Improve financial supervision

The financial market regulator should abandon its laissez-faire philosophy and beef up supervision over the sector.

The regulator must cap the leverage ratios of financial institutions and put capital restraints on all financial services except for pure broking and settlement services. High leverage ratios have been to blame in many a financial crisis. When the excess supply of money creates a bubble, the market can turn drastically downward once the market reverses and investors' confidence is affected.

Regulators must also reinforce supervision of OTC transactions because of the information asymmetry between seller and buyer. This asymmetry gives rise to moral hazard on sellers in a market where buyers rely heavily on sellers in trading non-standard and even tailored products privately. Another risk is that the regulator has no access to accurate data on banks' OTC investments. Banks give limited disclosure on OTC transactions because they are not required to do so, though they invest largely with public deposits.

Another thing the international community has reached consensus on is demanding hedge fund transparency. Many countries now require increased public disclosure of large hedge funds' assets, investors and trading strategies to help prevent market catastrophes and investment fraud.

Multi-polar future

The U.S. dollar became the dominant global currency under the Bretton Woods Agreements in 1944, but the United States adjusts its monetary policies only to serve its national interests. When the country adopts expansive monetary policies in an economic recession like the ongoing one, other countries have to shoulder the losses and risks that U.S. dollar depreciation entails.

Efforts should be made to reinforce supervision of the macro-economy of countries that issue major reserve currencies and limit these countries' fiscal deficit-to-GDP ratios and current account deficit-to-GDP ratios. Another option is a multi-polar international monetary system, which could weaken the U.S. dollar's dominance. The sovereign currency of a large country, backed by consistent and unified monetary and fiscal policies, will be the most qualified reserve currency candidate. China's endeavor to make the renminbi a reserve currency in the future will help speed up financial reform and build a sophisticated financial market in China.

The International Monetary Fund (IMF) should play its due role and strengthen monitoring of the stability of different economies. It should work out unified supervision standards on financial derivatives for all countries to abide by with a focus on major economies and multinational banks, coordinate information sharing, trace and predict factors that could have a large influence on the world economy, and enhance coordination among countries in risk management. The IMF should also enhance the participation and voice of emerging markets in working out the new rules for the world.