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Reluctant Regulators

Reluctant Regulators: How the West Created and How China Survived the Global Financial Crisis

Leo F. Goodstadt
Copyright Date: 2011
Pages: 224
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  • Book Info
    Reluctant Regulators
    Book Description:

    The 2007-09 financial crisis was predictable and avoidable but American and British regulators chose not to intervene. They failed to enforece legislation or implement their own policies because of an Anglo-American 'regulatory culture' of non-intervention that came to dominate financial regulation worldwide. Hong Kong - the international financial centre of an increasingly prosperous China - defied world opinion and made stability its priority, even where that meant extensive government intervention. This policy ensured Hong Kong's robust performance intvention. This policy ensured Hong Kong's robust performance during the 1997-8 Asian financial crisis and the global crisis. More significantly, it made possible Hong Kong's impressive contributions to financing China's economic take-off and to the modernisation of its financial institutions. Reluctant Regulators is a scathing indictment of regulatory inertia in the West. It provides important and original insights into the causes of financial crises and pays special attention to China's attempts at reform and Hong Kong's place in China's financial modernisation. The book will be of interest to professionals in financial services, to policy-maker, and to scholars and students in economics, political science and economic history.

    eISBN: 978-988-8053-58-2
    Subjects: Finance

Table of Contents

  1. Front Matter
    (pp. i-iv)
  2. Table of Contents
    (pp. v-vi)
  3. Preface
    (pp. vii-x)
  4. Acknowledgements
    (pp. xi-xii)
  5. Introduction Reluctant Regulators
    (pp. 1-18)

    The crisis that overtook the world’s financial markets in 2007 was a disaster that ought not to have occurred. Never had the defences against worldwide financial instability and global recession seemed so strong. The world economy was enjoying both rapid economic expansion and a general freedom from inflation. This achievement had reinforced the consensus among advanced and emerging economies that markets were more efficient than governments in fostering sustained and stable growth and in ensuring a better deal for consumers in terms not only of prices but of quality and choice as well. As an additional reassurance, the world’s central...

  6. 1 Global Crisis: Why Regulators Trust Financial Markets
    (pp. 19-34)

    The financial crisis that struck in 2007 was not the result of a downturn in either national business cycles or the international economy. The defaults in the United States sub-prime mortgage market that triggered the crisis were a shock that ‘was by global financial standards rather modest’, and it followed a decade of ‘seeming robustness’.¹ According to Hector Sants, a senior British regulator, its causes could be attributed almost entirely to:

    a series of gaps with regard to the oversight of financial institutions … a flawed set of prudential rules particularly for capital and liquidity … [and] a series of...

  7. 2 Fatal Decisions: Washington and London’s Deliberate Mistakes
    (pp. 35-54)

    The most serious accusation against the officials who presided over monetary affairs but failed to prevent the global crash is that they repeatedly ignored evidence of impending disaster.

    The financial crisis … [was] rooted in the refusal of regulators, lawmakers and executive-branch officials to heed warnings about risks in the system and to use their powers to head them off. It is the result of antiregulatory bias and deregulatory zeal — ascendant over the last three decades, but especially prevalent in the last 10 years — that eclipsed not only rules and regulations, but the very will to regulate.¹

    Under indictment here...

  8. 3 China: Reforms vs Regulation
    (pp. 55-76)

    China was not supposed to fall victim to the international financial crisis. On the contrary, there was a widespread expectation that ‘it would be an indispensable partner — just conceivably a leader — in hauling the world out of trouble’.¹ Although the Chinese government generally discouraged suggestions that the nation could expect to emerge completely unscathed, Prime Minister Wen Jiabao declared himself confident that the financial sector would not be seriously affected because ‘after more than 10 years of reform, [it] is relatively stable and healthy and capable of withstanding the crisis’.² The biggest boost to confidence was the government’s announcement in...

  9. 4 China’s Painful Decisions: Politics in Command
    (pp. 77-94)

    The global financial crisis began with misguided decisions in Washington and London that had catastrophic consequences worldwide. The policy makers stand accused of failing disastrously to recognise there were limits to the virtues of lightly regulated markets and to the efficacy of moral hazard. China’s experience of financial modernisation, by contrast, represents the case for the defence in assessing the merits of the intellectual consensus which shaped the Anglo-American regulatory culture. The persistence of state interference with banking business, a disregard for moral hazard and the continued constraints on both domestic and foreign competition imposed serious burdens on China’s financial...

  10. 5 Hong Kong: From Scandals to Stability
    (pp. 95-114)

    As a remote and indefensible British colony perched on the edge of China which did not recognise London’s right to rule, Hong Kong was a political anachronism whose survival was always at risk. Its economic strategy was also a relic from the 19th century: free trade and no import or currency restrictions; low taxes and small government; negligible state borrowing and regular budget surpluses; minimal interference with market forces and no state planning; no development subsidies and no investment incentives. The city, nevertheless, boasts an exceptional record of economic success against even more extraordinary odds.

    World War II had left...

  11. Conclusions Resisting Reforms
    (pp. 115-128)

    The international financial crisis of 2007–09 was arguably the worst ‘in the two hundred year history of the modern capitalist system’.¹ A truly global phenomenon, it ‘unfolded in an environment where financial institutions and other investors were excessively optimistic about asset prices and risk’, the IMF has reported. ‘Overall banking system leverage’ was most alarming in the United Kingdom, the United States, Germany and Switzerland, but similar trends were observable in China (and India and Brazil as well), though to a much lesser degree.² The consequences for the real economy were dire: ‘Banking contributed to a Great Recession on a...

  12. Notes
    (pp. 129-176)
  13. Bibliography
    (pp. 177-202)
  14. Index
    (pp. 203-205)