What the lowliest dim-witted official gains from petty payments for exercising discretion in small matters (permissions, licences, speedier attention to processing forms, use of an official seal or stamp, etc.,) the smarter, wide-awake, big players gain from detecting gaps and weaknesses in the regulations or ‘rules of the game’ and playing quite legally for mega stakes.

In some Asian countries the wide-awake big players are aligned by cronyism and family ties to governments to gain from speculation in property funded by pyramids of debt finance and tax breaks. In others, governments over-reach themselves in defending their exchange rates despite what the evidence from markets show about the quality of their decisions. That another international regulatory body is supposed to deal with these problems may be a triumph of hope over experience.

Would governments – all 180 of them – surrender sovereignty to such a boy without the right of veto? And if they had the right of veto would it do any better that the WTO? If the IMF only has power if the debtor country chooses (by past actions) to be beholden to it – and if it has no debts it is free to do whatever it likes – would this work in the flow of global funds?

Given we do not have a mythical Adam Smith unfettered ‘market fundamentalism’ – and never have had such a regime – it is difficult to see how this is the problem that needs the Soros solution.

Read Simon Tay's article at: MediaCorpNews,


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