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Submitted by Chuks Ukachukwu on
Just to add to the issue of possible solutions going forward, I think it is important that for financial stability, we should not be too afraid of increased regulation of compensation packages for those in the financial services industry, from the CEO to others, and activities in the financial services sector. There should also be increased regulation of financial engineering. Since financial system stability is critical to economic stability and growth, after this crisis, I do not think it is prudent to leave financial service workers to do as they please. The mainstream economic view was voiced by Demirguc-Kunt and Serven (2010:118) when they stated that " Despite their inherent fragility, financial systems underpin economic development. The challenge of financial sector policies is to align private incentives with public interest without taxing or subsidizing private risk-taking [actually not taxing or subsidizing private risk-taking seems utopian to me as I wonder how this can ever be done in the real world]. Public ownership or too aggressive regulation would simply hamper financial development and growth. But striking this balance is becoming increasingly complex in an ever more integrated and globalized financial system". The authors argue that striking a balance is difficult, but also have obviously argued against state/public ownership and aggressive regulation (not sure what aggressive regulation means since we may not really know the right balance and may have to keep trying different types of regulation-both direct and indirect). But state/public ownership and regulation are not always undesirable and can be beneficial if done well as the Chinese state seems to be doing now. Part of getting the balance is to keep experimenting. A recent Economist report (http://www.economist.com/node/21542924) on China stated that "The party has cells in most big companies—in the private as well as the state-owned sector—complete with their own offices and files on employees. It controls the appointment of captains of industry and, in the SOEs, even corporate dogsbodies. It holds meetings that shadow formal board meetings and often trump their decisions, particularly on staff appointments. It often gets involved in business planning and works with management to control workers’ pay. The party state exercises power through two institutions: the State-Owned Assets Supervision and Administration Commission (SASAC) and the Communist Party’s Organisation Department. SASAC, which holds shares in the biggest companies, is the world’s largest controlling shareholder and the state-capitalist institution par excellence. It has been spearheading the policy of creating national champions by consolidating and pruning its portfolio: the number of companies under its supervision has declined from 198 in 2003 to 121 today. It has also been implementing the party’s policy of creating a “harmonious society” by regulating pay. In 2009 the average SOE boss earned $88,000 and the highest-paid, the chairman of China Mobile, $182,000. High pay in SOEs has been a big source of disharmony". In essence, the public interest may demand trading off more financial engineering and high economic growth for the financial engineering and economic growth that the public thinks creates a harmonious society and in which other human goods are protected. As long as financial innovation and high economic growth are not the only arguments in the objective function of the public, then a balance is required. We may need to learn from the Chinese State capitalism model on how to find the true balance as requested by Demirguc-Kunt and Serven (2010), while overcoming some of the defects, especially as regards fighting corruption and nepotism. we are watching as things unfold