Avoiding the Next Global Financial Crisis: A Canadian Perspective, Focusing on the 'Boundedly Rational Consumer'

Abstract

The collapse of the American subprime mortgage market and the global financial crisis and recession essentially came to an end in 2009 and yet these events continue to haunt the global economy. They raise difficult to answer challenges and questions regarding whether enough has been done to prevent another global financial crisis in the near to medium term future, to compensate for the substantial harm incurred by consumers, smaller businesses and other market participants, and to re-instill confidence in the global financial regulatory system. The major argument of this paper is that changes in national and global financial sector markets and regulatory regimes since the collapse of the American subprime mortgage market and global financial crisis provide the boundedly rational but willing to learn financial consumer with somewhat better protection. However, these changes by themselves are not sufficient to prevent another regulatory debacle that would cause as much or even more harm to the financial consumer in the future – including in countries like Canada and Australia that were less affected by the last calamity. The monetary and psychic payoffs from gaming the financial regulatory system are still too attractive, and the culture of high risk, reckless, irresponsible, myopic, and pushing the envelope conduct is too entrenched, to respond to traditional top-down laws, regulations and enforcement practices of governments and their financial regulatory authorities. Moreover, the further globalization of financial markets; the growing complexity of financial products, transactions and contracts; and the integration of emerging market economies into global financial markets; pose new and unfamiliar dangers to national and international financial markets and financial consumers. These trends suggest that countries like Canada and Australia that were less influenced by the 2007 crisis may be less fortunate in the future. The paper’s major conclusion is that the likelihood of another financial crisis of similar magnitude can be diminished if there is concerted systematic action under a sustainable governance mode which involves inter-governmental and governmental bodies, the private sector, civil society, and individual consumers. Each actor has unique capabilities and energies. In some respects, the polycentric and distributed governance approach proposed here involves enhanced collaboration among all actors. In others, it involves recognition of the need for enhanced mechanisms to provide “checks and balances” on the powers and capabilities of any one actor or instrument. Harnessing the insights, capabilities and energies of all actors, including those of the financial consumer, will better ensure that: (i) the corporate culture of gaming the regulatory system will be reduced, (ii) the global contagion that characterized the last financial crisis will be mitigated and stopped at more national borders, and (iii) over time the current too big to fail approach to large international banks and other financial service providers will be recognized as unnecessary and a false hypothesis. This approach is referred to in this paper as “sustainable governance” because of our conclusion that both top-down and more organic bottom-up approaches will be needed, given the complexity and magnitude of the governance task. We recommend that more research should be focused on the self-actualization governance capabilities of individual consumers to protect themselves, and on the ability of civil society organizations to provide independent research, consumer information, “checks and balances” oversight functions, and strong advocacy on behalf of consumers. These two aspects appear to be under-studied in the financial reform research and literature conducted to date.