[DRAFT] Preventing Financial Crises

[Sierra Lyricalia]

"That is true, which is why the Traansval would support perhaps an altered measure, just one that doesn't infring on National Soverignty. There are ways to help prevent Finanical Crisises without forcing nations to do certain economic policies; perhaps the bill could be made option or a advisory/regulatory agency could be established under International control to help nations. Either way, as it currently stands this bill is far too invasive to be acceptable to the people of the United Republics."

EDIT: "Additionally, we find that this bill is not needed as all of these concerns are address in GAR #94, as pointed out by the United Republic Empire representative, which works towards the same goal and provides similar services without infringing on National Soverignty and requiring nations to adopt certain economic policies. This is much preferable to this proposal and is already adopted, meaning that we have no need for this current one. The Traansval stays against this proposal."

If you think it isn’t needed, you could launch a legality challenge if you chose to do so?

OOC: Legality challenges are for alleged rule violations. The closest thing to a valid rationale of "this is unnecessary" would be if it substantially duplicates a prior resolution. Since #94 specifically concerns small loans to people in poverty (while this proposal concerns many types of securities, many types of investors, and a clear focus on protecting central bank[ing system]s from cascading financial ruin, there's virtually no overlap and I have to believe a challenge based on that argument would fail.

[Imperium Anglorum]

there exists this already adopted proposal which addressed international financial crisises which doesn't infring on national soverignty.

No, there doesn't.

[The Traansval]

there exists this already adopted proposal which addressed international financial crisises which doesn't infring on national soverignty.

No, there doesn't.

Your not addressing my main concern, which is national sovereignty. I don't question a possible effectiveness of this economic plan working, my main objection is to requirements placed on nations to adopt economic policies instead of allowing nations to establish their own policies in regards to these issues.

Member nations shall allow the sale of secured and unsecured interest-bearing financial instruments, i.e. "base assets", to the Credit Securitisation Facility and other public investors. Member nations may make reasonable purchasing rules on those base assets unless they affect the Facility.

The term "Shall Allow" is an equivalent to "Are Required to allow", and while it is good that the provision allows Nations to set their own rules it still remains that said members would be required to sell "Base assets" to the CSF. Also, as a sidenote, its kind of odd to mention something in a provision before the provision which establishes it and explains what it is, just a minor quirk.

There shall be established a Credit Securitisation Facility, i.e. "the Facility", to tranche and securitise reasonably uncorrelated base assets. It will raise funds from the sale of securities it creates. It shall publicly document the components from which those securities are produced. All produced securities shall fulfil the most stringent reasonable transparency rules established by member nations or the Assembly in future legislation.

The Facility may subcontract out the maintenance of its products to third parties. When it does so, those products must maintain their original uncorrelated character and posted coupons.

The Facility may guarantee its products. It may use funds from its support programme to make those guarantees credible.

The Facility shall produce public indices to provide information on current pricing practices for securities it produces and their component base assets.

Once more I object to the "Shall be established" language, once more forcing WA members to create financial institutions instead of allowing them to create their own on their own terms. Although perhaps i'm reading this wrong because I can't tell if each nation will have its own CSF or if there is one international CSF. If there is one International CSF, then I HIGHLY object to having to sell Base Assets and then turn over the profits from the sale to an International organization out of my control. Even if it is transparent in all its dealings, there is so much wrong with being forced to sell Base Assets to my people, of my nation, and then having to turn over the money to a international organization. If I'm wrong and each nation has a CSF, ignore everything I said about an International CSF and focus instead of my first sentence.

other data that the Facility believes useful in determining an institution's value.

What other data? Who determines what data is an is not useful? There is a possibility of privacy violation here.

Overall this isn't a terrible proposal in my opinion and it has the right goals and ambitions, but its methods infring far too much on a nations sovereignty for me to support it. I would support any revised version which allows for nations to choose whether or not to be included in the CSF or any other way that involves voluntary cooperation rather than force to acheive its goals.

[Sierra Lyricalia]

"Ambassador, you're misreading it. It doesn't say that member nations must sell securities to the CSF - it says they must allow the sale of securities to the CSF. Your government is not being mandated to gather assets and sell them, it's being mandated to allow institutions which have or may create such assets to sell them. The CSF might well not be interested in buying - depending on the nature of the securitized assets. The state is not being forcibly impressed into the securities trading business, it's being gently mandated to allow the trading of securities by entities in its jurisdiction."

"I believe that most of your objection stems from this simple misunderstanding."

[Bears Armed]

OOC: Not that it matters, but the "Credit Securitisation Facility" is mentioned in the first clause but created in the second, which I find somewhat annoying.

OOC
Agreed. It really would seem better the other way around.

[The Traansval]

"Ambassador, you're misreading it. It doesn't say that member nations must sell securities to the CSF - it says they must allow the sale of securities to the CSF. Your government is not being mandated to gather assets and sell them, it's being mandated to allow institutions which have or may create such assets to sell them. The CSF might well not be interested in buying - depending on the nature of the securitized assets. The state is not being forcibly impressed into the securities trading business, it's being gently mandated to allow the trading of securities by entities in its jurisdiction."

"I believe that most of your objection stems from this simple misunderstanding."

"Even so Sir it still remains that member nations are forced to allow these sales. Perhaps a nation would prefer to not allow these sales to the CSF, perhaps they would much more prefer to do so with a domestic organization. If this proposal passes with its current wording then it will still, in the eyes of the Traansval, constitute an infringement of national soverignty. We will only consent to a resolution based entirely on choice and voluntary action. A Gentle Mandate is still a Mandate, just as a Gentle Dicator is still a Dictator."

[Imperium Anglorum]

We will only consent to a resolution based entirely on choice and voluntary action.

You did, you joined the WA on your own accord. You can resign at any time.

[Sciongrad]

"Ambassador, you're misreading it. It doesn't say that member nations must sell securities to the CSF - it says they must allow the sale of securities to the CSF. Your government is not being mandated to gather assets and sell them, it's being mandated to allow institutions which have or may create such assets to sell them. The CSF might well not be interested in buying - depending on the nature of the securitized assets. The state is not being forcibly impressed into the securities trading business, it's being gently mandated to allow the trading of securities by entities in its jurisdiction."

"I believe that most of your objection stems from this simple misunderstanding."

"Even so Sir it still remains that member nations are forced to allow these sales. Perhaps a nation would prefer to not allow these sales to the CSF, perhaps they would much more prefer to do so with a domestic organization. If this proposal passes with its current wording then it will still, in the eyes of the Traansval, constitute an infringement of national soverignty. We will only consent to a resolution based entirely on choice and voluntary action. A Gentle Mandate is still a Mandate, just as a Gentle Dicator is still a Dictator."

"With due respect, if your government's believes that any World Assembly resolution that requires it to adopt some policy, rather than simply providing it with the choice to do so, is an intolerable violation of its national sovereignty, it seems strange that it draws the line here, 450+ resolutions in. How is this position coherent?"

[Imperium Anglorum]

Back.

[Imperium Anglorum]

Some edits were made to reflect some newer literature on optimal bank regulation, which showed that limited-liability financial intermediaries generally under-allocate capital reserves and liquid asset reserves in a laissez-faire equilibrium. Unsurprisingly, it also showed that imposition of required capital and liquidity coverage ratios to the level that would maximise the utility of both depositors and investors would reduce the interest rate spread between depositors and lent funds, lowering the scope of intermediation, unless savings levels were supported by relatively small subsidies or deposit insurance.

The ratios themselves I find quite unexceptional and already are prevalent in the present. The idea of subsidising depositors, however, I see as more of a matter for national decision-making. While there is an obvious Kaldor-Hicks efficiency gain, whether a nation should impose that policy seems highly dependent on whether or not there exist other priorities for that government.

[Imperium Anglorum]

A colleague of mine just returned from a conference on this topic at Basel, which reminded me of the existence of this draft. Consider it resurrected.

[United Massachusetts]

Comprehensible English rule.

[Imperium Anglorum]

Comprehensible English rule.

Thoughts on category?

[Marxist Germany]

Comprehensible English rule.

Thoughts on category?

OOC:I never understood what they meant by commercial enterprise

[Kenmoria]

Comprehensible English rule.

Thoughts on category?

(OOC: None of the categories seem completely appropriate for this, but I suppose that advancement of industry and commercial enterprise make the most sense. You don’t have many clauses that directly ‘free’ the market, but it could be argued that stopping insolvency crises via the facility leads to businesses being given the choice to remain trading, and therefore more net economic freedom.)

[Imperium Anglorum]

1(a)

[Kenmoria]

1(a)

(OOC: Hence the ‘many clauses’ in my prior post,)

[Losthaven]

Losthaven is a bit concerned about the bias this proposal shows toward capitalism. There are, of course, merits to capitalism and it may be well to adopt capitalistic measures if a majority of our member nations wish to do so. But there is a considerable bloc of our membership that does not adopt or adhere to that economic system. This proposal would require all member nations to endorse capitalism by permitting the sale of secured interest-bearing financial products. The concept of lending on an interest-bearing "secured" financial instrument assumes profit motives and private property ownership. My home mortgage, for instance, is an interest-bearing secured financial instrument - it is a loan of money from the bank to me, contingent on my promise to repay the amount with interest (so that the bank may profit) with the consequence that if I do not, my personal property (the home I bought with the loan, or the "security") will be forfeited to the bank. Those concepts have no place in some member societies, and may even be quite harmful to the economic systems already there.

Conceptually, we also question the wisdom of requiring members to permit unsecured financial instruments in a bill designed to prevent financial crises. One of the reasons financial crises occur is that banks may make unwise loans, and then upon default will simply lose the money invested or trusted to them by their shareholders and customers. Requiring member states to permit banks to make such loans in the absence of some security that would make the bank whole in the event of a default seems like a recipe for causing a financial crisis, not preventing one.

Finally, the vast majority of this law simply serves to further populate our world with WA gnomes, even if they are to be helpful, financial-regulation gnomes. As we've expressed before, we generally disfavor resolutions which do not primarily coordinate joint action of member states toward a common goal (such as preserving the environment, or decreasing hostilities) and rather exist primarily to spawn gnomes, even friendly helpful ones.

We are by no means opposed at this juncture, but we do wish to hear the author's response to these concerns.

[Imperium Anglorum]

Losthaven is a bit concerned about the bias this proposal shows toward capitalism. There are, of course, merits to capitalism and it may be well to adopt capitalistic measures if a majority of our member nations wish to do so. But there is a considerable bloc of our membership that does not adopt or adhere to that economic system. This proposal would require all member nations to endorse capitalism by permitting the sale of secured interest-bearing financial products. The concept of lending on an interest-bearing "secured" financial instrument assumes profit motives and private property ownership. My home mortgage, for instance, is an interest-bearing secured financial instrument - it is a loan of money from the bank to me, contingent on my promise to repay the amount with interest (so that the bank may profit) with the consequence that if I do not, my personal property (the home I bought with the loan, or the "security") will be forfeited to the bank. Those concepts have no place in some member societies, and may even be quite harmful to the economic systems already there.

Conceptually, we also question the wisdom of requiring members to permit unsecured financial instruments in a bill designed to prevent financial crises. One of the reasons financial crises occur is that banks may make unwise loans, and then upon default will simply lose the money invested or trusted to them by their shareholders and customers. Requiring member states to permit banks to make such loans in the absence of some security that would make the bank whole in the event of a default seems like a recipe for causing a financial crisis, not preventing one.

Finally, the vast majority of this law simply serves to further populate our world with WA gnomes, even if they are to be helpful, financial-regulation gnomes. As we've expressed before, we generally disfavor resolutions which do not primarily coordinate joint action of member states toward a common goal (such as preserving the environment, or decreasing hostilities) and rather exist primarily to spawn gnomes, even friendly helpful ones.

We are by no means opposed at this juncture, but we do wish to hear the author's response to these concerns.

ELSIE MORTIMER WELLESLEY: We don't believe that mandating the sale of secured and unsecured instruments would mandate capitalism. Communist states have in the past borrowed money, as have state-owned enterprises in those states. Similarly, because the population as a whole has stochastic – but generally autocorrelated – consumption patterns, people will want to spend money now.** In fact, even without a business cycle and with overlapping firms, lifecycle effects will lead to asset transfers from one population of heterogeneous agents to another. (OOC: These models, even with identical utility functions, are actually pretty interesting; see Daron Acemoglu, Introduction to Modern Economic Growth 327.) Given a time-discounting utility function, it is always more moral for them to be able to do so than the alternative. But at a more broad level, human capital investments require significant upfront costs with only long-run benefits, the maturity mismatch there can only be corrected by borrowing, implicit or otherwise.

We don't think unsecured instruments are that large of a problem. Generally, because they are unsecured, firms do not offer them, or if they do, offer them at higher rates with more monitoring. Most unsecured debt is either at high interest rates or with reputable firms which are unlikely to default on their obligations. Investors generally know this. If they do not, the information released by the Facility would be adequate for them to discover this. Given that information is known, (OOC: Until the release of the ABX index in early 2006, the price of subprime risk in mortgage markets writ large was generally unknown. See Federal Deposit Insurance Corporation, Crisis and Response 20.) such investors would not overprice them, leading to the corrections that could actually cause the maturity mismatch that itself causes failure.

If you mean to say in your last few remarks that this is not an international issue, I think previous remarks in the transcript address that quite compellingly. (OOC: From here on for a few posts, including replies from me and Sciongrad. The question of whether it was an international issue was primarily interpreted as a question of whether pretending that financial shocks don't transmit across borders is godmodding.)

** Also really cool (I've been paging through the Acemoglu book) are negative productivity shocks, which generally, in real business cycle models, can lead to persistent fluctuations which are remarkably recession-like. Sadly, RBC models mostly sidestep the recession question by tying it to productivity shocks, which themselves are just treated as exogenous and unanticipated. I'd go for Id. at 581.

[United Federated States of Omega]

"It is the belief of the Omegan delegation that due to the way this legislates domestic markets by requiring them to allow the sale of some assets, that it comes into direct conflict with GAR #401. While we are broadly in favor of ensuring multi-national exchanges are protected, infringing upon domestic ones has already been prohibited by this body. We would also like to consider if it might be wise to add these powers to the International Securities and Exchange Commission laid out in GAR #401 as opposed to creating an entirely new organization. Again, we are broadly in favor of ensuring that the international economy does not collapse but also understand that we have committed to protecting the rights of nations when it comes to their domestic exchanges."

[Imperium Anglorum]

"It is the belief of the Omegan delegation that due to the way this legislates domestic markets by requiring them to allow the sale of some assets, that it comes into direct conflict with GAR #401. While we are broadly in favor of ensuring multi-national exchanges are protected, infringing upon domestic ones has already been prohibited by this body. We would also like to consider if it might be wise to add these powers to the International Securities and Exchange Commission laid out in GAR #401 as opposed to creating an entirely new organization. Again, we are broadly in favor of ensuring that the international economy does not collapse but also understand that we have committed to protecting the rights of nations when it comes to their domestic exchanges."

Are you referring specifically to the last clause of that resolution? And what specific clauses do you believe violate that provision?

[United Federated States of Omega]

Are you referring specifically to the last clause of that resolution? And what specific clauses do you believe violate that provision?

Yes, I am, however upon further reading I had misread the first clause of your proposal and no longer see a contradiction, my apologies. As such you have our support.