The New Financial World Order

[Cees Binkhorst]

REPLY TO: D66 at nic.surfnet.nl

http://blogs.wsj.com/economics/2009/01/15/the-new-financial-world-order/

 January 15, 2009, 3:59 pm
The New Financial World Order

The financial crisis will push banks back to basics — such as maintaining
healthy balance sheets — and could slow the pace of globalization, as
governments re-erect national barriers in an effort to shield their
economies from weakness in other parts of the globe.

Those are two conclusions of a report released Thursday by the World
Economic Forum, which sponsors the annual gathering of the world’s
economic elite in Davos, Switzerland. This year’s confab runs from Jan. 28
- Feb. 1.

http://www.weforum.org/pdf/scenarios/TheFutureoftheGlobalFinancialSystem.pdf

In a new, post-crisis world, the report says, governments need to clarify
which financial institutions are so important to the globe’s financial
system that they cannot be allowed to fail. Spelling out which banks are
guaranteed government help “will effectively split the financial community
into two distinct sets: financial utilities and financial risk-takers.”

Highly-regulated firms with government guarantees will, among other
things, have to hold more cash against losses and ensure they have enough
short-term funds on hand to stay afloat if markets freeze up. Firms that
don’t reach the “too-big-to-fail” bar, the report says, will face fewer
regulations - but only if they stay small.

The report paints surviving the current turmoil as banks’ most pressing
task. Globally, it says, bank write-downs as of Dec. 15 last year totaled
$993 billion, outstripping the amount of capital raised, which hit $918
billion.

Weaker banks are likely to be swallowed by stronger competitors, who
refocus on basics including developing asset-management businesses and
maintaining cash-rich balance sheets. Firms that manage family assets and
sovereign-wealth funds, because of their deeper pockets and longer-term
perspectives, are also likely to oust hedge funds and private-equity firms
as alternative investment vehicles of choice.

The 86-page report also spins four different scenarios about how the world
may look in 2020, depending on the decisions global leaders make now.
Policymakers, it suggests, should coordinate their efforts to craft a the
rules of the new financial order and acknowledge emerging-markets’
increasing importance.

Policymakers who fail to heed those lessons, according to one scenario,
risk starting downward spiral of nationalism, in which protectionism and
currency controls re-fragment the globe, causing global growth to stagnate
around 2.3% a year as international trade withers.

“We hope the report will be a tool for private-sector and government
leaders to think strategically about their choices,” said Kevin Steinberg,
chief operating officer of the World Economic Forum USA. “So that when
they’re crafting, for instance, stimulus packages, they’ll do so mindful
of the possibilities and think about their actions as ones that could turn
the future toward one possibility or another.” –Joellen Perry

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