Suppose a large trading nation is found to export huge quantities of products which have not been subject to proper regulatory oversight at home and create important risks for the buyers. And suppose further that importing nations have had to face serious repercussions as a result. When pressure is brought on the exporter of hazardous products to tighten its act and to increase regulatory cooperation with other nations, the country scoffs and says: "this is a domestic matter; we do not need any international oversight or pressure."
No I am not talking about Chinese toys. I have in mind instead complex financial instruments sold by the U.S.--which having been improperly evaluated by U.S. rating agencies and hence mispriced, and having been marketed abroad in huge quantities, are now wreaking havoc in financial markets everywhere.
The New York Times reports today that other countries are calling for a say in U.S. regulatory practices:
Politicians, regulators and financial specialists outside the United States are seeking a role in the oversight of American markets, banks and rating agencies after recent problems related to subprime mortgages.
Their argument is simple: The United States is exporting financial products, but losses to investors in other countries suggest that American regulators are not properly monitoring the products or alerting investors to the risks.
In general, Washington’s reaction has been that it wants “no form of oversight,” said Kenneth Rogoff, an economics professor at Harvard and a former chief economist of the International Monetary Fund.
Banks and investment funds from China to France suffered losses after buying mortgage-related securities and complex financial products based on them in the United States.
In many cases, investors were caught by surprise because American rating agencies had given the products top ratings, leading buyers to believe there was little risk. International investors are also asking why American lenders were allowed to give mortgages to home buyers who could not repay them.
The NYT does not note the parallel with Chinese exports of hazardous toys and other consumer products, but the parallel is too obvious to miss.
Once again, the globalization trilemma rears its head: If you want more economic globalization, you must either accept more global regulation or be willing to pay a higher political cost for adverse side-effects.