The U.S. and Latin America: A Need for Financial Reform
Against all odds, President Barack Obama, the Democratic majority and three daring Republicans have finally reached an agreement on financial reform that, according to the majority of experts, should predict, or at least alleviate, the most damaging effects of the next crisis. The $600 million Wall Street investors spent in their lobbying efforts had little practical usage.
It is certain that the financial reform has omissions and defects, but it also has its clear strengths. For example, it arranges for the establishment of an office for consumer protection, dedicated to preventing abuses in loans and with credit cards. It prescribes that in the case of bankruptcy of a company “too big to be rescued,” investors and shareholders would be the ones to cover the losses, not the taxpayers. The reform also establishes higher levels of capitalization for the banks, as well as rules to dissuade speculators and institutes new regulations for financial operations for the so-called “derivatives.”
The most complicated part, however, is yet to come, for the law confers the task of drafting hundreds of financial rules on ten regulatory agencies whose purpose is to regulate the complex national financial system. Along the way, the work of other departments in charge of monitoring practices and formulating reports denouncing what is not working — and proposing amends — will have to be coordinated. Likewise, these departments will have to reach an agreement with the work of the Financial Surveillance Committee to prevent dangers and future “bubbles.”
But there is, in addition, another element in this financial reform that is absolutely crucial: agreeing on the coordination and harmonization of the regulations of banking and financial institutions worldwide.
“Ideally,” Douglas Elliott, investigator for the Brookings Institution tells me, “the coordination ought to be worldwide even though the most important thing is that there is coordination between the most important financial centers in the world.” And if this should happen, I asked him, how important is it for the United States to coordinate with the countries in Latin America?
“There are parts of the reform that do not require coordination; for example, those in regard to consumer protection. But there are others like the requirements for liquidity and the capital of financial entities that should be synchronized. This would benefit everyone, as an enormous portion of the financial sector is truly global and everyone winds up indirectly affected by global competition in the end.”
And how would Latin American countries benefit if they were to harmonize their rules with those of the American financial reform?
“We would all be more confident,” responds Elliott. “We don’t know what the next financial crisis will look like, but it could very well explode in the areas in which Latin American countries are most vulnerable.”
“And it’s not only that,” explains Guatemalan economist Isaac Cohen to me, a long-standing member of ECLAC (Economic Commission for Latin America and the Caribbean). “We need to consider two important factors. The first is that the United States sunk the world in crisis and it now has an obligation to set the path out of it. The second is that it is the American economy’s own gravitation in the world which obligates it to assume leadership.”
Even though no Latin American country plays a principal role in the premier level of global finances, the benefit of coordination and harmonization with the rest of the world is obvious — above all, to attract more high quality investment to their countries. “Panama, for example,” Cohen explains to me, “is an important financial center in Latin America for the hard work it has done coordinating with the U.S. Department of The Treasury to prevent money laundering. If you want to play on the global field, you have to follow the same rules.”
Those who do not want to play on this field, he added, will have to remain on the bench, for in the financial world of tomorrow, there no longer is any other game.
It is certain that the financial reform has omissions and defects, but it also has its clear strengths. For example, it arranges for the establishment of an office for consumer protection, dedicated to preventing abuses in loans and with credit cards. It prescribes that in the case of bankruptcy of a company “too big to be rescued,” investors and shareholders would be the ones to cover the losses, not the taxpayers. The reform also establishes higher levels of capitalization for the banks, as well as rules to dissuade speculators and institutes new regulations for financial operations for the so-called “derivatives.”
The most complicated part, however, is yet to come, for the law confers the task of drafting hundreds of financial rules on ten regulatory agencies whose purpose is to regulate the complex national financial system. Along the way, the work of other departments in charge of monitoring practices and formulating reports denouncing what is not working — and proposing amends — will have to be coordinated. Likewise, these departments will have to reach an agreement with the work of the Financial Surveillance Committee to prevent dangers and future “bubbles.”
But there is, in addition, another element in this financial reform that is absolutely crucial: agreeing on the coordination and harmonization of the regulations of banking and financial institutions worldwide.
“Ideally,” Douglas Elliott, investigator for the Brookings Institution tells me, “the coordination ought to be worldwide even though the most important thing is that there is coordination between the most important financial centers in the world.” And if this should happen, I asked him, how important is it for the United States to coordinate with the countries in Latin America?
“There are parts of the reform that do not require coordination; for example, those in regard to consumer protection. But there are others like the requirements for liquidity and the capital of financial entities that should be synchronized. This would benefit everyone, as an enormous portion of the financial sector is truly global and everyone winds up indirectly affected by global competition in the end.”
And how would Latin American countries benefit if they were to harmonize their rules with those of the American financial reform?
“We would all be more confident,” responds Elliott. “We don’t know what the next financial crisis will look like, but it could very well explode in the areas in which Latin American countries are most vulnerable.”
“And it’s not only that,” explains Guatemalan economist Isaac Cohen to me, a long-standing member of ECLAC (Economic Commission for Latin America and the Caribbean). “We need to consider two important factors. The first is that the United States sunk the world in crisis and it now has an obligation to set the path out of it. The second is that it is the American economy’s own gravitation in the world which obligates it to assume leadership.”
Even though no Latin American country plays a principal role in the premier level of global finances, the benefit of coordination and harmonization with the rest of the world is obvious — above all, to attract more high quality investment to their countries. “Panama, for example,” Cohen explains to me, “is an important financial center in Latin America for the hard work it has done coordinating with the U.S. Department of The Treasury to prevent money laundering. If you want to play on the global field, you have to follow the same rules.”
Those who do not want to play on this field, he added, will have to remain on the bench, for in the financial world of tomorrow, there no longer is any other game.