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ECONOMISTS have urged the government to tighten the
local financial system by introducing “sound” regulatory
architectures. Just last week the Securities and
Exchange Commission of the US conceded oversight flaws
that fueled the collapse of some major banks.
“Unregulated financial markets do not guarantee
long-term benefits to the economy,” said Ateneo Center
for Economic Research and Development deputy director
Edsel Beja Jr. in a forum over the weekend.
Transparency has been insufficient because of market
myopia, according to former socioeconomic planning
secretary Cayetano Paderanga Jr. “There’s not enough
policy overseer in the financial markets.”
The
country, said Beja, has taken for granted reliable
structures to produce functional markets. This is the
primary problem of the capitalist economy, he said: The
economic base is ignored.
During
the period of deregulation and liberalization in the US,
transactions in most of the derivatives and complex
financial instruments were relaxed. Most of these are
off-balance sheet transactions. And, Beja noted, it is
not easy to know their magnitudes.
He said
advances in technology are significant in the expansion
and the sophistication of financial instruments.
“Therefore, the US financial markets became bigger and
more powerful than before.”
“Banks
can issue loans as before. But now, they can have others
or, if they are big enough, they can package the loans
into complicated and sophisticated securities, which are
called mortgage-backed securities or collateralized
obligations,” he said.
The main
problem with the new setup, said Beja, is that the
issuer of the loans is no longer the holder of the
loans.
“There
is an incentive problem: There is no [longer a] strong
incentive to make a good loan. Since there are no
regulations, monitors or checks, these transactions
continued and accelerated and—we now know—went out of
hand,” said Beja.
He said:
“The perverse incentive was to create more securities,
sell them off in the capital markets, get bigger fees
and fat bonuses and then redo the process again. Why
should brokers and underwriters care about defaults when
they already got their big fees and fat bonuses?”
The
Philippines will be hit as the US financial mess
proceeds—although to what extent we are not sure, said
Beja.
“The
Philippines and the US have the same financial models.
We reflect the pathologies and illnesses of the US,”
said former Asian Institute of Management president
Sixto Roxas.
“And,
there will be costs,” said Beja. In his study on the
impact of the 1997 Asian crisis, he estimated that the
Philippines incurred a cost of $51 per capita (2000
prices).
He
admitted that the Philippines has not recovered that
amount today. The figure in 2007 was $53 per capita. The
other Asian economies hit by the Asian crisis have not
recovered their losses, as well.
“The
fallout of a US financial collapse can be quite large
not only to the US economy but to the global economy.
And the costs will linger,” he reiterated.
Asked if
there are alternatives to a bailout, he said: “Maybe
not. American International Group Inc., Fannie Mae,
Freddie Mac and others to come may have to be bailed out
because the alternative scenario of a US financial
collapse might be even worse in terms of its impact on
the US economy and the global economy, on peoples and on
security.”
“But US
authorities must learn from this experience: That
unregulated financial markets are problematic and are
not sustainable. That in this financial casino, the
brokers and underwriters and the financial companies
made a lot of money, and they benefit from bailout. That
people who put their money in pensions cannot look
forward to a secure retirement,” he said. |
