New financial instruments to be tested according to the precautionary principle before they are allowed to be sold as legally enforceable contracts.
The financial and banking sector has become increasingly disconnected from the real wealth-producing economy. Rather than serving, finance has been diverted to purely speculative purposes, which may as well be labelled gambling. As such activities have become more profitable, and seen as a less risky option than providing credit for entrepreneurs, many have forgotten that we cannot in fact eat money.
For many countries, gambling debts used to be legally unenforceable as pure bets on future prices rather than hedging to protect against price fluctuations on real assets (e. g. harvests). Abolishing this law contributed to the financial crisis. Since then, post-crisis banking and financial regulations encourage lending to governments as the ‘less risky’ option. This is misguided and endangers our shared future as the real wealth creators are deprived of the start-up credit they need.
Banks and money can be good servants but are bad masters. Markets cannot exist without rules and these need to promote the creation of real wealth, not unpayable debt. Financial instruments should only become legally enforceable contracts when they serve the real economy. Just like cars and medicines, they need to follow the precautionary principle and be given the social privilege of legal status only when they are shown to be safe and beneficial.
Today, much urgent work to build and protect our shared future is not financed because it is less profitable than speculation and gambling. This destroys jobs, destabilises societies and threatens or delays investments required to ensure sustainable development. Expanding renewable energy production, resource recycling and efficiency, ensuring food and water security, are all urgent and exciting challenges for economic entrepreneurs.
Ensuring that the needs of entrepreneurs for credit are not ignored by banks, in favour of financial trading and the production of nothing but money, is vital for our future. Without access to financial capital, work to build a sustainable future is blocked or delayed and citizens will remain out of work while there is so much of it needing to be undertaken.
Towards the Mandatory Approval of Complex Financial Instruments
'Complex financial instruments increase systemic risks and jack up leverage in the financial system. The International Monetary Fund (IMF) wants regulators to be prepared to identify systemically important financial instruments. Yet, even transparency is impossible as long as financial instruments are overly complex.'
For the full interview of Saule T. Omarova (Professor of Law at the Cornell Law School in New York) and financial policymaker Peter Simon (MEP for SPD), by Suleika Reiners, former Policy Officer of World Future Council, please click here!