September 26, 2009
Much effort is still required to build a stable international financial system despite signs of economic recovery around the world, a U.S. scholar says.
Global coordination is critical in reforming the current financial system, said Andrew Ang, a professor of finance and economics at Columbia University, in a recent interview ahead of the G20 summit in Pittsburgh.
"The reform needs to be coordinated worldwide, it would be no use if you shut down or prohibit something in one market, because it will spread up somewhere else," Ang said.
Since the financial crisis erupted last year, some countries have called for a new global reserve system to replace the U.S. dollar as the world reserve currency, saying the use of dollar reserves was contributing to the weakness of the global economy.
Ang agreed that the global reserve system needs to be updated, but insisted the U.S. dollar may still dominate the global reserve system for many years.
"Fundamentally, no one asks the U.S. dollar to be a reserve currency, the dollar has value today because investors gave it value," the professor said. "Meanwhile, there is no other option so far to replace the dollar."
"I think what is going to come out of this financial crisis is the role of developing countries, particularly China. China has a little role a few years ago, but will play a bigger role in the future. But the shift from the dollar to other currencies still needs a long time," he added.
Earlier this month, EU leaders issued a joint plea to U.S. President Barack Obama to back their call for rich and developing nations to cap bankers' pay. They said all 27 EU nations are in "total unity" that the world cannot repeat the "scandal" of bonuses for executives and traders that encouraged banks to take huge risks.
The idea is good but it could not solve the problem, said Ang. "I am sure those people (bankers) could say, if you don't get paid in cash, you get paid in perks, if you don't get paid in options, you will get paid somewhere else. So these things are very hard to solve."
Ang also expressed concern that government bailouts during the crisis could lead to moral hazard.
The U.S. government allowed the Lehman Brothers investment bank to close, but bailed out other banks that made similarly bad real-estate deals and engaged in the same legal, yet risky, business practices of derivatives and subprime mortgages.
"If you're a Wall Street player and you know someone will rescue you, you'll just keep doing what you're doing," said Ang.
Ang also suggested that developing countries continue opening up capital markets even after the global financial crisis.
"Building up temporary firewalls is only temporary, and usually they come back and bite you. You prevent something right now, it will become even worse in a few months down the road," said the professor.
"The most effective thing one can do is to try not to put restrictions on the capital flows, but to encourage robust institutions with great transparency, good regulations, good legal systems and structures, and in the long run that matters," added the professor.
"Capital flows can turn within a minute, so one has to be prepared for that," he said. "Volatility is a part of life, and more open your economy is, there is good and bad things about that, one of the things is you expose to many more global influences than closed economies."