Regulation, Taxation, or True Effective Enforcement?

    Regulation's efficacy and methods are not a mystery buried in some ancient tomb. It consists of little more than channeling people’s most utilitarian behaviors. Regulators can basically choose to punish, award, or charge the actors in the marketplace to reach their regulatory objectives. Rather than regulate under the assumption that every market actor will try to please the regulators by behaving obediently and with a conscience, most people choose to believe punishment and proper enforcement are more expedient.

    While I am not attempting sanctimonious irony here, human beings know what the right things are to do rather than actually doing the right things. We know enforcement mechanisms are the foundation to an effective regulatory agency, we just can’t stop promulgating lengthy rules while at the same time collectively ignoring how to make sure those rules are adhered to. And such problems are even more serious in the financial regulatory perimeter. More complicated, lengthy, and annoying regulations usually mean we are now facing a “regulatory malfunction” problem. The Dodd-Frank Act itself is at least a voluminous 800 pages (the pages vary in quantity depending on what version you choose), let alone the pages of rules that all the financial regulators in the United Stated are required to propose under this Wall Street Financial Reform Bill.

The Moral Solution to the Floating Cloud-- Restoring Trust, Honesty and Prudence in Contemporary Financial Regulation

    Financial scandals, or to put it precisely and more definitionally exact, financial crimes, are fraught in today’s global financial market. Although the line between fraud and excessive risk-taking behaviors is somehow blurred in the financial fraternity, these kinds of misconducts are transparent to the rest of the world outside of the fraternity. Are you comfortable with the recent Swiss bank trader scandal, where a rouge trader in London in the UPS AG’s investment banking division incurred $2 billion of losses that basically lead the firm’s third-quarter financial statement into the red? Or do you think it’s just for Goldman Sachs, the largest and arguably most experienced investment bank in the world, to create an CDO (known as Hudson Mezzanine funding 2006-1) in which the bank cherry-picked all the assets portfolios then sold it to investors, while at the same time making a whopping $1.35 billion profit by betting against the CDO? Simply put, performing a rouse, making money while duping their trusting, unsuspecting, clients.

    All these recent happenings above lead us to a core question: Do we still have trust, honesty, and prudence in our financial market, and if the answer is nay, how do we restore or redeem those virtues and values into our financial regulatory reform? Other than traditional prudential regulation, the global regulators pay more attention to an area in which the ethical practices have been ignored for a long time, that is, the “Market Conduct Regulation”.

Regulating the Shadow Banking System

    The core mission of Bank Regulation is, in my point of view, to mitigate the systemic risk to the extent that everyone in the world can afford the cost of another financial crisis. Maybe a bit pessimistic, however I do subscribe to the belief that we cannot stop the current financial crisis from happening. What the regulators and all the market participants can do basically is to mitigate the scale of them and foresee them as early as possible. This is no time for myopia. Clarity of vision is essential.

    The recent global financial reform efforts that were proposed by the G20 Financial Stability Board, the U.S.A Dodd-Frank Act, and the UK Independent Commission on Banking, all reveal a clear and common tendency: to regulate those financial conglomerates that operate both in the traditional banking paradigm and via non-traditional banking activities.

Too big to fail, systemic risk and the Dodd-Frank Act

Systemic risk will easily widespread in a system where the financial industry is highly complex, interconnected and governed by several Large and Complex financial institutions (LCFIs). The cost of rescuing giant banks may be too great for the taxpayers’ purse, and the awareness of their systemic importance may encourage them to take greater risks, which is essentially the moral hazard problem.

Democratic Peace and Liberal Peace

There are two kinds of liberal peace theory if we are to talk about democratic peace. The first concerns with how regime type may affect peace; the other discusses how liberal trade may affect the prospect of peace. I would like to introduce almost all aspect of democratic peace theory in this article.

Democratic peace is not an invention. It is a discovery. Perhaps the most important discovery in contemporary history. The liberal peace theory is always there in the thoughts of Kant, Rousseau, and Wilson. The main assumption of the theory is that democratic countries will not fight each other. The world will be a more peaceful place if it is full of democratic countries.

In late 1960s and early 1970s. IR scholar collected enough data to employ statistical test on this assumption. Surprisingly, they do found evidence that democratic countries do not fight against each other. From then on, IR scholars try to explain why this phenomena exists. Because hard evidence is so clear, and the classic thoughts do not provide a good answer to this behavior, scholars begin to present variety of reasons to explain it. There are two category of explanation.

The first is the monadic nature of democratic peace. It is argued that democratic countries are prone to peace because they are constrained by domestic politics. The public does not support the aggression for pure expansion. People are more likely to support war only if the country is being threatened or attacked. So democratic leaders who want to raise campaign for world dominance rarely get approval from the public. Democratic countries are also more peaceful because they value peace and stability. Again people do not like war; conflict disrupt their daily life, take away their family. Democratic countries prefer to resolve difference peacefully. They do not prone to use force to resolve a territorial dispute or religious difference. This suggests that if democratic countries are going to use force, the leaders must have ensured that people fully support the war. So a fighting democratic country will be more united, and therefore more chances to win. The monadic democratic peace argues that the peaceful nature is born in democratic countries. They are generally more peaceful than authoritarian countries.

On the other hand, there is dyadic democratic peace, which argues that war is less frequent between two democratic countries. Democratic countries share the same political structure, political beliefs, political traditions, and ideology. They have similar institutions that would generate similar needs, which leads to similar interests. So they are more likely to be friends in international system. They are potential allies because they can understand each other better. They usually face similar dilemma when making important foreign policy decision. And they can trust each other because their regime is similar. They may belong to the same international institutions because of common interest. There are many opportunities that make them friends rather than enemies.

The above mentioned explanations focus on the nature of democratic regimes. They behave more peacefully because democratic countries have certain qualities. But is it all because of regime type? It doesn't seem appropriate to suggest domestic political institution is the only reason for war and peace. Scholars explore another line of liberal tradition and construct another explanation base on liberal trade.

The liberal economic democratic peace is rather simple. Adam Smith told us trade is good. Trade will increase a country's wealth. More importantly, it increases the wealth of people. War and conflict usually disrupt trade, even worse, it may interrupt trade relations with foreign country even after the arm conflict. General public does not prefer war because they want to promote profit from trade. A stable, friendly relationship with foreign countries is more beneficial to them. In democratic states, leaders have to follow people's wishes. Therefore, democratic states tend not to participate in conflict. The interdependence followed by trade relationship further decreases democratic state's willingness to use force. Democratic states tend to use non-violent ways to resolve the dispute. To the extreme, one may argue that democratic peace is actually capitalist peace. It is just that democratic states usually prefer trade and they usually do trade with other countries so they are less prone to use force.

There are certainly more literature discuss more specifically about democratic peace. The debate about whether it is regime type or liberal trade that causes democratic peace is still going on. I should introduce more interesting works in other articles.

Regulating Credit Default Swap

Regulation of Credit Default Swap (CDS) is probably the most contentious topic in terms of the global financial reform in the post-crash economy. Some people believed CDS is the main cause of the Global Financial Crisis, and conceived it as simply a form of speculation or, to put more explicitly, a gamble. I am not going to argue for any side but just would like to express some thoughts on the recent regulatory reforms on CDS.

Post counterterrorism world politics

Today, President Obama announced and confirmed the leader of Al Qaeda, Osama bin Laden, was dead. The "War on Terror" initiated by the United States has achieved major victory. Obama would not give up this great opportunity to increase his popularity. He specifically said that the operation was under his instruction.

I was at school gym. I watched Obama's speech on TV, thinking about the impact of bin Laden's death. Several college boys walk by, applauded, and shouted out loud. I did not laugh. I was pondering, like ten years ago, about how world will change afterward.