Reforming Global Financial Governance

It has been quite a four years. We have lived through collapsing financial markets, the deepest recession since the Great Depression, and now this tepid recovery and euro zone crisis.

We live in a time when economic questions have shifted from the periphery to the center of the national and global public dialogue and debate. Who would have thought that a financial crisis would bring young people out into the streets — in Athens, in New York, in London — in a way that, in the United States at least, two Gulf Wars and a decade in Afghanistan did not?

Questions that academics in the fields of international and financial economics deal with every day are now front and center at the dinner table and on the streets.

These are important questions, such as:

 What is the balance between the short-term need to stimulate economic growth and the long-term burden of high debt levels?

 How do we set tax policy so that the government can function without beggaring the future, while being fair to those who have gained financial success?

 What does growing income inequality mean for this country and its European partners, societies defined by now shrinking middle classes?

To find constructive answers to the kinds of questions society is now struggling with, we need to develop a perspective on analyzing the way the financial system operates.

Seemingly arcane and highly technical issues — such as the extent to which the financial system is regulated, transparent and accountable — have a direct impact on economic and political stability, on our ability to create fair and equitable societies, and on people’s lives around the globe.

Simply put, without a sound financial system in place, credit, loans, investment and jobs are harder to come by. Without a sound financial system, income and wealth disparities grow.

Indeed, as experience in the United States and in much of the euro zone has shown us, the impact of ill-conceived economic policy is most devastating to poor and low-income families. That is why sound financial governance and oversight is the linchpin of economic and social stability worldwide.

To get there, our global financial institutions need to be more transparent, more accountable and more effective in delivering financial stability. And they need to be responsive to the communities affected by their decisions.

To achieve these goals, we must rethink the global financial regulatory regime and expand the voices engaged in that global dialogue.

These are fragile times. The United States is wrestling with the twin burdens of modest economic growth and deficits unsustainable over the long term. In Europe, countries — including some that were considered fiscally prudent entering the economic crisis — teeter at the edge of bankruptcy. India and China are seeing slowing growth.

We are also in a unique time when it comes to rethinking global economic governance. We must seize this opportunity to rethink decades of policies which have weakened oversight and, as we all know, have not served even financial institutions well.

The task ahead is to rethink and restructure regulatory regimes in a way that puts financial institutions at the heart of economic development once again, that reflects our democratic values and enables us to build a better economic future for all.

Editor’s note: This article was adapted from the author’s opening remarks at the 21st Annual Hyman P. Minsky Conference in New York City, on April 11, 2012. The conference was organized by the Levy Economics Institute of Bard College with support from the Ford Foundation.