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The need to transform markets: an open letter from the Network for Sustainable Financial Markets

Investor think-tank: the views of savers “have not been aired” in the credit-crunch debate.

The crisis in our global financial system has elicited comments and actions from bankers and regulators but the concerns of ordinary savers – those who entrusted their retirement hopes to pension funds, insurance companies and fund managers and who have been (and will be) amongst the biggest losers – have not been aired. In one way this is understandable, given the pace and complexities of the debate. But the consequence is that bankers are assumed to be speaking on behalf of the investment system as a whole and this is clearly wrong. The Network for Sustainable Financial Markets seeks to interject in the debate the views of long-term investors who, of all the players in the financial system, best reflect the needs of ordinary savers. The Network maintains that the financial system failed because insufficient attention has been paid to sustainable wealth creation. We fear that the dominant response to this predicament – politicians and regulators taking a reactive and ad hoc approach – will continue and compound this mistake.In particular the Network worries that:

  1. Throwing central bank liquidity after a problem partly caused by too much liquidity can only provide a temporary bailout to a financial system that falls into crisis too often, without addressing why these crises occur.
  2. While greater transparency may often be the right solution to corporate governance failures, calling for more transparency and uniformity in risk management tools within financial institutions will not, alone, solve the problems we face. Similar calls have been made after every banking crisis over the past 20 years, have been implemented to little avail, and may even promote short-term, pro-cyclical and herd-like behavior.
  3. The problem of wrongly sized and directed incentives, an important root cause of why we are in this mess in the first place, is not yet being addressed head-on.

The Network is convinced that a more stable and sustainable financial system is attainable. The innovative capacity of the financial sector is real – the challenge is to harness it for maximum economic, social and environmental good and with a greater focus on the long-term than has happened to-date.
Towards that end, the Network exists as a virtual “think-tank” of investment professionals, advisors and scholars focused on financial markets to develop proposals for macro and micro interventions which can create healthier financial markets. Our first project has been to formulate a set of principles that we recommend guide the reform of our financial system. Other projects, focused on specific components of the challenge, are in the pipe-line. We are under no illusion about the power of the financial system: change will require concerted effort by many since denial and defensiveness stillpervades current discussions.
And yet, for the first time in decades, the architecture of the world’s financial system is being questioned by a wide range of thoughtful people and organizations. In those reform efforts, we need to aim high.
Once the immediate symptoms of the crisis have been eased, nothing less than a financial system that leads the transformation to healthy and sustainable economies should be the design remit. We welcome the involvement of others who support this goal.
For further information on the Network for Sustainable Financial Markets and to read our Principles for Financial Reform, see http://www.sustainablefinancialmarkets.net
Signed: Keith Ambachtsheer, Ann Byrne, Rob Bauer, Gordon Clark, Stephen Davis, Jack Gray, Steve Lydenberg, Michael Mainelli, Frank Partnoy, Avinash Persaud, Amin Rajan, Robert Swift & Ed Waitzer