Barney Frank, Chairman of the U.S. House of Representatives' Financial Services Committee, said at the Davos forum that financial institutions are inherently unable to self-regulate. To prevent a larger-scale financial meltdown in the UK or the United States in the future, he added, more stringent financial regulation and supervision are strongly needed.

President Nicolas Sarkozy of France, which has been an active member of the Group of Eight and the Group of 20 (G20), clearly expressed his support for Obama's financial "New Deal" at the opening of the forum.

The rules of the 20th century cannot apply to the management of the 21st century, Sarkozy said.

The weak supervision, associated with ceaseless, dogged quests for profits, has permitted excessive speculation. In the end, what followed was a global catastrophe.

In such desperate times, according to Sarkozy, it is unacceptable for large financial institutions to be receiving government assistance while doling out bonuses to senior management.

George Soros, on the other hand, struck a different note, saying it is still too early for governments to exert such tight regulatory measures. These policies, he noted, may well frighten banks into being more cautious in their lending practices—something that could well inflict heavy damage on the U.S. economy, which is still very much in its recovery stage.

Robert Diamond, President of the British financial services firm Barclays PLC, also expressed pronounced opposition to Obama's regulatory plans. Restrictive measures, he argued, cannot prevent another financial crisis, and that more regulations portend to adversely affect banks in London and New York.

Many bankers have long capitalized on the concerns of politicians about the economic recovery, as well as the competition from emerging markets, to minimize financial supervision. Forum participants, not surprisingly, had little good to say about those who have exploited such conventions to their own ends.

Indeed, according to electronic polling at the event, only 12 percent of participants expressed worries that a shadow of excessive regulation over the financial system could lead to another financial collapse.

This directly contrasts survey data recently released by the U.S. professional services firm PricewaterhouseCoopers on January 26, which indicated that 60 percent of bankers strongly fear increased government regulations.

International bankers should be reminded of the numerous missed opportunities to avert the current global crisis. After a serious financial crisis rippled from Asia to Russia and Brazil from 1997 to 1999, European regulators and their Japanese counterparts rightly called for more stringent supervision of capital flows, while China and other developing nations proposed the establishment of a "new international financial order."

Regrettably, these far-sighted proposals were cast aside by Washington. In fact, so pronounced was the sway of Wall Street lobbyists, that the U.S. Government actually exerted more efforts toward refusing to accommodate these requirements than simply ignoring them altogether.

Similar political struggles will continue, of course. But it is imperative that a new consensus on financial supervision should be reached between the government, the financial sector and the general public. Such an agreement will allow for a more sustainable growth for the global economy well into the future.

Banks and other financial institutions also have an obligation to understand that a tighter, more properly designed supervision system is in their own long-term interest.

Global coordination

Recently, international economic institutions have inflated their forecasts for the global economy this year. For example, in its 2010 economic forecast, the International Monetary Fund (IMF) raised its estimation of global economic growth this year to 3.9 percent from 3.1 percent.

Moreover, different forecasts have predicted that developing countries will likely become locomotives of the global economic recovery.

Not surprisingly, the UN has predicted that China and India will produce the fastest economic growth—at 8.8 percent and 6.5 percent, respectively. On the other hand, growth for most developed countries, according to UN statistics, will be generally modest and unstable.

This trend is underscored by data that predicts the U.S. economy will increase by a mere 2.1 percent, while the EU and Japan are expected to witness growth of only 0.6 percent and 0.9 percent, respectively.

On the eve of its opening session, the Davos forum released its global risk report for 2010. The report warns that all nations remain vigilant against the possibility of a second wave of financial crisis.

It is clear that were there a second global recession, the vast majority of optimism surrounding economic growth would cease. Given the seriousness—and possibility—of such a scenario, Davos forum participants called for greater international cooperation.

For instance, Jaime Caruana, General Manager of the Bank for International Settlements (BIS), called for more balanced macroeconomic policies and increased private sector involvement.

More importantly, he argued, coordination between the Financial Stability Board, the G20, the BIS and other international financial agencies must be strengthened.

Justin Lin, chief economist at the World Bank, noted that one of the biggest challenges the world community faces is how to conduct a transformation from a stimulus-based recovery to market-oriented growth, while reducing unemployment. IMF delegates also warned rescue plans should not be abandoned prematurely.

To enhance international coordination, we need platforms like the Davos forum with which to forge a consensus among nations. Moreover, we should try to make these international mechanisms more practical and effective.

Judging by the current situation, the G20 can clearly be a practical choice.

Today's challenge is to fortify the G20 mechanism, while reaching a compromise between its developing members and industrialized members. Also, cooperation mechanisms must be developed along with a universal financial regulatory framework.

Undoubtedly, leaders of industrial nations with formerly advantageous positions under the old world order—especially the United States—must now stand up to domestic pressure to oppose damaging policies like trade protectionism. At the same time, these nations must embrace a new economic order. Only in this way, will we be able to see the formation of a just and sustainable global economy.

The author is a professor with the School of International Studies at Peking University and Director of its Center for International Political Economy