The US must join Europe in revamping the rules of finance – for mutual prosperity.
If an ounce of optimism exists in the market meltdown, it is this: Europe and the US have agreed to make the world safe again for capitalism by rethinking global rules for the financial system. One thing is for sure: The old rules, largely set in 1944, are as good as a rusted-out speed-limit sign.
Too much of the new world of international finance, such as hedge funds, derivatives, and mortgage securities, now operates in the shadows. US credit-rating agencies badly underestimated the real risks of subprime mortgages. Big banks have become too big to fail. And most of all, when Wall Street crumbles, the rocks ricochet from Shanghai to Stockholm.
Reining in the excesses of this complex, 24/7 business won't be easy – even within each country. But hope for reform is strong after recent joint action by Europe and the US to prop up banks and grease money flows.
Round 1 in designing a new "architecture" for global finance starts Saturday when the current head of the European Union, French President Nicolas Sarkozy, meets with President Bush in Washington. He will bring with him a raft of reform ideas from the EU. "We need to found a new capitalism based on values that put finance at the service of companies and citizens and not the reverse," says Mr. Sarkozy.
Europe's finger, as might be expected, is already pointed at the US for this crisis, with the same finger wagging for more "discipline" in Wall Street. The EU's initial proposal is to set up a supervisor for the world's 30 largest financial institutions. Most of those, of course, are American.