The current economic crisis has called into question the adequacy of the global financial system, and only a complete re-think of financial rules and institutions will protect the markets from an eventual repeat, according to an expert.
Speaking at Toronto’s Design Exchange on Monday, former U.S. Treasury Secretary and chairman of Citigroup’s executive board Robert Rubin said the current volatile environment is the most complicated and consequential set of difficulties in the financial markets of the United States since the 1930s. “We’re going to need a re-conceptualization for a market-based financial system with private-sector institutions that are too interconnected systemically to be allowed to fail,” he said.
Rubin explained that while regulatory reform is obviously required, it must come in the right form to be effective. The goal, he said, should not be to eliminate systemic risk, but to find the right balance between reducing systemic risk and maintaining the benefits of a market-based economic system.
He suggested that higher capital requirements for products of financial engineering are required, as well as guidelines for off-balance sheet financing, and a move away from mark to market accounting, which he referred to as highly procyclical.
In his short-term prognosis for the U.S. economy, Rubin expects that conditions will continue to be difficult following a resolution of the crisis, at least into 2009, and he is confident in the government’s ability to lead the country away from the brink of a complete economic collapse. “I think public policy should be able to stem the immediate crisis in confidence that we’re now experiencing,” he said.
Rubin’s long-term perspective is that the global economy is undergoing the most significant transformation since the industrial revolution, characterized by mass transfers of wealth and the emergence of new economic powers such as India and China.
The main challenges to the U.S. economy are the multiple financial imbalances such as trade deficits and the national debt, according to Rubin. “We have fiscal deficits where we should have had surpluses and a diminished national savings rate,” he said. “The sooner we can deal with these, the less of an impact they will have.”
Just hours after the announcement that Citigroup would acquire the banking operations of Wachovia with assistance from the Federal Deposit Insurance Corporation, Rubin said there is enormous misunderstanding about U.S. Treasury Secretary Henry Paulson’s troubled asset relief plan with respect to the cost to the federal debt and deficits.
“If these assets are bought at a price that realistically reflects risk and long-term values, there should be no immediate cost to the taxpayer and no cost when it comes to ultimate realization,” he said. “Instead, you would have a purchase of assets on the one hand, offset by the issuance of debt on the other.”