GLOBAL REGULATORY DIVERGENCE.
Jim Mann's fine piece from the February American Prospect, "America's China Fantasy," warned of the wrong sort of convergence -- of capitalism and despotism. On the other hand, we are also seeing global regulatory divergence. This is rather dangerous, as the current financial meltdown demonstrates, because it is just too easy for corporations and investors to do end runs around the nation with adequate regulations -- and too hard for the regulatory fraternity to act in concert during a crisis. The bank regulators have been attempting, to no avail, to create common worldwide capital standards. Meanwhile, national regulators have rather different strategies of what to do in the current crisis, which frustrates necessary central bank coordination. These differences also pervade national financial cultures. For instance, the other day Josef Ackerman, the CEO of Deutsche Bank, Germany's largest, told the Financial Times that he thought it was "crucial" that bank assets -- loans to hedge finds, sub-prime mortgage companies, and the like -- be "marked to market" -- in other words reduced in the value carried on the banks' balance sheets to reflect the current worsened market conditions. But the Federal Reserve, on several occasions, has done just the opposite. Every time banks face a credit crunch -- as in their huge losses on third-world lending in the 1980s and the Fed's rescue of Citibank in 1990 -- the Fed desists from marking down dubious bank assets for fear of deepening the crisis. The time to fix the roof, as it were, is when it's not raining. Ackerman is right to call for much tighter regulatory standards, but this is not exactly the most propitious time to accelerate the credit crunch. However, the divergence in European and U.S. views on how tightly to regulate financial speculation is one more paradox of globalization. Britain, home to Europe's hedge fund industry, also runs a much tighter ship when it comes to regulation. Britain's Financial Services Authority requires disclosures of large hedge funds not required by our SEC. The E.U. has tougher anti-trust standards, too. There was a time when American industry and finance just assumed the world's rules of capitalism would simply be made over in the U.S. image, because of the overarching strength of our economy. Today that fantasy is about as sound as a dollar. (Click here to read the rest of my commentary for the day.) --Robert Kuttner
