Hello, welcome to visit Shanghai Forum
In 2003, I wrote a book called The NewFinancial Order and in 2012, I wrote a book called Finance and the Good Society.The “good society” is a kind of human society we`d like to live in. And thetheme of my most recent book is that finance is actually a pillar ofcivilization.
But the corrupting influences of control ofmoney and a well-functioning financial system requires adequate regulation anda strong legal framework.
Financea pillar of civilization
Finance is intimately linked withhumanity’s pursuit of a good society. Financing is about enabling humanactivity and is its functions are deeply integrated into the fabric of oursocieties.
Just like anything important that one wantsto do, depending on some long lasting organization, finance is a long projectinvolving lots of people. It is a technology for sorting out the costs andbenefits of projects, and creating organizations that go beyond one human lifeand last for centuries.
Corruptingpower of finance calls for regulation
Unfortunately, there has been a popularprejudice held against finance that most people think that finance is justgambling. And one reason why people often think that finance is useless or it`sjust a corrupted game is that they have the impression that financial crisisare crazy just like people playing a game of dice. And though there is still arole for financial market because finance does have very concrete and importantfunctions and these prejudices are far from covering the entire truth, I thinkthat is of some truth to that.
Financial institutions deal with so mucheconomic power that it generates opportunities for people for corruptedactivities. Therefore, it highlights the vitalness of regulation. While bothgovernment regulation and industrial regulation are costly, so that we need todo some costs and benefits analyses, nonetheless regulation is essentialbecause of the tendency for corruption.
And we need lawyers because people don`tthink that they can get the law enforced properly. If people do not believe inthe law, they are a lot less likely to start businesses.
Since it gives an idea about the strengthof the legal system in a country, it hints at the ability to withstand thecorrupting aspects of finance. As for personal financial advisors, actuallythere is no country does well for now. And I think we need more of them becauseif people don`t understand what they are doing, these systems are so importantand complicated that you would need someone to explain them to you.
Corruption springs to life even among thoseadvisors, so I think we need government subsidies for financial advice, legaladvice and regulation.
Chinashould continue to experiment
China is going through a number of steps.But some of these steps are quite recently, which suggests that they are notfully implemented. As China develops, it has to get more and more close to theforefront of financial innovation, and that means experimentation. The targetis constantly changing especially with new information technologies like theInternet, and China should be, or is, already a part of this process.
Importantrole of alternative forms of finance
For example, the sub-prime mortgage was afinancial innovation which allows people with poor credits to get homemortgages. Sub-prime mortgage is issued by the so called shadow banks. Now, wehave seen the shadow banking developing in China. It sounds evil, but it`s notand I think it does play a proper role.
There are several recent innovations whichI think had showed a lot of promise, such as benefit cooperation, crowd-fundingand social impact bonds. The benefit cooperation is a new cooperated firm thatis halfway between for-profit and non-profit. I believe it`s very respectful ofpeople feelings that people want to have a purpose beyond of making money. Andthose crowdfunding websites allow people to invest in companies. These thingswould grow up further and finance will become more and more internet financeand global, and less driven by traditional banks.
Theimportance of philanthropy
I think that a culture of philanthropy is apower of free market system. The real problem is that the free market economywill make some people fabulously wealthy. But what to do with all these money?It is a problem for China.
In order to make a philanthropic feelingstronger, it is important to have a tax system that involves charitablededuction. You can have marginal tax rate for those high income people, butalso give them high charitable deduction. And China has apparently weakcharitable deduction right now. It has to be more allowing people to becreative in their philanthropy.
Behavioralfinance
Finance is going through a revolution nowbecause of the development of behavioral finance that is psychology applied tofinance. And people are not machines or computers, they have feelings andhigher aims, they are psychological. So we have to improve the functioning ofour financial system. It means getting the financial system more involved withpeople, making it clear to the people how can they achieve the highest aims. Itinvolves experimentation.
I think “identifying new dynamics” meansfirst experimenting, then having some mistakes, then working around to the potentialfor corruption, and then watch what other countries are doing. It`s a very slowprocess of identifying new dynamics, so what we have to do is not do it all byourselves, we have to set up a system that encourages other people to do it.
Thank you.
