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A Means to Avoid Global Bankruptcy: Balancing Fiscal Challenges with Transparency

Submitted by on 16 Sep 2011 – 12:03

Dr Don-Terry Veal Dr Don-Terry Veal, Director, Auburn University Centre for Governmental Services

As nations continue to experience fiscal challenges, and in some cases fiscal bankruptcy, the search for solutions to improve economies for governments and businesses seems like a never-ending process. The current broad-based financial crisis is a major aspect of today’s economic conditions and is widely viewed as the worst financial crisis since the Great Depression of the 1930s. To address the fiscal crisis, some argue that we revisit the pros and cons of free markets and regulated economies, such as the importance of striking a balance between free markets and the amount of government regulation needed to protect people and the environment. Others stress the importance of increased spending as a means to stimulate economic growth, whereas increases in consumer spending are widely viewed as a sign that the economy is bouncing back.

Whether in support of free markets, regulated economies, or increased spending to stimulate growth, exploring such approaches can only strengthen our understanding of the deeper issues gripping global economies and contribute to balanced solutions. Fiscally balanced solutions would 1) incorporate appropriate considerations for the current fiscal challenges, 2) promote the importance of transparency reporting accurate financial information, and 3) serve as  recognition of the needs to provide support for global financial organizations and avoid global bankruptcy.

Current Fiscal Challenges

Although there is no magic bullet to improve our fiscal conditions, an outlook of “gloom and doom” is certainly not the answer. However, we have to tread the delicate balance of having a positive outlook without overlooking the problems of Main Street. For example, as recently as August 2, 2011, reported that the U.S. economy created no jobs, and the unemployment rate held steadily higher at 9.1 percent, fueling concerns that the U.S. is heading for another recession. It was the first time since World War II that the economy had experienced a net zero jobs created for a month. On or around that same day, it was also reported that a federal U.S. agency sued more than a dozen major banks for billions of dollars in losses, arguing that they misrepresented the quality of mortgage securities that they put together and sold in the run-up to the bursting of the housing bubble.

One positive way at looking at the current fiscal challenges is to take confidence in knowing that the best of ideas and talents emerge when faced with times such as these. The current fiscal challenges will likely produce new icons, such as the next Bill Gates (former CEO of Microsoft), the next “Great Economist”, or Internet inventions that led to the world-wide-web. It will be from within this group of talented individuals that will lead us into the next day, year, or era of prosperity.

A more immediate positive outlook is that broad economic analysis has identified global transparency as a critical need to improving fiscal conditions, in order to avoid future challenges with misrepresented information, as is currently being experienced by the mortgage finance industry. Citizens around the globe are also unified in their demand that increased transparency is needed in governments and in organizations.

Transparency and Accurate Reporting

A major cause of the 2007 financial crisis was a lack of transparency and accountability in mortgage finance. The highly complex network of agencies overseeing different parts of the financial markets failed to identify or respond to the macro trends that led to the crisis. According to the Congressional Research Service (2010), throughout the housing finance value chain, many participants contributed to the creation of bad mortgages and the selling of false securities, apparently feeling secure that they would not be held accountable for their actions. This cycle continued until the system itself collapsed.

The challenge of reporting information accurately has not only been a problem for fiscal networks. In this recent era of globalization, It has also been a problem for other areas where the exchange of information is relied on for purposes of decision-making. According to Dr. James Witte, a visiting professor working at an Egyptian university, from a personal interview immediately following the January 25, 2011 Egyptian revolution, there must be a better way to verify the accuracy of information in order to prevent disruption or even death in the Middle East. Witte argues during that an unsubstantiated text message relating to an act against Christians or Muslims can result in mass protest and potential violence. Only in the aftermath of the protest would the truth be discovered that the message wasn’t accurate. In the meantime, the adverse effect through unverified social media would cause great harm. Commitments to the process of global transparency can sharpen our insights and serve as a base of support when developing tools and regulations that connect activities for financial and informational networks.

Transparent organizations are managed so that all can see what’s inside, and knowing what’s inside of government is clearly the demand from citizens around the globe. In the end, transparency is viewed as a step in the right direction for it leads to a healthier economy through eliminating corruption, which strengthens investments to communities, and raises public sentiments for government, which in turn increases public trust. Transparency helps to improve the global challenge of a lack of confidence in financial institutions.

Coordinating international networks that are responsible for reporting information accurately and overseeing financial markets is an enormous task. Developing accuracy in reporting is essential for our economic future and requires global participation. The use of broadly accepted models employing best government principals is essential in order for this broad process to be designed successfully.

Avoiding Global Bankruptcy – Support for Global Organization

Transparency is a fundamental component of democratic government and addresses the rights of citizens to know what is taking place with their government. The need for increased transparency is supported by governments around the globe; too much secrecy leads to an abuse of power and a lack of accountability.

As the international focus turns to creating a sustainable society, transparency is essential as international institutions improve networks to secure accountability in financial institutions. Nations don’t exist in isolation, and financial systems have become so interdependent that a negative change in one nation’s fiscal reality can lead another to financial bankruptcy.

Nations have to work together to establish working models that support each other’s fiscal regulations and reporting. Some good recommendations for improving our global financial regulatory system are: 1) furthering research focused on sound financial practices, 2) providing support for conferences and training dedicated to developing a unified definition of transparency for various layers of governments and organizations around the globe, and 3) collaborating on ways to coordinate financial activities that are responsive to all countries. Exploring issues such as these can also strengthen our understanding of the deeper issues gripping global economies, such as preventing financial loss, contributing to balanced economic solutions, and avoiding global bankruptcy.