Let Big Banks Fail and Not Show Other Countries How to be Corrupt

            Robert E. Litan’s article “Toward a Global Financial Architecture for the 21^st Century” couldn’t be more relevant to what the United States and other developed nations are facing today.  Litan raised important points about how the global banking and monetary systems need to evolve to face future crisis’s, but in light of the current banking situation in the developed world I don’t know if ‘our’ system is the best answer.  The one idea Litan mentioned that seemed to be legitimate was that in order for market forces to correct inefficient or corrupt banking practices the security of government bailouts needed to be taken out of the equation.  While I don’t think this will happen, it is definitely a real problem that the market must figure out.

            The idea that the United States and Western European banking systems are superior to that of the developing world is correct, but maybe the superiority is a bit exaggerated.  Litan argues that developing countries need to allow foreign banks (from the developed world) to set up shop on their soil.  The idea being that these banks will bring in their knowledge and expertise and in effect help the developing countries banks learn more prudent financial practices.  There is one major problem with this idea though, and that is ‘our’ banks are mired in high-risk and in some cases outright fraudulent lending practices.  The very thing that Litan warned about when he wrote, “…U.S. banks that had weakened capital positions as a result of uncollectible loans to less developed countries were not forced by regulators to recognize the full extent of their losses, and instead were allowed to take risky bets-primarily in commercial real estate.”  While the author stated that the United States, ‘…learned the lesson of regulatory “forbearance” the hard way’, that is obviously not the case.  

            The ‘Western’ banking system may be a technically superior way of monitoring financial markets, but one could argue that the same problems still exist.  In “Toward a Global Financial Architecture for the 21^st Century” the author showed many examples of how the modern banking system was regulated, but I have to ask myself if the so called ‘prompt corrective regime’ and other regulatory agencies actually do what they are credited with.  The current housing situation and failure of many banking institutions help tremendously in answering that question.  I would argue further that even while ‘our’ system is technically superior, the consequences of failure are much greater as we may soon find out.