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23 Mar, 2009

Uncompromising Aviation “Safety Standards” Should Be Applied In the Financial World, Too

A brilliant analysis of the global financial crisis by the UN Conference on Trade & Development suggests that world financial regulators can learn a lot from the stringent safety rules rigorously applied by the aviation industry — arguably the first time that a clear linkage has been made between a financial crash and an aircraft crash.

The report, titled The Global Economic Crisis: Systemic Failures and Multilateral Remedies, was released in Geneva on 19 March 2009, just a few days after the ITB Berlin. The report was written by economists serving on UNCTAD’s Secretariat Task Force on Systemic Issues and Economic Cooperation in advance of several upcoming international conferences on the ongoing crisis.

Because UNCTAD is one of the few U.N. agencies that reflects a clear viewpoint of the developing countries, the report offers a completely different take on the causes of and solutions to the financial crisis.

It rues the fact that although each financial crisis is followed by widespread political support for greater regulation, “often, after a period of economic stability is achieved, policymakers lose sight of the rationale for existing regulations and begin to scale back.

“A possible solution to this self-defeating cycle is to follow the example of air-safety regulators, who, besides learning from relatively rare airplane crashes, also put a great deal of attention on near misses.

“In the field of financial regulation, there was much to be learned from the collapse of US-based Long Term Capital Management (LTCM) in 1998 — but because a crisis didn’t result, systemic changes were not made. A proper regulatory response then might have limited the consequences of the current crisis.”

Adds the report, “It is often argued that financial regulators should not fight the last crisis. And yet, this is exactly what agencies in charge of air traffic safety do with considerable success. Some argue that things are different for finance, as the principles of physics that keep airplanes in the air do not respond to regulatory changes, but financial markets, designed and operated by human beings, do.

“Financial innovation, the argument goes, is viral and reacts to regulation by producing more complex and opaque financial instruments. Hence, the argument continues, each financial crisis is different from the previous and is thus unpredictable. According to this view, nothing can be learned and new regulation can only do more harm.”

The report says that “this line of reasoning is certainly true for the particular instruments, which are the proximate cause of any financial crisis. In 1637 it was tulip bulbs, in 1720 it was stocks of the South Sea Company, and in the current crisis it is mortgage-backed securities.

“Nobody knows which financial instrument will be at the centre of the next crisis, most likely not mortgage-backed securities. Probably this instrument has not yet been invented.”

The linkage between financial safety and aviation safety has won immediate applause from the Pacific Asia Travel Association (PATA) whose new President and CEO Greg Duffell is a former Australian Air Force pilot. He described the UNCTAD report’s argument as being “spot on.”

“Safety is drilled into our (air) training programmes over and over again,” he said. “There is no room for any deviation. Perhaps similar safety training programmes need to be drilled into this young generation of financial analysts and investors as they emerge into the markets and start dealing with hundreds of millions of dollars of other people’s money.”

Mr Duffell said that although he agreed that nobody could argue with the principles of physics, invoking the laws of human nature as an excuse may not be appropriate.

“Yes, laws are made to be broken under human nature. But that is precisely why all these financial institutions and industries have codes of ethics and good conduct to ensure highest standards of corporate governance and transparency.”

Asked if he felt PATA had a role in taking this linkage forward, Mr Duffell said it was certainly worth tabling at a future forum of an advisory council now being set up.

At the ITB Berlin 2009, tourism industry leaders, including tourism ministers, chief executive officers and senior officials of travel industry organisations showed no desire to seek accountability from those causing these global problems.

A lone exception came from an industry outsider, Prof Dr Max Otte, a best selling German author of “The Coming Crash” who moderated one of the events at the ITB Convention. He blasted central bankers for merely printing money in an attempt to try and stave off the early pangs.

He attacked private sector bankers for doing nothing even when they knew things were going badly wrong and criticised supervisory authorities for not listening to warnings about scandals like those perpetrated by the rogue financier Bernard Madoff.

Finally, he said the pressures of operating in the environment of the U.S. political system “removed the last safety belt” – another analogy with the aviation industry.

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