International Regulation

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Finally I wanted to get to international regulation.

One of the most venerable international regulators,
I don't know if it's really a regulator.
It's like a banker's bank.
The Bank for International Settlements was set up in
1930 which was a central bank for central bankers.
At that time in 1930,
there was some tension,
international tension that led them to think
that central banks didn't want to deal directly with each other.
They wanted an intermediary so that they didn't have a public.
This became more important later when the Nazi government appeared in Germany and well,
even by 1930 with Mussolini in Italy.
They wanted to deal with them but they didn't want to deal with them directly.
So the BIS was set up and now it has 57 members
central banks who are international regulators.
It's located in Basel Switzerland which is a charming little town in
the mountains in Switzerland far away from any international intrigue.
Switzerland of course is a country that's been neutral since time immemorial,
so they tend to set up things like this in Switzerland.
Separate from that is something called the Basel Committee.
In 1974 was set up to coordinate banking regulation.
In 1988 they set up Basel 1
which was their first statement about proposed banking regulations for countries.
They didn't have any authority to impose these regulations but
they recommended them and most countries of the world took them on.
It was revised in 2004 as Basel II and it was revised again in 2009 after
the financial crisis with Basel III which was adopted by the G20 countries in 2010.
The G20 country, I'll come back to that. Here we are.
There are these different international organizations which have
no official regulatory power but they are meeting places where governments of
countries get together and discuss regulatory issues and they make
statements at the end of each meeting which often lead
to parallel regulatory changes across countries.
So the G8...
They started out as the G6 I guess and then they were the G7 and then the G8 and now
they are G7 again because they kicked Russia out, at least temporarily.
So these countries, they typically have two separate meetings,
one for the finance ministers and then one for the heads of state.
The meetings of the heads of state get the most attention.
Then there's the G20 which is more comprehensive.
Now it's 20 countries and I've got them listed here.
They haven't kicked Russia out of this one.
The G20 is less collegial. It's everybody.
It's really all the big countries in the world
and there is some tension among these countries.
If you look at the G7 countries,
they're all kind of,
I can't seem to go back.
They are all sort of Europe and Japan and U.S., and Canada.
You wouldn't expect big disagreements among these countries now but
the G20 is more- I've talked to people who've attended
both of them and claiming that the G20 is
more countries reading statements that were written by
their propaganda experts but they function well.
One thing they did is approve the Basel III agreements.
Their next meeting is in Hangzhou in China.
Financial Stability Board is another thing that was created by the G20.
Actually it was a reconstitution of something
earlier in Basel also called the Financial Stability Forum.
Financial Stability Board or FSB makes
proposals about financial regulations to
the G20 which often tend to be adopted in many countries.
So those are- We have
international financial regulatory organizations which in effect set policy but
we don't have international regulation
which is becoming a problem because we have more and more multinational firms.
Firms that operate across
national borders where you as an employee don't quite know what country you
live in because they might transfer you to another country any day
now and your corporate offices are in some other country.
I think this will grow and grow through time as the economy gets more developed.
So we'll need more and more international regulation but it's a theme.
I go back to- I assigned as a reading for this part of the course,
the introduction to my book with George Akerlof called "Phishing
for Phools" and again the basic thing that we want to get
across is that regulation has always been the secret to success of free markets.
That is, the markets have to be regulated within limits.
In the United States after the Great Depression before World War 2,
the reaction to the complaints about the financial community
by the Franklin Roosevelt administration was to,
let's make capitalism work by regulation.
The reaction in other countries wasn't quite the same
but I think it led to relative success of
the U.S. economy and there's SEC is now copied by other countries widely.
The general concepts of regulation.
So I think it is- To set up free markets,
unregulated free markets as an ideal is just being ignorant of history.
These markets have generally been regulated by
the state governments in the United States or
the federal government and in other countries.
They've never been left completely free.