With government deregulation and the triumph of financial liberalization, the dangers of systemic risks, the possibility of a financial tsunami, sharply increased.
Investment banking has, in recent years, resembled a casino, and the massive scale of gambling losses has dragged down traditional business and retail lending activities as banks try to rebuild their balance sheets. This was one aspect of modern financial liberalisation that had dire consequences.
Now financial liberalization is just a catastrophe waiting to happen, and there are very well understood reasons for that.
Modernization is found in markets.
Capital market liberalization includes freeing up deposit and lending rates, opening up the market to foreign banks, and removing restrictions on capital account transactions and bank lending. The focus is on deregulation, not on finding the right regulatory structure.
In Asia, a lot of successful economies that had been living on their own saving, decided to open up their financial markets to international capital in the early 1990s. So here were countries doing quite well, but they decided they'd borrow a bit more and do even better.
I plan to eliminate the equity cap in investment, and I also plan large-scale deregulation to meet global standards.
Until Japan's economy drove off a cliff, there was a running argument in Asia about whether it would be wiser to follow the 'Japan model' - with its megacorporations, jobs for life, state control of strategic industries - or the 'American model' of largely unfettered markets.
The reform of state industry, and most directly related to that, the banking sector, is enormously daunting.
As I talk with the Chinese on currency, I encourage them to move much more quickly with opening up their capital markets to competition, because I don't believe the world is going to give them as much time as they would like.
I look forward to the day when China has a truly market-determined solution... To get there, you need to have a currency that is market-determined, an open capital market, and you are going to need a competitive, open financial system.
